The weekend edition of the Australian Financial Review published a stinging critique of the Baby Boomer generation, which it claims has blown its retirement savings by running-up debts on property and consumption:
“They have already spent all of their super before their first day of retirement,” says Simon Kelly, a professor and author of the study undertaken for CPA Australia, one of the world’s largest financial services organisations. “Their debts on retirement match their savings. Most people are seeing their annual super savings statement and considering it a way of paying for the lifestyle that is being lived now.”
“There is going to be a very big reality check,” says Lindsay Tanner, a former federal minister for finance and current special adviser for Lazard Australia.
Growing welfare commitments are “simply unsustainable”, he says. “We live in a society that has become conditioned to receiving presents from Father Christmas. Western governments have been using debt to prop up lifestyles but it can’t go on”…
“Boomers always looked after themselves first,” says Kelly. “They have been spending in anticipation of receiving a lump sum from their superannuation fund. But they have not thought it through”.
The benefits gravy train could be derailed as governments come under increasing pressure to fund demand for services from a shrinking tax base as boomers retire…
“It [superannuation] has failed, so far, to deliver on some of its core objectives,” says Kelly, a former researcher for National Centre for Social and Economic Modelling, a leading think-tank with the University of Canberra.
Unlike previous generations, which tended to pay off mortgages and other debt in the lead-up to retirement, boomers have “shown a big appetite for personal debt” by more than doubling their mortgage debt and increasing credit card debt by more than 70 per cent in the lead-up to retirement…
Nick Callil, head of post retirement solutions for Towers Watson Australia, says its analysis had also picked up rising debt in the lead-up to retirement. Typically, those with less than $200,000 will use their lump sum to pay off debts and, rather than invest for income, will spend most of the remainder on consumer goods or a holiday before falling back on the state pension…
“What this generation is really saying is that they plan to live on the (state) pension,” says Kelly… “They don’t seem to appreciate that the super lump sum was intended to supplement their retirement.”
Whether the Boomers have blown the retirement is a moot point. However, the above statements do highlight some major flaws in Australia’s superannuation system. Chief amongst these concerns are that it allows someone to retire at 60, withdraw their super tax free as a lump sum, use the money to pay down personal debts or consumption, and then go on the aged pension from 65 years of age. In such instances, the taxpayer is left wearing the cost of superannuation concessions throughout the individual’s working life, and then again once that same individual goes on the aged pension.
The flat 15% tax on superannuation contributions is also spurious. Under the current arrangements, the amount of super concession rises as one moves up the income tax scale, resulting in a system where higher income earners receive the most super tax benefit, despite being the very people that are the least likely to rely on the aged pension in retirement.
These are loop holes that must be closed. Some sensible first steps would be to tax superannuation lump sums whilst at the same time encouraging retirees to withdraw their savings as a annuity. This would discourage retirees from spending their savings too quickly and becoming reliant on the aged pension.
Replacing the 15% flat tax with a flat 15% concession would also improve the equity and sustainability of the system by: 1) providing all taxpayers with the same taxation concession; 2) boosting lower income earners’ super savings and thus reducing reliance on the aged pension; and 3) reducing costs to the budget.
The fact remains that Australia’s population is ageing fast, with the proportion of workers to non-workers set to decline significantly in the decades ahead (see next chart). As such, the Government will ultimately be forced to scale back entitlements as the tax base shrinks. Better to begin reform now rather than wait until the situation worsens materially.
