There are real risks of unintended consequences to both superannuation and the housing market tied up in the Government’s First Home Super Saver Scheme (FHSSS), according to the Financial Planning Association (FPA).
Not the least of those risks is an erosion of the benefits of compound interest, the FPA has warned.
The FPA has used a submission to the Treasury dealing with the Government’s FHSSS Budget initiative plus its home downsizing proposals to warn of significant unintended consequences including increased pressure on the Age Pension in future years.
“The FPA is concerned that allowing people to access their superannuation accounts for a deposit will have consequences on both the housing market and the retirement income system, ultimately increasing house prices and the strain on the Age Pension,” the submission said.
It said that while the proposed FHSSS was based on the release of voluntary contributions, these FHSSS funds were not quarantined from superannuation balances, meaning the proposal would still have consequences for the retirement savings of many Australians who use the scheme.
“The investment earnings in super usually represent a larger component of an individual’s superannuation balance at retirement than the voluntary contributions an individual makes,” the FPA submission said. “Any income earned by assets sitting in super gets reinvested to buy more assets, over years and years. A key attribute of the superannuation system is the use of compound interest to improve the growth of retirement savings. Removing money from super early dramatically cuts its growth potential.”
“The longer the funds remain in super, the greater the consumer nest egg in retirement,” it said. “The early release of funds presents long-term implications for the superannuation system as consumers lose the impact of compound earnings over several decades, leaving Government to fund the resulting shortfall in retirement savings.”
The FPA submission said using superannuation accounts to fund housing would reduce the retirement savings of future retirees, putting extra pressure on the Age Pension.
“As evidenced with the first homeowner grants, incentives for housing usually push up house prices. Such schemes commonly result in a condensed influx of people being able to afford to buy with more money up front to spend on a house, driving more demand for properties and artificially inflating house prices to match the availability of funds,” it said.
“Housing markets then adjust accordingly to the influx of funds, further disadvantaging home buyers. This ignores the cyclical nature of markets. Encouraging people to buy property at what may be the peak of the cycle in some cities will not grow wealth, rather it will only lead to an increase in household debt.”