An economic recession can mean a period of job losses, wage cuts, and prolonged unemployment. People might struggle to make ends meet, let alone keep up with loan repayments and super contributions. Sometimes to manage hardship, people can request early access to money that has been put away for retirement. For instance, in 2020, the Australian economy went through its first technical recession in almost three decades. The measures taken by the government to counter the effects of this recession included allowing Aussies genuinely facing financial hardship to withdraw up to $10,000 from their super funds. Those who didn’t qualify for withdrawing super benefits per this scheme could sometimes still withdraw super funds on compassionate grounds.
How does a recession affect super fund balances?
The super contributions you make are often invested by the fund’s trustees, with interest earned on this investment paid into your super account. Usually, super fund managers and the Australian Prudential Regulation Authority (APRA), try to ensure that super funds offer their members a healthy return on this investment.
However, this cannot be guaranteed during a recession. This could be because super funds are often at least partially invested in stock markets, which tend to drop during an economic downturn. For instance, during the Great Financial Crisis, the return on growth funds’ investments in the calendar year 2008 was -21.5% (according to SuperGuide), which meant that the super fund balance decreased. On the other hand, despite the economic recession in 2020, super funds finished the year up 3.7 per cent, compared to 14.7 per cent in 2019 (which was not marked by a recession).
Super balances can also shrink during a recession if the government allows members early access to super benefits. In 2020, super benefits amounting to nearly $36 billion were withdrawn by members claiming financial difficulties or on compassionate grounds. Between September 2019 and September 2020, total super assets in Australia dropped by 1.6 per cent, to $2.9 trillion.
For super fund members, this effectively lowers the income available to them upon retirement. The Australian Securities and Investments Commission estimated that someone aged 30 today could stand to lose $21,516 worth of retirement benefits if they withdrew $10,000 from their super fund in 2020.
How does a recession affect superannuation guarantee contributions?
In Australia, the percentage of an eligible employee’s income that an employer must contribute as guaranteed super was frozen at 9.5 per cent in 2014. This rate was an increase from 9.25 per cent for the 2013-2014 financial year. Also, it was stuck at 9 per cent from 2002-2003 to 2012-2013, though it was not impacted by the Great Financial Crisis of 2008-2009. The super guarantee percentage was scheduled to increase to 10 per cent by July 2021, and 12 per cent by 2025.
However, as a result of the 2020 economic recession, the government has suspended the proposed increase to 10 per cent, arguing that workers may benefit more from receiving wages now than contributing to their super.
Given that employees may be hit wage freezes or even wage reductions during a recession, the super guarantee contributions their employers make could stagnate or decline. If employees wish to avoid this, they could check if their employers will allow them to salary sacrifice super contributions, but this would depend on employees being able to put aside some part of their income. Some employees could also consider making personal super contributions and claiming a tax deduction at the same time. Remember that both salary-sacrificed super contributions and tax-deductible personal super contributions are considered concessional contributions. The cap for concessional contributions can also be carried forward if not used in a particular financial year.