Make retirees spend their super

Superannuation Minister Jane Hume has recently stated that super funds should be forced to offer new retirement income products so that retirees use more of their super rather than save it.

According to The AFR, Treasurer Josh Frydenberg will echo these comments when he speaks to a retirement income forum today, saying that people should be encouraged to use their super more effectively.

Such comments by Hume and Frydenberg are seen as backing the push by backbench government MPs and the business community to revoke the legislated increase in the superannuation guarantee (SG) from 9.5% to 12% by 2025.

The Australian Treasury’s Retirement Income Review noted that superannuants have been reluctant to draw down their savings, instead relying solely on their investment returns to fund their retirements. This, in turn, has turned Australia’s superannuation system into a wealth accumulation and transfer scheme that has increased inequality:

Inheritances are significant, representing the transfer of wealth from one generation to another. They are not distributed equally and increase inequity within the generation that receives the bequests. Most people die with the majority of wealth they had when they retired. If this does not change, as the superannuation system matures, superannuation balances will be larger when people die, as will inheritances. Superannuation is intended to fund living standards of retirees, not to accumulate wealth to pass to future generations…

For example, assuming no change in how retirees draw down their superannuation balances, superannuation death benefits are projected to increase from around $17 billion in 2019 to just under $130 billion in 2059 (Chart 3H-5)…

Although inheritances can help people to prepare for retirement, they are distributed unequally, with wealthier people tending to receive larger inheritances than those with lower wealth (Chart 3H6). Inheritances therefore increase intragenerational inequity…

Super nest eggs were never meant to be preserved in order to pass onto one’s heirs after death. They are supposed to be drawn-down to fund one’s retirement.

Consider, for example, a new retiree with superannuation savings of $500,000 earning a return of 5% annually (i.e. a combination of interest and dividends).

If this retiree relies only on investment returns to fund their retirement, they would receive $25,000 a year in income (i.e. 5% times $500,000). However, if principal is also drawn down, then $38,200 would be available over 20 years to fund their retirement.

Put simply, retirees must be made to draw-down their superannuation savings. This is a far more equitable and cheaper option than lifting the SG from its current level of 9.5%.

Unconventional Economist
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Comments

      • If they are going down the unpopular path why not get rid of negative gearing, add a land tax, fix up the dividend rort and everything else. If you are going to go down, go down in style.

    • Come on – then you’d have a potential conflict of interest. This might see the government neglecting and underfunding measures that ensure folk a safe and dignified old age in order to hasten their demise.

      Oh, hang on….

  1. “then $38,200 would be available over 20 years to fund their retirement.”
    What happens if they live past 85? Or require care at a nursing home?

    • Display NameMEMBER

      You will want to die before getting anywhere near a nursing home. $6 a day budgeted for food. Its Hunger Games for the oldies. $6 budgeted for food per person per day. That alone should be enough to put you off.

      Thank Howard for this. And the non mandatory staff ratios. Fall over in the dunny? You might be there for a week before they find you….

  2. Unfortunately, people don’t come with use by dates stamped on their rear ends. People don’t know how long they are going to live, and they don’t know what nasty, expensive problems they are going to have along the way. The obvious and most humane solution to unused superannuation balances is to tax them when they are passed on. Much better than leaving ordinary people (but not the rich) terrified of running out of money. We already have a death duty on some unused superannuation balances, but this policy needs to be extended and the loopholes closed..

    • The best solution to the problem of an old “ex-worker” living too long is easy – go back to the pre-Keating scheme.

      While a person works they are paid varying amounts based upon the economic value of their labour. Economists will tell you that this gives great incentive for workers to work hard and upskill and leads to improved productivity.

      However once people stop working, there is no reason to pay them varying amounts based upon the economic value of their PAST labour. All retired people should be basically be paid the same amount, or an amount that is based upon their needs – not their PAST market value.

      Keating wanted less fortunate workers to have a worse retirement than more fortunate workers FOR NO GOOD REASON. He has achieved this and it is a disgrace to the entire Labor movement.

      • A universal pension with the pension and all other income in retirement taxable would be the best solution. We could eliminate the superannuation tax concessions or only allow them until a modest balance has been accumulated. This would actually be considerably cheaper than our existing system, as per the Grattan Institute, the Australia Institute, etc. We would also save the more than a billion dollars that Centrelink spends every year on armies of bureaucrats to chase after people — and that is just for the aged pension, since people would only need to prove their age and their citizenship or permanent resident status. We should still tax the existing huge superannuation balances that haven’t been used, though. The problem is that the politicians’ rich mates like the existing system and don’t want change..

        • Inclined to agree with the universal pension idea. Certainly more robust than the current arrangement where those with enough warning of their impending demise simply give it to the kids tax free before they shuffle off. It’ll be interesting to see how that one plays out if voluntary euthanasia ever gets legs.

    • PlanetraderMEMBER

      They are taxed when they get paid out on death where it goes to non dependents. Except of course for the tax-free amount you put in yourself.

  3. if principal is also drawn down, then $38,200 would be available over 20 years to fund their retirement

    You answered your own question as to why retirees don’t do it. In lieu of higher interest rates that would make annuities feasible, how about the govt provide an alternative so that retirees don’t fear becoming homeless if they live to 100?

  4. Not sure why the focus on the SGC going from 9.5% to 10% while property prices go boom again. It’s not as if the compulsory contributions are going to be saved elsewhere – it will ultimately end up capitalised in higher land values. Force people to draw down on the total of the corpus available to them in retirement, including their boomy-boom inflated house prices via reverse mortgages.

    Or stop house prices from going boomy-boom so people don’t need to set aside so much to save for retirement.

    • The problem with reverse mortgages is that they tend to have extortionate interest rates, and people can live for a very long time, so compound interest can work its magic. See

      https://www.finder.com.au/reverse-mortgages

      To get the doubling time divide ln2 by the interest rate. So for an interest rate of 5.25%, divide ln2 by 0.0525, and you can see that the debt doubling time is 13.2 years. If a couple borrowed the equivalent of the aged pension over 13 years, they would then owe around $700,000, with around $140,000 of it interest. If they then hit the assets test limit, no more principal would be owing, but the existing debt would double over the next 13 years and would continue to snowball, even if they had so little left that they qualified for the full pension. Nice rort for the bank or the government, which would be collecting far more in interest than was ever paid out as a pension. Just value the house and tax it when it is passed on, unless it is going to the surviving spouse or a genuine dependant.

  5. Ironic coming from these clowns, I mean if only there’d been a policy to to discourage reaching for yield.

  6. I actually do not think it will get worse. Here is why:

    1. The current people who have a heap of superannuation probably also have a heap of other assets as well – given super has only been around since 1993 – so they werent forced to eat into their superannuation.

    2. The people who have died with big super balances given it was only started in 1993 probably died at a young age. I know who business professionals who died in the last 12 months at age 63 and 64.. . probably with 600k each in super+.. There are very few people aged over 80 now dying with huge amounts of super as it didn’t exist for most of their working lives.

    3. I know heaps of people now aged 35-55 who have completely stuff all assets – lifelong renters, etc, – but have super balances of $200k+ because they have been working since they were 15. There are other people I know who earn minimum wage but have 50-150k in super as well. These people will all do a “smash and grab” with super – rip it out in a lump sum, blow it on a new car, holiday, etc. – and then go crawling onto the aged pension.

    Given we haven’t seen the “smash and grab” generation get access to lump sum pull out yet (although we got a taste for it with the $10k covid pull out) – i think the premise that it will lead to intergenerational wealth inequality growth is actually wrong – because other asset classes such as property are far worse in this regard than super!

    • For years, it was not hard to “retire” after 55 and get access to up to around $175,000 of super in a tax free lump sum for that year. I knew a few that did and I told a few as well. Still is doable to my knowledge . I bought my northern rivers house with my smash and grab 6 years ago. Still working occasionally but not for much longer.

    • charles bukowskiMEMBER

      Mate, your forgetting all the old public servants who had super going back to the 60’s. Telstra, comm bank, they matched your contributions, defined benefit for life, all retired at 50, 55 years of age with $1M+

  7. Humes focus on drawdowns is a straw man argument in the superannuation debate. The key problems with the system mostly stem from the Costello changes. 1. Removal of RBL’s 2. Tax exemption for taxpayers 60 years of age and over on benefits paid from a taxed super fund. 3. Ability to continue to make super contributions to age 75 subject to work test. 4. Super earnings tax free. And all this supplemented by cash back on access franking credits.
    It was like winning four lottery’s at once.
    If the government wants to get serious about the scheme it would bring in the company rate of tax on any super earnings from balances in excess of the transfer balance cap and possible the best thing to do would be to limit excess super balances to say 50% of the transfer balance cap. Return the scheme to a saving scheme to fund a basic retirement income rather than a tax rort. At the same time scrap or limit excess franking credit rebates.
    Linking the excessive tax expenditure issues on the scheme to the SGL is nonsense, but then neither Hume nor Frydenberg have ever shown a serious understanding of the benefits or shortcomings of the scheme or a desire to put in some comprehensive fixes. The last Liberal to make some modest changes to the scheme was Kelly o’Dwyer and she would have struggled to have been preselected again for the seat of Higgins again such was the backlash. She chose to retire instead.

  8. Leith, I’ve mentioned it before, but I’ve never seen you address what happens in the Nursing Home EOL zone – & Why people hang onto what they can for as long as they can.

    You need to study it, & ask why deposits range from $350-$600k pp. Currently 90% can’t afford anywhere near a full deposit & have to top up with their pension – If they can’t make it work (often not), they have to rely on the Governments 10% allocation of beds. Yes 90% need help while only 10% are allocated for! The rest can be passed from home to home till an allocated bed becomes available.

    What happens when one ends up in the home & one in a downsized unit & they don’t have enough to cover for one, let alone that it can sometimes be 2 needing beds? What happens if one end’s up in another town & their spouse can’t travel to see them anymore? It Happens!

    Time to open your other capable eye & look at the Whole pig in the Python!

    • Hi Colin – below is what the Retirement Income Report said about Aged Care. They seemed to play down some of the issues you’ve raised above so it would be good to get your take on their observations:

      Box 5A-7 Using retirement income and assets to cover aged care costs

      The costs associated with residential care accommodation can be paid as a refundable lump-sum deposit (RAD), as a non-refundable ongoing Daily Accommodation Payment (DAP) or a combination of both. Residential aged care providers often prefer RADs because they can be used for capital financing. But providers can no longer require consumers to pay a RAD. Increasingly, people are choosing to pay their accommodation fees daily, rather than as a lump sum (Aged Care Financing Authority, 2019). In 2017-18, 73 per cent of the aged care population paid their accommodation fees by either a DAP or a combination of the DAP and RAD (Aged Care Financing Authority, 2019, p. 120).

      People have a range of options for funding aged care, depending on their total means and how their assets are invested. Stakeholders considered equity release and private insurance were underutilised options that are likely to be more efficient than precautionary saving. Some academics are currently exploring the viability of long-term care insurance in Australia (National Seniors Australia, 2020; CEPAR, 2019, p. 32).

      If people are able to meet all their aged care costs using regular payments, having a steady income stream may give them a greater degree of comfort that they can meet these costs. Private income streams can be created by drawing down financial assets (such as superannuation), using housing assets through equity release, or (if available) purchasing long-term care insurance.

      However, most people in home and residential care are full-rate Age Pension recipients. In June 2016, 82 per cent of people in home care and 60 per cent of new residential care admissions were full-rate Age Pension recipients (Tune, 2017, p. 160). As the superannuation system matures and people retire with more savings, future generations may be better able to contribute to their aged care costs.

      • Hi Jason,
        Looks like the usual motherhood statements of possibilities that address Nothing, just what I’d expect from our glib leaders. The last line in that piece is the only thing that rings as a possible realty – but even that will depend on life’s circumstances for some time to come. Currently it’s not working for most!

        Most of the current generation don’t have the wherewithal to cover the DAP, the RAD, combinations of both or any other way of doing it in a manner that doesn’t leave them destitute while one of them is still living in their PPOR. And if they’re both in the big house I doubt more then a Very few could cover a RAD for 2 (here at least). Destitute After death doesn’t matter so much – even though they all want to leave something for their kids, but being in a home & not even being able to buy basic toiletries because the home has taken all their pension is just too much of a gouge.

        If reverse mortgage options weren’t such a gouge it may help in some circumstances. David hit’s on it well enough below too – 2 years is the projected time in a home now, but what if you account for that & they’re still kicking for another 5? It’s a difficult projection to make. And then the partner’s not getting any younger either & if they’ve got to go in too, unless they’ve got enough equity left in the house there’s even more deficit.

        They’re pensioners, Clink has a list of assets, but it’s all got to be done again. Super has to be redeemed to help cover the RAD – Reams of Complex Paperwork! There’s absolutely an opening for advisors to navigate the minefields presented by both the homes & CLink. Getting the balance of RAD & DAP right so it’s as sustainable as possible is key (basically buying time, while the spouse can still exist & use the heater as well), but just getting someone who understands the paperwork & requirements in what is a stressy time would be of great benefit. Most I’ve met at dad’s home have a story of frustration & woe just navigating these area’s. Quite a few offspring are subsidising in some way to alleviate the gouge.

        I did my absolute best trying to work out the money side for my olds while my Public Servant Sis & hubby shuffled the paperwork (as they’ve shuffled paper for decades & know their way around it). They stuffed it up because of obscure wording & box ticking, & needed a lot of contacting to bed it down. My projections didn’t come off as well as they could’ve, but have kept Mum’s balances near stable to what CLink Told us was a minimum buffer for her to keep (& part of her pension is subsidising his home away from home!). Dad’s lasted for 4 years & could well go for another 2, & by that time Mum will be close to going in, & even when sold up, they don’t have enough to make it work if they’re both in there together without us kids further subsidising the nursing homes gouge.

        The estate will get any RAD’s back minus interest, inflation or anything else. While they’ve had the luxury of playing with it in their slush fund to help run the show – on a shoestring that even the high turnover, understaffed nurses will say is just too tight!

        We were warned by the Manager that the government would be tightening up (Jan 2018?) & they didn’t know how they were going to make it work – It was tight before, & now it’s just a run down shitstorm at all the joints here, dissatisfaction throughout staff, inmates & families. Huge turnover among staff (& now they’ve gone the Import route, most are nice & caring, but some are impossible to understand, & I’m used to accents), turning bitchy/stressy, morale is Low, & the Glib Government says all is fine…… Maybe in Deakin Manor it is, but not so much for the rest of the plebs.
        (Disc, My partner has spent some of the 90’s in Nursing homes, early 00’s at Deakin House & back down this way again for a while – she says she’ll take herself out before going into one when it’s her time! And it was better then than now).

        HTH in some way…..

    • Aged care is a social service and should have never been privatised. When any social service is privatised one should expect price gouging, profiteering and a general drop in service quality, all in the name of maximizing profit.
      It would be much more efficient if retirees used up their super by 80, (average lifespan), went on the pension, and then spent the last two or three years (typical) in a public aged care system (if required).