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We’re all gamblers now

The changes to superannuation make our risky retirement system even worse

17 September 2016

9:00 AM

17 September 2016

9:00 AM

We are a nation of gamblers. We wager more per capita than any other country on earth. But it is one thing to enjoy a flutter on the ponies and another to let the government turn saving for your old age into the financial equivalent of retirement roulette.

How did we let that happen? Who dreamed up the idea that you should be expected to have an appetite for risk at an age when you don’t even know if you ‘dare to eat a peach’ as T.S. Eliot put it.

The government is now gambling that no-one will notice that 70 per cent of people will be worse off thanks to its latest proposed changes to the age pension and superannuation. And the depressing news is that so far, they have been getting away with it. How? It’s the same ruse that pickpockets use the world over. Distract the victim – in this case with arcane questions about legislative retrospectivity – then lunge for the wallet.

We can thank Paul Keating for this state of affairs. Think of it as the end-of-life lottery he decided we have to have. When he introduced compulsory superannuation, employers, starting with the government, started closing the old defined benefit pensions. And the government, desperate to balance the books, started taxing superannuation contributions and earnings much more heavily.

In the short run it meant Labor delivered the last budget surplus it has ever managed. But it came at a high price. Despite being forced to lock away ever more of our money for the last quarter of a century, we still aren’t able to maintain our standard of living in retirement.

Unless you’re on the dole, in which case moving onto the pension is moving up in the world, retirement is likely to be a step down. Analysis shows the average middle-income, middle age couple has almost twice the income of a couple of similar age in the bottom 20 per cent. Once they turned 65 however, the middle income couple is only 25 per cent better off. We can blame that on the interaction of the means testing of the age pension (a form of taxation) and the punitive taxation of retirement savings. Given that, you might think the government would be too embarrassed to fleece the middle class of even more money. But you would be wrong. In a pincer movement that seems pretty audacious given that it is being launched on Dad’s (and Mum’s) Army, the government is making it harder to put money into super, increasing the taxes on it and making it harder to get the pension.

When the new pension assets test comes into force in January 2017 up to 300,000 retirees will lose some or all of their pension entitlements. Increased taxes on the transition to retirement provisions may hurt up to another 300,000 people, many of whom are on average incomes. These people will also be hit because the government is tightening the cap on concessional contributions. And they will not be able to put anything into superannuation as an after-tax contribution if they have already put $500,000 into super in after tax contributions. All this is a direct blow to the middle class since the poor will always get the pension and the well-off never will.

It’s ironic that 75 years after Menzies reached out to the Forgotten People, the government is hell-bent on creating, and forgetting, a new generation who are being punished for the seemingly heinous crime of trying to provide for themselves in old age. Indeed, the government’s modelling shows that many middle income people will be permanently locked out of the upper reaches of the super system. For example, the average woman, with a pre-retirement super balance of $120,000, will be unable to catch up to the government’s indicative middle income retirement balance of $713,000 because the after tax cap would limit her to putting in $500,000. So if she had $500,000 in assets, for example two small investment properties, she would have to pay tax on the income they generated.

How fair is that? People have low superannuation balances due to low wages or periods of unemployment, self-employment, part-time employment and unpaid employment
in the voluntary sector or caring for children, disabled or elderly relatives. Why should they be limited in their capacity to catch up and forced to pay tax on income-generating assets in retirement when those who have been lucky enough to have unbroken employment histories and high incomes can pay no income tax in retirement on assets of up to $1.6 million.

But don’t imagine those with assets of $1.6 million have it easy. The government portrays these people as wealthy yet they will earn just $77,360 per annum, less than average annual ordinary time earnings of $78,832. And this is calculated assuming an investment return of 5.75 per cent – to get that return you have to accept that when the next global financial crisis comes along your savings will probably be smashed. To generate income with the same reliability as the Age Pension, the appropriate risk-free rate of return is the 10-year government bond rate, which reached a record low of 1.82 per cent in August. On such a rate, the $1.6 million will generate a fraction of that income.

Yet the government’s modelling shows that it assumes retirees will not only play retirement roulette but that everyone will be a winner and secure a magical 5.5 per cent return every year of their retirement. Good luck with that. Just remember, if your savings are wiped out, the government won’t let you put any more into your pension fund once you reach the $1.6 million limit. And that threshold is indexed to CPI, so over time it will be eroded compared with wages. And don’t expect any better from Labor. Their assumptions are just as deluded and they plan to tax savings even more harshly

Few countries have been able to get away with inflicting such uncertainty on the elderly. As Nobel prize-winning economist Robert M. Solow wrote: ‘When the Bush-Cheney administration proposed to replace Social Security (with superannuation)… my first thought was that its goal was to take the Social out of Social Security. It took a few minutes longer to realize it also intended to take the Security out…’

The Bush-Cheney attempt failed. But in Australia, as Milton Friedman might have said, ‘we are all gamblers now’. Well, not all of us. The politicians and Treasury officials who designed the roulette that the rest of us are obliged to play enjoy the security of a generous defined benefit pension, worth up to 75 per cent of their highest salary, for life, courtesy of us. You can bet on that.

Rebecca Weisser’s report, ‘Strangling the Goose with the Golden Egg – Why we need to Cut Superannuation Taxes on Middle Australia’ is published by the IPA

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