A University of Melbourne finance professor and Super Consumer Australia director has proposed an alternative solution to soften the blow of COVID-19, one reliant on borrowing funds from the Reserve Bank of Australia rather than superannuation funds.
It comes as the industry responds to Prime Minister Scott Morrison's proposal to allow Australians financially impacted by the coronavirus to withdraw up to $20,000 over the next two financial years from their superannuation balances, in the case they find themselves out of work or lose 20% of their income.
But in an article for The Conversation, finance professor Kevin Davis said the government's "early superannuation release" proposal will only make matters worse.
"Allowing that could make the economic situation even worse. If super funds were to provide cash to their members, they have to get that cash," he said.
"If they sell the assets they hold (shares, bonds and so on) that will further depress already depressed asset prices. The last thing we need is such sales solely for the purpose of obtaining cash, particularly if the assets have long term value."
Instead, he suggests the government should allow Australians to borrow against their superannuation savings with zero interest rates, allowing them to repay their super funds when their income returns to "normal".
These repayments could be made through a higher tax rate on future earnings, or through voluntary contributions.
Davis suggests a novel form of quantitative easing could be the solution.
"The super funds could borrow from the Reserve Bank, using super fund assets as collateral (a practice known as repurchase agreements or repos)," he said.
"These specific repos would need to be at a zero interest rate, to match the zero interest rate being paid by members."
Davis, who is also a board member of Superannuation Consumers Australia, argued a zero interest rate would not be "unreasonable" considering the current low interest rate environment, and would make the loans "risk free".
"This solution has the advantage that super funds would not be dumping assets into already depressed markets," Davis said.
"It would be no more costly to the government than giving cash hand-outs, and the money would be repaid."
He argued his proposal would allow the government to have a more targeted approach, and would enable them to more directly help those without access to their super.
"Importantly, while it would require temporary, crisis, adjustments to the super framework, it wouldn't undermine the system," Davis said.
To achieve this, Davis said super funds would need to allow members to switch their accounts into "drawdown mode" similar to the accounts used by pensioners.
The ATO would need to be notified of members switching to these accounts, Davis said, so as to "implement repayments via annual tax calculations or via advising employers to withhold and transfer a larger sum as regular pay as you go tax amounts".
The RBA too, would need to introduce a new zero interest repurchase agreement for super funds.
Davis argued this would be the best option for Australians, who already face record high levels of household debt.
"There are other ways for Australians to get cash by drawing on other assets, particularly equity in their homes," he said.
"But at the current time, with uncertainty about what the crisis will do to housing prices, increasing indebtedness in this way with an interest cost doesn't seem to be as good an option as borrowing against super."
Desperate times call for innovative measures, he said.
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