Late yesterday PM Gillard confirmed that 60+ super-holders will be exempt from increased taxes. Which leaves the rest of us picking up the tab. The following, cross-posted from Roger Montgomery‘s blog, nicely captures the implications.
Dear Under-50 Investor,
Superannuation will be no good for you if you are under 50 today, so invest the absolute minimum amount into super.
That means, no salary sacrificing, no co-contributions, no non-concessional contributions. Ignore the calls to save tax and boost your super. This is not advice but a challenge to others, much more qualified than I, to dispute it and explain why I am totally wrong. By the way, as a fund manager of course, I am financially delighted to be completely wrong on this one!
What I am saying is risky – I may be labeled a ‘generationist’. Note my tongue is firmly in my cheek during the writing of this entire rant (and that’s partly because I have only ever invested the bare minimum into super). More seriously however, I am also swimming against a veritable tsunami. There are so many on the teat of this topic that one risks offending with a ‘less is more’ stance.
What I am not saying is that you shouldn’t invest. You must invest, irrespective of your age. What I am questioning is the wisdom of investing through a structure that may not be as tax effective, nor may your funds be as accessible, in the future as it appears today.
Since about 1995 (when I was 24 years old) and my accountants at the time suggested I put more money into super, I have staunchly told anyone my age who would listen that they’d be mad to put extra funds into super. I have always thought ‘you’ll never see it’. The reasoning was simple enough; Super was set up by baby boomers, for baby boomers. And since I am not a boomer, the favourable tax environment enjoyed by the boomers, I believed, would be gradually eroded such that it wont be any advantage when it comes around to my turn. ‘No thanks’ was always the response I gave my accountants when they suggested I’d be wise to put additional funds into super.
A superannuation storm has now been stirred up by the Labour party and many investors, who have been maximizing their contributions, are screaming blue murder.
Like an episode of some Socialists Unite sitcom the outcome of my prediction is a benefit for the greater good but not for the people to whom this missive is directed.
As you read on you will observe a shift in policy towards to super. Individually, the seem like minor modifications. But taken chronologically, there’s a trend in place that may mean investing within the super structure is becoming less and less attractive for the young.
Now please don’t regale me with tables showing how Joe Citizen can save tax by stashing away a little extra into super or how a person on a low income will be better off thanks to the governments co-contribution scheme. What I referring to is a change, over many years, to the very rates of difference between investing inside and outside of super and an erosion in the benefits that exist today.
As the aggregate amount invested gets bigger, and as baby boomers get older, the temptation to tap into the giant pool simply becomes too great for the government to resist. In the 2013-14 financial year the total tax effectiveness on superannuation will be just over $33 billion. There will be many minor storms along the way. The current war appears to be about taxing withdrawals from accounts with very high balances. Over time however I expect it is inevitable (thanks also to poor economic and fiscal management – see my post here on The Balance of Payments and my meeting with Andrew Robb) there will be a gradual erosion of the attractiveness of super for younger people.
In the 1991 Budget, Treasurer John Kerin announced that from 1 July 1992 , under a new system to be known as the Superannuation Guarantee (SG), employers would be required to make superannuation contributions on behalf of their employees. When the Keating Labor government introduced the system in 1992 (The National Wage Case established guidelines to require new industry superannuation schemes to conform to Commonwealth operational standards) it was part of a reform that sought to address the inevitable climactic change in the government’s finances that would be brought about by a generational avalanche. In 1993, the World Bank endorsed Australia’s three pillar system for the provision of retirement income as world’s best practice.
There are however two points to note. Compulsory Super was introduced not because of some altruism on the part of the government of the day but because of the cost that would be imposed on governments of the future as baby boomers aged and required increasing medical assistance and to offset the cost of the pension as the bulge in the population approached and passed the qualifying age.
The second observation is this; it was introduced by baby boomers for baby boomers.
The proposed solution to the inevitable train wreck on government finances was a combination of a safety net (a means-tested Government age pension), a compulsory superannuation contribution by individuals (forced savings) and finally a voluntary version of the same thing.
The trade unions agreed (as they had done in 1986) to forego a national 3% pay increase in return for an equal contribution into superannuation. The 3% was matched by an employer contribution, which would increase over the years to total 12%. Between 1992 and 2002 contributions were progressively increased from 3% to the subsequently capped 9%.
Tellingly, the Howard government was criticised by former labour Prime Minister Paul Keating for not increasing the compulsory rate. Of course there would be more than double the amount of money in the super system today (not withstanding the impact of silly money management practices and GFCs) if the rate was 15% since 1996 instead of 9%.
And this brings me to my next point; the amount of money in the super system. There’s $1.4 trillion approximately and of that about $439 is being self managed. That’s $1.4 trillion. Hmmmmm. If I was a government number cruncher, I would find that $1.4 trillion more than a just tasty morsel. I wonder what would happen to the government’s coffers, if we taxed it just a little more here? Or perhaps we extend the age before people can get it there? And what if we cap the amount they can take out now that all our boomer mates have withdrawn what they need? Or what about taxing payouts? Gosh we could really do something fancy with all that money now that it is so temptingly locked up form people and they keep putting more in!
I think you get the drift. Recently I was at an awards ceremony and a popular expert on investing was giving a lecture on super with a long-winded history of the introduction of the pension.
Here’s the history taken from an interactive schooling website: “Coming into effect on 1 July 1909, the Commonwealth aged pension initially provided £26 ($52) per annum to men and women over the age of 65 years. This figure was just under one quarter of the ‘basic wage’ which was decided in 1907 by Justice Higgins. To be eligible for the pension, an individual had to be able to meet a number of criteria. They had to have resided in the Commonwealth for more than 25 years and to be of ‘good character,’ (despite the latter not being defined). Non-residents, the Indigenous people of Australia, Asians and Indigenous people from the Pacific Islands, New Zealand and Africa were completely excluded from claiming the pension. See image 2
To ensure that those who were most in need of the pension received it and also to limit the cost to the government, the 1908 Act also provided that the Commonwealth old-aged pension be means- and asset-tested. An individual who had an income of more than £52 ($104) per year or owned property valued at more then £310 ($620) became ineligible for the pension.
In 1910, around 34 percent of those over 65 were receiving the old-aged pension. The average life expectancy of an Australian was only 55.2 years for men and 55.8 years for women, which meant that not many people lived long enough to receive the pension. Today, the average life expectancy of Australian men is 77.6 years and 83.5 years for women. Since more Australians are living beyond 65 years of age, unprecedented numbers are becoming eligible for the aged pension. In 2004 the number of aged pensioners reached 72 percent.”
Interestingly our investing expert – a boomer himself – focused on the very last point along with a carefully placed reminder that Australians were never meant to qualify for the pension because they would be deceased, on average, a decade or so before they qualified.
Wham! There it is. Get people to start realizing that they were never meant to get the money anyway. Maybe, one day, we’ll hear the argument we’re not meant to qualify for our super until ten years after we’re deceased too. Don’t laugh. If government finances become sufficiently precarious and there aren’t any boomer left to upset, anything is possible.
The train has left the station and the evidence is everywhere. The government wants to get their hands on your super and they don’t want you to get as much of it.
Today the Gillard government is considering ending the tax-free status of super withdrawals. But this is not the first change that seeks to repeal some of the claimed largesse that individuals enjoy through the super of the pension. Way back in 1994 the pension age for women was raised to 65, in 1996 the superannuation surcharge was introduced to tax contributions above a predefined level.
These changes however were followed by a golden era – a period of apparent government generosity. To reduce the financial burden on the government a Pension Bonus scheme was introduced in 1998 and a person could accrue a pension bonus payment by deferring claiming the pension while still working. The maximum age for SG contributions increased from 65 to 70 in 1997 and then to 75 in 2002. The Super Surcharge was reduced from 15% to 12.5% in 2003 and co-contributions were introduced for low income earners. In 2004, the Treasurer released A more flexible and adaptable retirement income system as part of ‘Australia’s Demographic Challenges’ announcement. Amongst other things this report proposed to allow access to a person’s superannuation, in the form of an income stream, before they had left the work force (i.e. transition to retirement pensions) and to scrap the work test for those under age 65. 2004 was also the year that the Superannuation surcharge was reduced again from 12.5% to 10% and in 2005 Treasurer Costello abolished it altogether. In the same year the work test governing contributions made under age 65 ceased to operate.
Then in the budget of 2006 the generosity towards baby boomers really cranked up. In the Budget, Treasurer Costello announced plans to simplify superannuation. “Simpler Super” includes:
- exemption from tax on end benefits for Australians aged 60 or over from I July 2007;
- no tax on a lump sum;
- no tax on a superannuation pension;
- reasonable benefit limits to be abolished; and
- transferring super between funds made easier.
The implementation date was at the peak of the pre-GFC froth, 1 July 2007.
And the generosity continued into September that year when the Social Security assets test threshold was raised from $531,000 to $839,500 for a couple and from $343,750 to $529,250 for an individual. It was estimated that more than 300,000 extra people would be eligible for the age pension.
Next, the taste of blood.
In 2008, Labor’s first Budget contained details of a review of taxation – “Australia’s future tax system”, to be chaired by Dr Ken Henry and the terms of reference included the government’s commitment to preserve tax-free superannuation payments for the over 60s. But in May of that year Minister Sherry announced consultation on a measure (introduced by the Coalition Government) requiring future superannuation contributions and existing balances for temporary residents to be transferred to the ATO. If unclaimed after 5 years, the amounts would be confiscated. A forecast of up to $1 billion in additional revenue annually was predicted.
In December the same year the Act requiring temporary resident’s superannuation benefits to be paid to the ATO, if not claimed within 6 months of departing Australia, commenced operation. In 2009, the Act raising tax rates of Temporary Residents’ superannuation benefits when paid took effect.
In 2009 Minister Sherry announces a review (it later became known as the Cooper Review) followed by the terms of reference into the governance, efficiency, structure and operation of Australia’s superannuation system. In July of the same year the rate at which the government superannuation co- contribution was paid was reduced “temporarily” between 1 July 2009 and 30 June 2014 but would return to $1.50 for every $1 contribution (subject to income test threshold) on 1 July 2014.
In the same year, the limit on concessional contributions (formally known as tax deductible contributions) was reduced from $50 000 p.a. to $25 000 p.a. for 2010 onwards. The Pension Bonus Scheme was completely abolished.
The following year the government responded to the Henry Review and the Superannuation Guarantee rate was proposed to be raised to 12% between 2013–14 and 2019–20, and the Superannuation Guarantee age limit would be increased to 75 from 1 July 2013.
Meanwhile, the government proposed changes to the co-contributions scheme. And surprise, surprise, the government co-contribution rate would be set permanently at $1 for every $1 of personal contributions made by those receiving an adjusted annual income less than $31 920 p.a. So much for the “temporary” change and the promise to return to $1.50 made back in 2009. The qualifying age for the age pension would now also increase by six months every two years until it reaches 67 years of age on 1 January 2024.
In 2011 Superannuation Minister Bill Shorten confirmed that the amendment to abolish the age limit meant that from July 2013, up to 51,000 eligible workers aged 70 and over will receive the superannuation guarantee for the first time.
“Making superannuation contributions compulsory for these mature-age employees will improve the adequacy and equity of the retirement income system, and provide an incentive to older Australians to remain in the workforce for longer”.
It may be subtle to you but to me the shift is well underway. You cannot put $1.4 trillion of long-term equity in front of a government struggling to balance its books and expect them to not be tempted to tinker.
Today’s announcement by Gillard to end the tax-free status of super payouts for those with more than $1 million is another shining example that ‘generationism’ is well and truly underway and the battleground is superannuation.
I believe by the time someone turning 40 today is entitled to extract their super, the tax rates will be higher, the amount they can withdraw will be lower and they may not qualify at all because the age, at which they can qualify, will move. Remaining in the workforce longer will be something that younger people will need to get used to, to fund the profligacy of the generation before.
The government will argue that the greater good – infrastructure, healthcare et al – is best served with a sound balance sheet and so if you all keep contributing more super for longer we collectively will have better roads and cheaper healthcare. So much for funding your own healthcare with the proceeds of your concessionally-taxed super! I believe that in the longer term you will be funding the government’s expenditure by contributing to super. It is simply too big to be ignored.
Cross-posted from Roger Montgomery.
Having moved to Australia a couple of years ago, a couple things jumped out regarding personal finances here:
1. House prices were (and are) too high relative to rents to justify buying.
2. The treatment of investment losses (negative gearing) is more generous than any other jurisdiction I’ve lived in, I think unjustifiably so.
3. The superannuation system is too generous, if it’s purposes are reduction of public obligation for the age pension, or any goals related to financial equity.
I understand that I’ve only been here a couple of years, and that there is a long history of governments making changes to super. However, to me that seems to occur because the system is so generous, and there is ample room to shave away some of the consumer surplus that super investors get.
Why invest in super? For readers of this site, who one assumes have incomes above 40K/year:
1. Reduced taxes on contributions (from your marginal rate to 15%)
2. Reduced taxes on investment growth, every year
3. Currently, no tax on withdrawals.
If they take away (3), investors are still left with gains 1 & 2, while the benefits of lightly taxed growth will be disproportionately beneficial to your $1M+ investor.
3) if you tax pension funds at retirement phase, every dollar that is taxed now will be claimed come centrelink time in the future.
Right now, Government is just deciding whether to take the liability now or pass it to future generations/governments in the future.
The problems with Super as I see it are:
1) When a new framework like Superannuation is introduced the first generation will pay twice. i.e. pay super and also support the aged pension via income tax payments.
2) Agreed that the govt will likely tap into the vast reserve in the way of increased tax payments. I remember reading somewhere that the cost of the aged pension to the tax payer is less than the cost of the tax rebates as per the current superannuation structure.
3) The average super fund does not have the liquidity to support a large scale draw down of funds. I predict we will see a GFC like redemption freezing of funds in the future.
The simple problem I see with super is that your money gets put (mostly) into the stock markets, and if we go into a no growth or degrowth environment (because of a debt jubilee, or panic over energy problems, or unmanageable climate change, or any other reason), the markets could crash, worse than 2008, and leave you skint.
+1
And the corollary is that if super funds maintain their value over, say, the next 50 years, it implies that there has been constant growth. That is to say, constant increase in population with all the attendant energy, water supply etc consequences. In effect, the question is, how long can the great Ponzi continue? A lot of whingers about baby boomers come from (or have) families with more than 2 children. They are themselves the solution & part of the problem…
Nice eye catching scenarios, but it won’t happen any time soon. Why? You have every major CB standing button ready to buy the markets by hook or by crook any time serious weakness appears. There is an enormous put under stocks.
Not touting Super.
The problem is conventional Super allows too few options. It’s pretty much either stocks or bonds. If you give it some thought, there are some alternatives to that.
Spot on article all in all!
It ought be read in conjunction with Rumple’s article here
http://www.macrobusiness.com.au/2013/01/the-pre-saving-myth-of-superannuation/
I think the issue is even more complex. Most of the money put into Super is being wasted on ‘consumption’ anyway e.g. Retail malls, office buildings to house more lawyers, infrastructure that simply caters for accommodating more migrants on the edge of cities etc etc etc
Furhter, if a Govt increases social spending, funds that by reducing infrastructure spending, then sequesters Super funds for infrastructurre, essentially, have not the Super savings then been spent on Social spending?
I’m a boomer! For most of my life I have not been able to afford Super contributions. So I don’t have a lot of it. I didn’t take maximum advantage of the tax concessions of the past few years for two reasons
1. To me it looked like a rort on society
2. I reckoned the govt was going to steal it all anyway.
Being over 60 this year we are exempt. Next year….who knows? Politicians in general, but the current crop in particular, have been known to say one thing and then do another. Anyone totally planning their finances on the basis of what the Prime Minister has announced is a fool.
As per Roger Montgomery’s opinion when Govts get tight for money there is nothing they won’t steal.
Yes Flawse, I agree with your points 1 & 2 and the fact that politicians keep moving the goalposts…you don’t know where you stand in say 20+ years time.
Back in the 90′s I looked at which “rort on society” provided by the Federal gov would be best for my retirement and concluded that it had to be the NG benefits so I never contributed into super but instead bought a few IP’s and held them until I stopped full time work recently.
I believe that I accumulated more that way, But even though I took advantage of the generous residential investment tax breaks..how can I say this…Now with our manufacturing and general economy being hollowed out or even dare I say ruined I agree with the abolishment of NG as our economy has changed so much from 20 years ago.
Now, put together what you said “Most of the money put into super is being wasted on consumption anyway e.g Retail Malls” (to sell 90% imports vs Aus made) and combine that with the money we have pumped into the housing market at the expense of investing in high tech manufacture, R & D, proper green industries and its no surprise that we are all hollowed out even with the mining boom.
Snail…exactly.
You were smarter than I was with the IP’s. I’ve a bad habit of investing on what should happen rather than what will happen!
I feel sorry for guys like you.
I am seeing the front end of it now. mainly guys in SME’s, instead of super contributions, or financial investments, kept reinvesting in their own business.
Capturing goodwill and efficient processes.
The less productinv bogan boomers piled into housing… many have now got out making a motza.
Boomers wanting to sell their SME are now finding financing, and young people’s capital suppressed, thus finding offers for their business somewhat underwhelming.
Yep, happened to my Dad as well, albeit ten years ago. Spent 10-15 years building up his business and sold it for a decent amount (though since dramatically reduced by the GFC), but would have made more just by not selling their first house and sitting on it for another ten years.
Spot on
The arrangements we see today are not in anyway guaranteed.
Trust factor zero in this camp.
Hi Flawse,
I replied to your China question last night but it got stuck in moderation, I just checked an it is now available.
BTW: I was writing it after 11pm having already consumed my daily allowance of Shiraz. So you might need to cut me a little slack.
Got it thanks…agree totally!
It’s still hard to believe that the RBA includes compulsory super as “disposable income” in its international comparisons of dwelling price-to-income ratios, which conveniently places us in the middle of comparable countries.
The RBA explains away the inclusion of compulsory super as “disposable income” (derived from the national accounts) by arguing that in places without compulsory super systems (virtually every other country on earth), people must save for their retirements in ways that are included in national accounts measures of income. This is a ridiculous argument by the RBA. How many FHBs internationally – typically those in their 20s or 30s – would choose to put money away for retirement before taking care of other needs, such as buying a house or raising a family? They wouldn’t, which means that FHBs internationally have more income at their disposal than a FHB in Australia (they also have the choice to save for retirement later in life, say, after their house is paid-off).
The fact of the matter is that compulsory superannuation should be removed from the national accounts measure of Australian income in order for a fair comparison of dwelling price-to-income ratios across countries, by virtue of the fact that Australian home buyers don’t have the choice to spend the money required to be allocated into super on housing costs (unlike home buyers in other countries). The RBA’s inclusion of super as disposable income has downwardly biased the perceived cost of Australian housing versus every other country without such a system, and is misleading.
“…they also have the choice to save for retirement later in life, say, after their house is paid-off” I’ll give you one guess as to how they will do that, if indeed they wait until the existing debt is discharged….!
Exactly! and take into consideration that Generations after Boomers have much larger mortgages.
For sure as arrow notes above there are now flaws in the system, particularly reflecting that the automatic contribution wasnt raised during the Howard era.
But the system as is works is now a redistributive tax channeling funds to those with the most assets and who have chalked up the most debt.
Those held to mortgage ransom after the boomers can wait longer to get anything from the system and presumably get less.
Cue the Peter Fraser style ‘suck it up’ apologists, and those running the ‘life is not fair’ line. Maybe they have a point and the system has been structured in such a way as to present an inescapable ransom generator for the Boomers.
All good stuff, but Australia’s dessicated two party political process and lapdog mainstream media really should be raising issues about the super system, and particularly its nexus with mortgages and debt (and maybe even incorporate the employment outlook – with a reference to yesterdays Gregory and Garnaut) to be raising issues and discussing ways to address them.
But we can be sure neither party will want to go too close to either, that mainstream press will be well paid not to, and that any raising of questions in places like MB will certainly bring out the Spurious Vim and speciousness of the usual spruikers.
But anyone under not just 40 but arguably about 55 could well be asking what is in it for them….
Slow down UE. The government may use this rationale as an excuse to make super ‘available’ to GenX/Y FHBs to buy an existing home!!
Re RBA blather on price to income ratio, I think we have reached a critical mass where the truth is self-evident. Most people just laugh off the RBA’s “permanently high plateau for the last 10 years” thesis.
I’m sure that FTB’s would use their super funds in other ways if they had access to them, bt from an accounting POV the RBA is absolutely spot on. It has always been so even before the days of compulsory superannuation the contribution when applicable was included as part of the overall salary, although it can’t be used for loan servicability calculations.
It’s also worth noting that the nations with the best savers are also the nations with no old aged safety nets. If we want to instil a culture of savings then perhaps we should get rid of both super and all safety nets.
That’s not my position, but it’s either one or the other and I don’t particularly care which is chosen, in the end for a good saver it works out much the same.
You miss the point, Peter. FHBs in other countries are voluntarily able to pay for a house now and ‘save’ later (e.g. once house is paid-off). FHBs in Australia don’t have this choice. Hence, they have lower disposable income. Money locked away until retirement is not disposable, period. Hence a comparison of dwelling prices to household disposable incomes should exclude compulsory super contributions and earnings. To do otherwise is misleading and gives the impression that Aussie houses are more affordable than they really are.
I get that point, but the RBA are nevertheless correct from an accounting POV. Retirement savings (super) are on the balance sheet and the contributions are part of the income – they can’t just pretend that it doesn’t exist.
I think that it would be more wrong to leave that off than include it.
That’s a personal POV and I don’t expect others to agree. However if FTB’s had access to more disposable income, they would only bid the price of low level housing up even more.
Oh – and all of the calculations are done using median house values and median incomes – that includes older buyers who MUST save for their retirement.
Median homes are not purchased by FTB’s they are purchased by older buyers who earn the median income or higher.
The true affordability for FTB’s is a measure taking into account prices in the newer lower priced suburbs using the disposeable income for a working couple in the 25 to 30 y/o bracket pre children. That’s when they buy their first home.
It’s an interesting point – have you noticed how the ramp up of househod aggregrate mortgage debt almost mirrors the ramp up of funds in superanuation since the 90s?
Essentially compulsory super forces the populace at an aggregrate level to take on more household debt than they otherwise would have.
However, I am not convinced that the SG should not be included in the national accounts household disposable income data. It is true that in other countries people must save in other ways (maybe at other lifetime phases), so this should be accounted for in these sorts of stats somehow? Essentially we in Oz don’t have to save as much as those in other countries to end up on an equal footing at retirement. I know I certainly count my super savings as a part of my over-all long term “savings” pool, even though there is some risk as to how much tax I may eventually have to pay to get it out (as per your article).
Also, if you remove the Sg contributions from the income measure, you kind of take away the “ying” that offsets the “yang” of that increased household debt we have because of the compulasory super system.
If you look at the savings charts pre Compulsory Super you will note that we saved, but gave that up when super was introduced, so it has replaced savings not added to it.
http://economicstudents.com/2012/03/australias-household-saving-ratio/
Our savings rate fell from 15% to almost zero in the decade folling the introduction of super. It has only bounced back again because of fear induced by the GST. That effect will fade again over time especially as the super contribution rate rises.
Let me guess without clicking on the link – the savings disappeared in 1996 with the baby boomers’ first exhalations into the property bubble?
I have to agree with UE on this one.
To take the example to it’s logical extreme, if the SGL was set at 95% rather than 9%, does anyone seriously believe that it should still be included in disposable income?
There are a few sides to this.
On the one hand as arrow notes the scheme as is is very generous, particularly to those who have been in a position to be generous putting in. The failure to increase automatic contribution rates in the Howard years ultimately means that the whole system is not really in a position to fulfill the role Keating originally intended when he set it up.
So I tend to see for sure the tide running towards higher taxation of contributions and longer contributory periods before access.
But the Roger Montgomery article does raise some serious issues. Unlike him I dont see it as an under 40 issue, but more likely an under 55 (nearly) issue.
These people are seeing the Boomer set who have been in a position to set themselves up using the system stroll away with very big lump sums and pensions.
Quite rightly they are (if they are thinking about it) thinking that they will get less and wait longer for it.
At the same time they are likely to have mortgages for much longer in life, and about 3 times the size of the Boomers going before them, largely because this is the ‘market’ and have had to go into debt far more substantially than their predecessors. At the same time anyone casting an eye over Gregory and Garnaut yesterday couldnt help but suspect the employment market is going to become seriously ugly at some point possibly not far away.
The structure of the system as is is to some degree working as a redistributive tax towards those who have the largest share of the assets and wealth.
Presumably the Peter Fraser style ‘suck it up’ crowd will say there is no alternative to both the fiscal issues the system faces and turn a blind eye to the fairness and generational conflict issues super already encapsulates, and which presumably will come into sharper focus in the years ahead. They may have a point, maybe the system is so structured that Generations X (to some extent) Y and Z have no alternative. But ultimately as the old Irish saying goes if you force people to choose, some will choose to fight, and on this issue – particularly in its nexus with mortgages and debt – the younger generations should certainly be asking some seriously pointed questions.
…..and a seriously dessicated two party political system and lap dog mainstream media should be providing alternatives and providing an avenue raising issues and discussing them.
Hey, I thought the system had chewed this up – which is why i hastily rewrote it under UEs post above
There are three types of retiree :
1. Self Funded
2. Part State Pension and Super pension
3. Full State pension & for a couple nearly $300k in Super.
Question:
For six points which one is going to cost the next generation the most tax dollars.
The macro picture is that the cost to the working generation is equal to their expense when they aren’t working – regardless of how it is funded.
That’s right.
If the oldsters eat one chicken (they didn’t raise themselves) then they have cost workers one chicken.
Hmmmm!!!!! Does that mean… for me to be a good citizen I should just take all my money to some South East Asian country and buy and eat their chickens so I don’t buy and eat an Australian chicken?
Bugger … might have to change where I live.
It’s all about ” My Generation” “We cant get No Satisfaction”
Give us some music we can rock our chairs to Claw – we raised a bunch of no hopers mate, who make crap music and bemoan their lot !
It’s all about baby-boomer rorts if you want to get elected! Baby-boomers demand their rorts, or else!! Totally corrupt generation.
Totally corrupt generation?
Adolf would have been proud of you, nothing like blaming ‘em for everything eh?
You will of course be pleased to know that I, personally, am a baby boomer who traveled around a lot and, like many of my “boomer” generation, never thought about being a codger when I was young, got divorced etc etc. So, like many boomers, my pension is a Webley revolver, bullet to be provided when I hit 64 or, (my personal plan is to retire at 105) am unable to work. Corrupt? B@#$%cks!
I invoke Godwins Law – you instantly lose the argument, sorry rob!
Been a lot of that going around lately. Christopher Pyne had a doozy the other day.
Oh! I’d better accept that I and my entire generation are corrupt and responsible for the worst aspects of capitalism. No worries! It’s just that, I’m sure I’ve heard that line before somewhere……
And naturally, of course, I fully understand that Gen X & Y and those who follow would never dream of making a buck or two through influence should the opportunity arise. No negatively geared schemes for them. All in all I’m immensely cheered by the knowledge that the human race has become more socially & morally responsible since our lot were around.
Don’t pay any attention to the whining kids rob. They will lose interest and move on shortly.
Actually it’s not a generational issue really. it’s about productive investment and work vs non-productive investment and work.
The non and anti productive of the younger generations are as a part of the problem as those in the boomer generation.
Then non-productive sectors just grow and grow and get richer at the expense of the productive. You fix that you’ll fix most of what is wrong.
For mine there’s a bit too much self-righteous claptrap going on here.
Should have to disagree flawse.
It is a generational issue. The most productive people at any time in history are males bbetween 29-49, always have been, always will be.. unless to many disincentives are put in place to where they opt out.
This is generational because boomers are becoming less productive, as is a natural chronological outcome, and seeking to become rentiers.
The economy not only ha too many of them, but incentives are in place for everyone else to become one.
Where’s rewarding those that did work, and want extraordinary return… not those that are now working or wanting to work.
it is rational to see people outside of the baby boomer sgenerational emulate this.
My two bobs FWIW. I reckon Mitch is on the right track. Ken Henry flagged it in 2008, and with a lot of Gov debt on issue, I think the future will be small balances ie less than 300k will be given the option of using their super to purchase a higher age pension and perhaps a tax stick for higher balances
I also think a simpler version of RBL’s will come back into play.
Costellos simpler super was only ever costed till 2012 anyway and it was based on a Pre GFC world in any event.
The only other question I have is how would australia have fared without 2 billion dollars a month entering our financial systems as a result of the SGC contributions during the GFC.
Great article. The way boomers have used super as a tax shelter is a disgrace.
In hindsight it would have been easier if boomers just amended the tax act to state:
“Income tax is payable for each year by each individual and company, and by some other entities, unless you are a boomer”.
“Income tax is payable for each year by each individual and company, and by some other entities”.
Hey I like that, but we should not give favourable treatment to those bl**dy BOOMERS.
Could we also make it fair and add to it a little, something like.
“And the tax payer has the right to determine where his tax money is to be directed”
Lets see now … where do I want my tax dollars to be directed to? I have it.
My tax dollars should be redirected to me to help me pay my taxes as I am retired.
Ahhh …. feel better already.
While I agree with the author’s view that the govt is likely to change the rules on super, there’s not much discussion on whether the changes would result in a more equitable system in the long run. Yes, yes, the boomers have had a good run out of the current system, that’s in the past and we can’t change it. The real question is, what sort of super system do we want for the future?
In my opinion, the taxation concessions in super are currently too generous and skewed towards the wealthy. There’s a flat tax rate of 15%, meaning if you’re on the top marginal rate you get the best benefit and similarly it’s the high earners who are able to accumulate the most assets in their super. Instead of taking the pressure off the public purse it’s turning more into a tax shelter for the rich. I read the other day that the tax concessions from super will soon exceed total expenditure on the pension. That is a ludicrous state of affairs.
I also read this morning that the current thinking of the govt is that a higher tax rate will be introduced for high incomes earners/larger super balances. That to me seems an entirely fair proposal – we have progressive tax rates on ordinary income, why not progressive rates on super income?
So I think super will always remain a tax advantaged investment vehicle (remember that the industry is one of the most powerful in the country, see Ross Gittins’ article from yesterday). And when the boomers move on, why do you think that Gen X will be any less vigorous in defending their retirement savings? There’s nothing magical about the boomer generation – each one acts in its own self interest and when our time comes we will too.
“When our time comes…”
First they came for my youth with expensive tertiary education, then they came for my peak earning years with massive house prices and now they are coming for my retirement.
Our time is now!
I’m sick of being used as a generational credit card.
I shouldn’t have to pay for both my own and my parents’ retirement.
BB are the worst savers in history. It was a deliberate choice with all their money funnelled into lifestyle and chasing easy money capital gains.
Are you with me brothers?! TO WAR!!!
Problem with any investment based pension system is that it relies on stability of an economic system.
We all know that western economic model is designed to be unstable, that economic failures happen often (more and more often), that high inflation is official economic policy, …
It could happen sometimes that a generation gets something out of an investment based pension, but that is exception not the rule. I’m afraid to say, but I think that not even boomers will enjoy it for long. They still have 20-30 years to go, and I’m not sure that super will last that long.
in terms of stability the development of Self Managed Super Funds may well turn out to be a bigger boomer rort than tax free withdrawls on super or NG. SMSF’s are growing at exponential rates as residential and commercial property investment is capital gains free (if sold in the pension phase…55+).
This is underwriting Melbourne’s apartment glut and adding to the instability of the property market.
+1. That’s what I was trying to say above.
Problem with any investment based pension system is that it relies on stability of an economic system.
I’ve actualyl considered it the other way around.
With a demographic bump having their pension system reliant on investments… their decision making is more prone to short-termism, and destabalising the economy.
Paul Keating made one major mistake with Super.
Changes to superannuation should have required a 5 year lead-time. Ie, the laws could be made but not implemented for 5 years. This would ensure governments wouldn’t raid it. It would require consecutive governments to make changes.
That would be unconstitutional without amending the constituion to specifically allow for it, a parliament cannot bind future parliarments.
Superannuation is a sad creature of public policy.
1. It has been and still is notoriously inequitable across income levels.
2. It is a tax haven for the comfortable and the rich. It ignores those outside the workforce for good reason e.g. house duties and carers (more often women).
3. It is a huge drain on public finance in tax foregone. While it is legitimate to encourage people to provide extra for their retirement, why subsidize the process of getting rich?
4. Given the radical softening of the age pension means test by Costello, and even before that, the impact of super on reducing Government provision in pension payments has been vastly exaggerated. (85% plus still draw some level of aged pension).
5. And yes, the baby boomers have benefited once again, if only because the current super mess is not sustainable fiscally into the future in its current form.
6. The whinging and fretting on various media sites about the “unfortunate” plight of people with only one or two million in super, in the face of possible Government retraction of taxation concessions, has been truly tasteless.
There is a thriving culture of entitlement in Australia- but it would be a gross mistake to attribute it to the ususal suspects.
Agree with all your points CP, and as I said above, as a minimum there needs to be a progessive tax rate applied to super so that there’s some equity in how the system works…
You missed the big one – it’s far too easy for people to take their super as a lump sum, spend a year or two traveling around Australia or the World, blowing it all, then fall back on the pension.
It’s also not all that unsual for people to take it as a lump sum to pay off a mortgage, then go onto the pension – which is perfectly reasonable at a personal level, but if it’s going to be used for such a purpose, what’s the point of having it in the first place?
This is mostly an urban myth.
Actually most of the lump sums I see taken out by baby boomers are to pay off their debts, mainly mortgages on their home.
The ones with prudent records, ie no mortgage debt mostly act very cautiously with regard to their balances. Most baby boomers seem to think they are going to live to be 110 so have to make that money last for 40-50 years!
Superannuation is a sad creature of public policy.
1. It has been and still is notoriously inequitable across income levels.
Well it could be viewd as a reaction, swinging the pendulum the other way.
Make no mistake, the boomers have no sense of charity.. of giving without no reciprocal obligations. Their view of the aged pension is long service leave, not income suppor to avert destitution.
“I’ve put taxes in!!, I derserve something back”.. whilst disregarding zero CAS’, and very few budget surpluses.
However, once in, regardless of tax contributions made, the aged pension was equal. They didn’t like that.
So instead of being a PAYG, equal income support from condsolidated revenue, it become individual spools, with size based on ability to contribute.
I.e. not equal, becaus inputs are/were not equal.
2. It is a tax haven for the comfortable and the rich. It ignores those outside the workforce for good reason e.g. house duties and carers (more often women).
There are measures for stay at home mothers. Beyond that, it’s a inter-personal relationship issue, with no place for government.
Feminists already lie enough in regards to monetary issues, notably the ‘pay gap’, there isno need to stoke tis fire on their behalf.
3. It is a huge drain on public finance in tax foregone. While it is legitimate to encourage people to provide extra for their retirement, why subsidize the process of getting rich?
The tax issue is sperate to the abstract of super.. a quaratined trust to provide for ones own retirement. They are not within the same circle of a Ven ndiagram, you shouldn’t conflate these things.
4. Given the radical softening of the age pension means test by Costello, and even before that, the impact of super on reducing Government provision in pension payments has been vastly exaggerated. (85% plus still draw some level of aged pension).
Well it’s the biggest item on the federal governments budget.. $51 billion… compared to $8 for unemployment benefits.
The real issue is products brought to market.. by workers.. compared to the dependency ratio.
Everything else is just fluff. People can not acquire enough goods to have 25 years of retirement… i.e. non-working life… from a 40 year working career.
This is 100% an calibration issue, namely the line in the sand that says “age 65″
5. And yes, the baby boomers have benefited once again, if only because the current super mess is not sustainable fiscally into the future in its current form.
Change the age criteria for the aged pension to 72, change the preservation age to say 70, and it is completely sustainable.
Change them the other wya, to say age 35.. then you come to understand the problem is calibration of the dependency ratio, not the holistic structure of trusts hold retirement savings in quarantine.
6. The whinging and fretting on various media sites about the “unfortunate” plight of people with only one or two million in super, in the face of possible Government retraction of taxation concessions, has been truly tasteless.
It’s only a highlight because those impacted are baby boomers.
As I’ve state din previous threads, they believe society is meant to cater for their whims. They are the narcissist generation. There is no social contract with them, there is no give and take.. it is just take.
There is a thriving culture of entitlement in Australia- but it would be a gross mistake to attribute it to the ususal suspects.
yes, younger genrations have it to, but it’s a rational response. No one likes being exploited for perpetuity, and I think most now know they baby boomers will never stop taking. Their brains aren’t conditions for that, they can’t even see, they can’t be reason with, that they are taking too much.
Payback will be a bitch however.
Crikey, RP, what a great long list of unsupported generalisations. You really do have a chip on your shoulder.
Please consider the possibility that baby boomers are no more a homogenous group than is your generation.
Didn’t say there were any more or less homogenous.
But a culture is defined by generalisation, and when defining a genration it it made particularly at the end of their lives.
The baby boomers are not the future of this country, and they are barely the present… and quite simply, this country can no longer afford to invest in its past.
Let’s go full godwin’s… not every German was a nazi, but all german’s were held into account for the nazi’s.
If a generation wants to overtly exploit other generations, as i said… payback will be a bitch… it too is a rational and predictable response.
the ultimate payback is for all the young people to leave Australia and immigrate overseas…which i think is sort of happening (based on personal observations of friends/family)…
“all german’s were held into account for the nazi’s”
Even the Jews who died in the concentration camps?
I worked in the accounting profession before my current role and can confirm it was the best game in town for boomers. Particularly when Costello introduced simple super. I had one client with upward of $20m in his fund, when the rules changed he was getting a $400k refund of imputation credits annually, throw in all the other tax benefits and his estate was set for a few generations yet. Liberal voter for life!
At that point it became pretty clear that this was not sustainable. The annual tweaking you reference, I’m certain is part of the longer-term plan for greater government control. Just another piece of the nanny state puzzle.
As a 32 year old I won’t go beyond the minimum for sometime. I suspect it will be 70 before I see any of it (assuming survival of course) and it will be taxed far greater than today’s handouts.
Unless these demographics also ring true for Australia and our generation will slowly get more say at the polls:
http://www.businessinsider.com/echo-boomers-will-save-the-us-economy-2013-2
This shows a lot of the defeatist attitude, and was probably the major reason why I didn’t further pursue a political career.
When they say ‘you get the politicians you deserve’, it is true.
You consign yourselves to being totally detached from the political process,thus think even bad decisions are foregone conclusions.
It start with local candidates, the absolute case study in this is NSW politician Alex Hawke.
When coming to pick a new member, he’d invite 20 of his churchianity thugs to a preselection meeting… and he got his way.
20 people shifted the balance of power in who presents your seat.
The figure 20 is the sad idictment, because if most of you were not too enthralled with bread and cicuses… if most people didn’t regard Desperate Houswives, My Kitchen Rules ro whatever.. as more important than democracy, then 5,000 would.. .should be present at preselection meetings for each party.
20 thugs won’t have any power.
Vigilance in preserving democracy goes beyond ticking your federal election voting sheet once every 3 years.
Interesting article. Thanks for the link.
“our generation will slowly get more say at the polls”
Not sure what generation you are, but I thought you might be interested in this snippet: 98 of the current MHRs are baby boomers. The average age of MHRs is 52. Seven of the current parliament are pre-boomers.
Boomers are greatly over-represented in parliament compared to their proportion of the population (not surprisingly). This should change dramatically over the next ten years or so. Then it will be gen X’s turn.
Am I the only one who sees the glaring error in this piece?
“reminder that Australians were never meant to qualify for the pension because they would be deceased, on average, a decade or so before they qualified.
Wham! There it is. Get people to start realizing that they were never meant to get the money anyway.”
This is completely false. Just because the life expectancy was 55, and the super age was 65, does not mean that the majority of people die before 65! It simply means that there was (likely) a high infant mortality rate, dragging the life expectancy down. It doesn’t mean that people got on the pension for 1 year from 65-66 and even then those people were rare. People have been living to 90 for a long bloody time. Yes, health care has improved and things are different now, but this is a completely false conclusion from the data.