Withdrawing up to $20,000 from your superannuation under the Morrison government emergency measures might have seemed attractive at the time, but it could turn out to be the worst financial decision you have made.

That is the conclusion of research by Labor-aligned think tank the McKell Institute, which also acknowledged that many Australians used the money to pay for their mortgage, rent or other household bills.

McKell made its conclusions by looking at the returns of superannuation funds since the early access scheme was introduced, and calculating the investment growth forgone by those who withdrew.

A rapid recovery

The think tank found super funds had increased by between 15 and 20 per cent since the low point in April 2020, with members withdrawing a total of $36.4 billion under the scheme.

Anyone who took out the maximum $20,000 available has therefore missed out on a gain of $3644.

Had the $36.4 billion in withdrawals stayed in super, it would be worth $41.1 billion by now.

So overall, the three million people who withdrew have collectively lost $4.7 billion, McKell found.

“If you took out $20,000 from the time it was allowed in April and July, you would have $23,644 if you had stayed in super,” McKell Institute executive director Michael Buckland said.

He offered a thought experiment to put that into context.

“If you had to pay $3644 in interest in a single year on $20,000, then you’ve got the worst loan in history,” he said.

“It was worse than borrowing it from a payday lender. A personal or payday loan charges about 10 per cent interest.”

Although the government needed to offer support to those hit by the pandemic, using superannuation withdrawals was one of the worst ways possible.

It effectively moved the burden of the response to those who could least afford it.

And it failed to make use of the government’s access to cheap money.

Government borrows cheaper

“When the government provides support it simply borrows, and on three-year bonds it is only paying 0.25 per cent,” Mr Buckland said.

“So the question is, ‘To fund welfare, do you have people lose 15 to 20 per cent in a year, or do you pay 0.25 per cent?’

“The government sees it as a good thing, because it doesn’t add to their debt. But someone else is bearing that cost – in this case people in the form of smaller retirement balances.”

In addition to taking on debt, the government “could have even sold down infrastructure assets that are trading at a high at the moment because of record-low interest rates,” Mr Buckland said.

That would have allowed the government to cash in profits to provide necessary financial support without adding to its debt mountain.

As the chart above shows, the largest single number of people making withdrawals spent the money on rent or mortgage payments.

That may sound like a good use of the cash, but even paying down a mortgage would leave a person worse off than keeping the money in super.

“Mortgage rates are now less than 3 per cent, so if you chose that path you have effectively saved yourself 3 per cent and lost 20 per cent,” Mr Buckland said.

“It sounds reasonable, especially if you are struggling to make repayments, but it was still an expensive way to fund that welfare.”

That’s not to say people didn’t have legitimate reasons for withdrawing their super, though.

Look beyond the figures

Grant Malkiewicz, financial adviser with Verse Wealth, said although using super to pay off the mortgage makes little sense from an opportunity-cost perspective, it would have reduced the length of the loan and “provided a level of comfort” to some people.

Especially if their business was under pressure or they were worried about losing their job.

“Holding some cash just in case could have been a survival mechanism in that situation,” he said.

People struggling with credit card debt could also have been justified in paying down debt.

“On the psychological and emotional side, withdrawing super could have been important,” said Robert Goudie, an adviser with Consortium Private Wealth.

“Not every decision should be purely based on numbers. Sometimes it just helps people sleep at night to know they have a certain amount of interest covered.”

What’s the deal with recontributions?

Those who withdrew and discovered they did not need the money could make smart decisions in the future to help remedy their situation, too.

“They could make a co-contribution for themselves and their partner, which would give them a $500 freebie from the government,” Mr Goudie said.

A spokesperson for the ATO told The New Daily that while those who made early withdrawals could recontribute the money if they found they didn’t need it, they would likely come under scrutiny for doing so.

“If an applicant chooses to recontribute to their super account, it will count towards their non-concessional contributions cap,” they said.

However, if the ATO deems recontribution was the aim of the exercise from the beginning, then the member “may be subject to tax consequences, including administrative penalties and interest charges”.

The New Daily is owned by Industry Super Holdings