Business Spectator’s Rob Burgess has an interesting article today in Business Spectator, arguing for reforms to Australia’s retirement system in a bid to make it more sustainable:
The question for the 44th parliament is: do either Tony Abbott or Bill Shorten have the intelligence, the grit, the bloody-mindedness to start selling a policy that will solve a colossal problem: the increasingly bizarre relationship between the generations caused by our out-of-kilter superannuation investment and housing markets.
The issue is complex, but with the right thinking there is an opportunity to promise (and deliver):
– A healthier federal budget demanding fewer tax dollars for health care and the aged pension
– And economy in which pensioners and super-annuants have more money to spend on themselves or their families, not less
– A more honest, transparent and equitable tax system that rewards hard-work and investment, but that cannot be gamed in the way the current super tax concessions can be.
We do not have such a system at present… [Instead ] a massive transfer of wealth between generations has begun that makes a mockery of Australia’s ‘progressive’ tax system – a system that all sides of politics support…
We now have an increasingly top-heavy demographic profile, with older Australians sitting on large assets in those two main baskets: houses and super…
The almost unique market conditions that made the boomers so asset-rich (though not always income-rich) won’t be repeated. Like a juicy meal passing through a python, we can see the lump moving through the economy – and there is no second lump following it…
Ian Harper, former Fair Pay Commissioner and now a partner with Deloitte Access Economics, says the choice facing Australians is a “lag” in the transfer of assets that could be “smoothed” by a sensible approach to mobilising the capital tied up in the housing market.
Rather that the children of baby-boomers getting a largely untouched dollop of money when their parents housese are sold in, say, 15 years’ time, they could receive a smaller dollop and watch their parents leading happier lives in the meantime…
Harper would like to see the government guaranteeing a new securities market – let’s call them Equity Release Bonds – by effectively issuing put options on bonds that banks (or others) create by securitising ‘parts’ of homes…
Such a scheme would also take pressure off the health and pension spending of federal and state budgets, but only if housing assets and superannuation assets were brought together when assessing individuals’ pension and health care entitlements.
While Burgess’ suggested government intervention in the reverse mortgage market could help to free-up retiree’s home equity, boost their disposable income, and help alleviate some of the pressure on the Federal Budget, it does not go far enough in treating the root cause of Australia’s busted retirement system.
As argued repeatedly, a key reason why Australia’s retirement system is both unsustainable and inequitable is because a 15% flat tax is levied on superannuation contributions, which provides higher income earners with the lion’s share of tax concessions whilst households on lower and middle incomes – precisely those that are most likely to require the aged pension – receive minimal concessions, hindering their ability to build-up a retirement nest egg and discouraging them from making additional contributions. As a result, the Budget is losing billions of dollars of forgone revenue each year through generous superannuation concessions targeted at upper income earners, whilst doing little to relieve pressure on the aged pension.
The exclusion of the family home from the assets test for the aged pension, combined with the ability to withdraw one’s super as a lump-sum (instead of an annuity), also creates an incentive for households to borrow to purchase an expensive home in the lead-up to retirement, retire at 60, withdraw their super tax-free as a lump sum, use the money to pay-off their mortgage or to fund 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. And while such a strategy makes sense for the individuals concerned, it compromises the integrity, fairness and sustainability of the retirement system which, after all, was supposed to relieve pressure on the Budget, not exacerbate it.
All that is required to restore integrity to Australia’s retirement system is to make concessions on salary sacrificing into super 15% for everyone and means testing all of one’s assets (including the family home) when working out who receives the pension.
The fundamental issues around superannuation concessions and means testing of the aged pension need to be addressed before examining government involvement in the reverse mortgage market.
