Why the First Home Super Saver scheme has no point

After the shock of the early release of superannuation scheme's COVID-19 amendment, the superannuation sector can breathe a sigh of relief that government hasn't introduced a mechanism to allow members to divert their super savings into a deposit on a first home.

They might have expanded the First Home Saver Super (FHSS) scheme, almost doubling its capacity to release funds into a first home from $30,000 to $50,000, but as this is based on members putting that extra amount into their superannuation account by way of voluntary contributions, this measure is just for show.

Yes, it might have frightened a few left-wing commentators on social media last weekend, but that was likely because they didn't understand the scheme.

But who could blame them? The FHSS scheme is poorly understood because it is so inconsequential. Yes, it's a brilliant idea to enable Australians to use the administrative infrastructure of their superannuation fund to help them save for their first home. But with interest rates at 6000-year lows and - based on comments from the Reserve Bank of Australia - likely to stay that way, and home prices exploding through the stratosphere so rapidly, the FHSS scheme has no point.

And this helps explain why it's difficult to find out how many people have used the scheme and how much they've saved through it for home buying. Two years ago, Guardian Australia  was told by the Australian Taxation Office that in 2018-19 the princely sum of $41 million was released as part of the scheme to 3337 fund members. There are Sydney neighbourhoods that paid more in stamp duty.

If ever there was a scheme that would help Australians get into the property market to buy their own home and so better guarantee a higher standard of living in retirement, the FHSS scheme isn't it.

And even if this enhanced FHSS scheme is a test run for a KiwiSaver style super-for-home-deposit scheme, that scheme has hardly impacted KiwiSaver. And, fun fact, New Zealand house prices have at the same time surged faster than Australia's.

Superannuation has much bigger policy conundrums it should be worrying about and preparing to fight over, and this budget has touched on a few of them.

Like how the upward trend in the proportion of superannuation benefits paid as income streams has so profoundly reversed that we are back to where we were eight years ago, albeit part of the surge may be due to the early release scheme. If this trend doesn't slow and turn around fast, it won't be long before serious pressure mounts and retirees will only be able to take their superannuation as an income stream.

Another is that personal contributions into superannuation are going nowhere - they are flat in dollar terms over the past decade. The only part of the superannuation system growing its inflows are employer SG-driven contributions into not-for-profit funds.

Even personal contributions into self-managed funds have collapsed, with thanks of course to the introduction of the transfer balance cap. Okay, policymakers might have expected it to have an impact, but I wager none expected it to crush contributions in SMSFs by 60%. No wonder retirees were so protective of their franking credits and will continue to be so.

But one minor-major superannuation policy reform in this budget that will make a serious mark is the removal of the threshold below which employees would not receive SG contributions.

While getting rid of this threshold may be a small boost to low-income workers, they will blaze a trail for the rest of the workforce because this measure will shine a scorching ultra-bright light on the fees low-balance members pay. In doing so, they will help supercharge Australia's stampede to much lower fees because they will remind all of us about how much we are paying.

But this also highlights the masterstroke of the government when a few years ago they stared down protests to introduce the 3% fee cap on accounts below $6000. Let us not forget that if you need a government-sponsored fee cap to protect you from high fees, you're probably in the wrong super fund.

And this brings us to reforms that will allow superannuants to swap out of expensive, low-performing legacy products without paying tax or social security penalties.

While it's a complex reform, the efficiencies it could create within Australia's oversaturated retail super product market might in time transform retail super and re-energise parts of the platform market. And not before time.

This article first appeared on Financial Standard

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