Australians are dipping into their super funds like Winnie the Pooh sticks his paw in a jar of honey. The Australian government decided to let us take out up to \$20,000 in two bites. Millions of people didn’t need to be asked twice.

The official estimate for the amount removed from Australia’s retirement savings system is now a whopping \$42 billion.

According to ME Bank — a bank owned by super funds — the group most likely to raid their super are those aged 18-24. 30% of them dipped in compared to a population average of 8%. Because of the magic of compounding, the effect on retirement incomes in this group is much higher than the effect on a person with a shorter period until retirement.

The way compounding works is via a kind of curve we are all familiar with by this point of the pandemic: an exponential one. In each time period the increase is higher, making the curve turns towards vertical at the right-hand side.

As the next graph shows, a 20-year-old with 45 years until retirement could have expected \$20,000 in superannuation to turn into \$420,000 extra in retirement. Whereas a 35-year-old with 30 years until retirement could expect that \$20,000 left in super to turn into \$152,000 extra. The longer you have until retirement, the more those few dollars matter.

Sounds simple right? Young people should just have patience! Let’s look more closely. This graphic makes a couple of assumptions.

First is that young people would have \$20,000 to withdraw at all. Now, I set the starting point at \$100,000 so the curve illustrating the effect of withdrawing funds starts at \$80,000. That starting point doesn’t change the difference between the two scenarios. You could do the comparison between having \$20,001 or \$1 in the first year and the difference between the lines would be the same.

But even having \$20,000 in super to withdraw is very rare for young people. The median person aged 15-24 has just \$2500 in super.

What that means is most 18-24 year olds given the opportunity to clean out their super fund of \$20,000 will have left the cupboard bare. And no matter how magical the magic of compounding might be, you can’t create an exponential curve if you start with zero. Young people who clean out their superannuation during the pandemic will be starting from scratch when, or if, they next find a job.

Superannuation is seen as very democratic. But it is not evenly distributed at all. The median super balance for all Australians was \$65,000 for men and \$45,000 for women in 2017-18. Does that shock you? It’s not what all those glossy AMP ads would suggest is normal.

The average super balance in Australia is \$169,000 for men and \$121,000 for women. The average looks much higher than the median because superannuation holdings, like most wealth, is concentrated among the top end. Meanwhile, millions of Aussies have literally zero in super. The uneven distribution of superannuation in the community means realistically, the aged pension is unlikely to go away.  Even in 2065, people who chased their super down to zero in the pandemic will still have access to a pension. They’re not going to be on the streets.

The second assumption in the graphic above is the rate of return. This is vital. I chose 7% because that’s been a historic norm for investing. But what if it isn’t accurate? If the return is lower, the apparent penalty for withdrawing funds is much lower.

As the next graph shows, with 2% returns for the next 45 years, the penalty for withdrawing \$20,000 now is just \$49,000 in 45 years time. I’ve used the same scale as on the graph above to make the comparison stark.

In a low returns world, there is much less advantage to saving. Taking out \$20,000 now makes far more sense. This is the fact we all must wrestle with.

In general, the chocie to consume now or consume later — whether to save or borrow — depends on our own preferences. I can borrow, moving consumption from the future to the present. Or I can save, moving consumption from the present to the future. How do I make these choices?

Most people would prefer to consume now, all other things being equal. This is why we pay interest on savings — you have to offer some reward to get people to defer consumption.

How much return do you need to be motivated to save? It depends on what they call a discount rate. This varies by person. Do you need 1% a year? 5%? 7%? It can swing wildly depending on your circumstances. Your discount rate might shoot up if you lose your job, for example. After all, you need to eat and pay your rent in the here and now.

Official interest rates are at zero. The federal government is borrowing billions of dollars for 30 years at under 2%. It may be rational to assume long-term returns will not be high. If your personal discount rate is 3% and you expect returns on your super to be 2%, raiding your super makes perfect sense. This is the reality facing young people; income loss in the here and now, plus low expectations about the returns on saving.

The history of the Australian stock market has been one of high growth, but as the super funds tell you in the fine print, past performance is no guarantee of future performance. In Japan, the Nikkei index remains below its 1991 levels. Trying to save in that context has been a fool’s errand.

It is easy to moralise about young people raiding their super. But it may be that doing so is the rational response to the world they face.

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Peter Fray
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