It almost goes without saying that 2020 has been an extraordinary year for all of us.
As part of its response to the COVID-19 pandemic, the federal government is allowing people to withdraw up to $20,000 from their super accounts tax-free, consisting of up to $10,000 last financial year and $10,000 this financial year. Applications for the second withdrawal must be made before 31 December 2020.
These policies have had an immediate impact on the nation’s superannuation system. By the beginning of August 3 million people had withdrawn $30 billion in hard-earned retirement savings.
As is often the case with ‘policy on the run’, the unintended negative consequences can eclipse the well-intentioned policy objectives. These negative impacts, ranging from fraud to the loss of insurance, are felt most acutely by the young and economically vulnerable, with 35% of fund members aged under 40 making withdrawals.
Analysis by Industry Super Australia points out that withdrawing $20,000 over the next year could cost a 30 year old $100,000 at retirement, and a 40 year old $63,000. So an early withdrawal now might be the difference between a dignified retirement verses one reliant on welfare and the forced sale of other assets.
Of course, many people will have accessed their super to help pay debts, keep a roof over their heads and put food on the table which was the intended purpose of the scheme. But research by AlphaBeta has revealed a troubling surge in non-essential spending during the mass super raid, with a reported 114% increase in online gambling transactions during the pandemic.
I believe the government should have extended its wage subsidy program and other stimulus supports rather than eroding the super savings of those least able to afford it.
What's more, more than 100,000 super fund members have completely drained their accounts and effectively ended their membership of that fund.. This means these former fund members have lost their insurance cover for death and total and permanent (TPD) held through their default super accounts. This cover is a critical lifeline for many as it's often the only insurance people and their families have to claim on if they pass away or become permanently unfit for suitable employment.
Automatic insurance provided through super is now more important than ever given the serious psychological impacts likely to be generated by the forced social isolation and economic dislocation during the pandemic. Modelling is sadly predicting a 25% increase in suicides with a third of these likely to be young people who may no longer have insurance cover due to questionable government policies.
For those who retain their super insurance, there are a few long-standing issues to be aware of with some insurance products as the government slowly winds back income support.
The quality and value of TPD insurance is often determined by the employment conditions and average hours worked by an active super fund member. The rise of the gig economy and underemployment has left thousands of precariously employed workers with substandard disability cover that will only pay out if they are permanently unable to perform basic 'activities of daily living', such as feeding and washing themselves. These thresholds are almost impossible to satisfy and many injured or sick workers discover their TPD insurance is worthless.
Recognising many more people will find themselves out of a job or on reduced working hours as a result of the COVID-19 pandemic, the Financial Services Council (FSC) announced on behalf of its life insurance member companies an initiative designed to ensure that customers’ TPD cover will not impose these harsher definitions if their work conditions change.
On the face of it, this is good news for those workers affected by the fallout from the COVID-19 pandemic. However, it is only a short-lived reprieve because the life insurers' moratorium is due to finish on 1 January 2021, well before the JobKeeper program is expected to end in March. Many workers who might be retrenched or put on reduced hours by their employers when the JobKeeper wage subsidy stops will have significantly reduced life insurance coverage thanks to insurers bringing back the harsher definitions three months earlier.
It is clear the FSC must extend the initiative beyond the end of JobKeeper as a pragmatic first step. More broadly, the FSC should recognise it is unreasonable for some insurers to continue to include clauses for some workers that are almost impossible to satisfy and scrap them altogether.
We also expect to see a rise in mental health claims as workers struggle through the economic fallout after the JobKeeper program ends. Claimants with 'activities of daily living' and other substandard cover are in for a nasty surprise as these definitions are judged against physical capabilities, not psychological health. That will leave many mentally incapacitated members with no insurance entitlement as long as they can still feed, clothe or wash themselves.
The insurance system provided through super is a crucially important safety-net for Australian workers. That’s why it’s vital to ensure the disability cover retains its value and integrity by abolishing substandard terms – terms which disproportionately impact the most economically vulnerable workers.
It’s really very simple: if a member pays a full premium they should expect to receive full cover. Until the industry stops using substandard definitions like 'activities of daily living’, the heart of the problem will persist where people are left with largely useless insurance despite paying the same premiums.
At Maurice Blackburn, we will continue campaigning for meaningful change that ensures all workers, with all conditions, are fairly insured.