The government could, as an alternative, help Australians finance their homes with super, market experts say

A proposal to junk the compulsory superannuation contributions could potentially do more harm than good to many Australians, market experts say.

The opt-out super plan, which was proposed by backbench MPs in the state, would allow workers earning less than $50,000 to access their supposed super contributions as wages. The proposal was being considered as part of the federal government's Retirement Income Review.

Retirement savings at risk

Compulsory super contributions are crucial to help Australians fund their retirement, said Peter Locandro, managing partner of Chan & Naylor in Melbourne, Moonee Ponds & Wheelers Hill. Giving them the option to take their super fund as wages would basically go against this objective.

"Getting extra wages would certainly help many Australians pay the bills they need to today, help with mortgages, and general living," he told Your Mortgage. "However, what would stop people from spending that money on a new car that they don't need, or perhaps, that overseas trip that they have been wanting to take but could not previously afford?  The risks of pushing this change would be how to monitor how much everyday Australians would be worse off in retirement.”

Also read: Why Aussies need to check their super accounts

An analysis by Industry Super Australia showed that the plan would also increase the tax bills of workers.

Wages are taxed at a higher rate than super contributions. This means that workers who opt out of super would not only endanger their retirement fund but also be worse off given the higher taxes they have to pay.

For instance, a 30-year old working mother earning $50,000 could potentially lose almost $300,000 from her super and pay more than $61,000 extra in tax.

"The numbers don't lie. Opt-out super is a blatant tax grab that would be used to prop up the government's budget bottom line, at the expense of hardworking NSW workers' retirement savings," said Bernie Dean, chief executive of ISA.

Using super to buy a home

A more practical and useful solution would be to allow people to use some of their super fund to purchase a property, said Sarah Megginson, market commentator and editor at Your Investment Property.

"I think it would be smarter to see policies designed around allowing people to use their superannuation funds to buy their own home. At least that way, the money is going towards an asset," she said.

Megginson said the proposal to scrap the required super contributions would be a big step backwards, especially for low-income workers who wish to own a home but are struggling with affordability.

"Giving people access to small amounts of money in the form of their superannuation on a weekly or monthly basis isn't likely going to see people use that money in a meaningful way," she said. "What happens in 30 years from now in retirement — when the superannuation funds they could have had compounding away for three decades are missing?"

Also read: More Aussies are using their super to pay off mortgages

However, the biggest issue with policies that would allow super to be used to fund a home purchase would be regulation, Locandro said.

"If it would allow young Australians to buy their first home, how much superannuation do young Australians have? Generally, if you are in your 20s, you haven't been in the workforce that long, and as a result, haven't accumulated too much in forced superannuation. Therefore, how effective would such a policy actually be?" he said.

Saving for retirement

Young Australians are encouraged to start contributing to their super as early as possible to maximise the scheme's benefits.

Locandro said saving early increases the effect of compounding, providing Australians with more than enough funds for their retirement.

"Savings and how to budget in everyday life is something that should be taught at home and should be introduced into our schooling curriculum. The world of money has dramatically over the past years and will continue to do so. Australians need to be educated," he said.