Industry super sector warns of damaging consequences of Hockey idea that Paul Keating dismissed as ‘not responsible enough to be considered a thought bubble’

This article is more than 5 years old

This article is more than 5 years old

Australians could have $140,000 less in superannuation when they retire if the government allowed first-home buyers to dip in to their accounts to purchase property, according to the industry super sector.

Industry Super Australia (ISA) warned on Tuesday that the proposed changes to super rules would have the biggest impact on low and middle-income earners, who were already disadvantaged by the structure of super tax concessions and faced the prospect of inadequate retirement incomes.

The prime minister, Tony Abbott, said he was happy to see debate on the “perfectly good and respectable idea” floated by the treasurer, Joe Hockey, to allow Australians to access their superannuation accounts to buy their first home.

But the former Labor prime minister Paul Keating said the proposal was “not responsible enough even to be considered a thought bubble” and would “destroy universal retirement savings at its core”.

ISA, which represents industry super funds, said the average first-home buyer’s deposit was about $40,000, which would wipe out the first nine years of a young adult’s super savings, assuming a starting salary of $50,000.

According to the group’s calculations, such a person would retire at 67 years with $140,683 less in their super account in current prices, or would have to work extra years to make up the difference.

The projected impact at retirement is significantly larger than the initial withdrawal because of the effect of compound interest over the life of the super account.

The chief executive of ISA, David Whiteley, said the idea could drive up home prices and was “completely at odds” with the government’s push to reduce the pressure on the age pension.

“People would expect to either retire with less and have a less comfortable retirement or bear a larger burden on the age pension or work longer – possibly into their 70s,” he said.

“When you consider the ageing population and you recognise the need to reduce the burden on the age pension in the future, and you recognise the need for greater private provision of retirement, the question is how do you achieve that and get people to save money?”

Whiteley said while the “blunt instruments” of policymakers were to force people to work longer, they should focus on better distributing super tax concessions. Existing concessions are often criticised for favouring higher income earners.

“What we need to ensure is we are getting as many low and middle income earners to save as much as they can for their retirement,” Whiteley said.

“Secondly, we need to increase contribution rates to 12% [from 9.5% at present] as soon as possible.”

Whiteley said the idea of allowing super funds to be used for home purchases had been rejected in the past because it was bad policy.

“Someone could wipe out their first decade or so of their savings, lose the compounding benefits of that capital and then may well find themselves no better off in the housing market because this policy has led to an inflation in home prices,” he said.

Keating said growth in the superannuation asset base “could not happen if people were permitted to take funds for convenience, thereby diminishing the asset pool and its capacity to compound”.

“This would especially be the case for younger home buyers who would typically have a relatively modest pool of superannuation savings from which to draw,” Keating wrote in an article for Fairfax Media on Tuesday.

“In fact, any meaningful housing deposit taken from the accumulated savings of younger savers would effectively eliminate or near eliminate the base from which the important compounding would otherwise occur.”

But Queensland Liberal National party senator Matt Canavan, who backed the idea in his first speech to the Senate, said the most important investment people would make was to own their own home.

“Paul Keating says that allowing people to invest in their own home ignores the impact of compound interest. Last time I checked, property was an asset, an asset that earned around 5% a year in capital growth,” Canavan said on Tuesday.

“Why make people save for retirement before they can own their own home? We should free up the rules around superannuation so that young people can use their income and their savings to buy their first home.”

Canavan said “unreasonable restrictions on land release” were part of the reason homes were out of reach for his generation, but that was “largely a state issue”.

“We should be helping people buy their first home when they are 25, not 65,” he said.

In 1993, the then Liberal party leader, John Hewson, proposed allowing first-home buyers aged under 35 to use up to 75% of their accumulated superannuation benefits for the deposit.

New South Wales Liberal MP Peter Hendy said he was one of the co-authors of that “Fightback” policy “all those years ago”.

“I think it was a legitimate policy to put forward at the time,” Hendy told Sky News on Tuesday. “I think it is very very much a policy we should be considering but we need to run a prudential ruler across it so we ensure no rorting would occur.”

Abbott said on Monday he could “remember back in the early ‘90s when I was helping John Hewson to draft the Fightback statement, putting in a suggestion to this effect”.

He said the idea had taken hold in other countries, including Singapore, and he was “very happy to see further debate” but the government did not have any plans to introduce it at this stage.

The shadow treasurer, Chris Bowen, said on Tuesday the “thought bubble” was “nothing more than reheated Fightback policy” and it contradicted comments by the finance minister, Mathias Cormann, in October 2014 that such a move would drive up house prices.

“The prime minister used Singapore as an example for his latest bad idea, but Singapore has contribution rates of 36% – 16% employee and 20% employer,” Bowen said.