An article from SuperGuide.
As a voter, and as a taxpayer, I am comfortable with most current retired Australians paying no income tax, and for other retirees paying a lower rate of tax than the younger population (and when I refer to younger, I include myself in that category).
Many of our current Australian retirees paid taxes (higher than what we pay today) for up to 50 years (and some still pay tax), and those taxes helped build the infrastructure and community services that we all enjoy today. Hopefully, the efforts of each successive generation will add to the experience and lifestyle of the generations following.
In terms of retirement planning incentives, and budgetary concerns, of course there needs to be a limit to how far tax concessions extend. Such considerations are particularly relevant when a couple or individual chooses to retire earlier than age 65 and 6 months (current Age Pension age), or earlier even than age 60 (although tax-free super benefits generally only kick in from age 60). A retirement lasting 35 to 40 years is an expensive proposition for the retiree, but may also be an expensive proposition for the working taxpayer shouldering an extra tax burden to enable the retiree to enjoy those tax concessions for 35 to 40 years.
In my view, any future limit to tax concessions should not apply to anyone already retired, and should not apply to anyone on the cusp of retirement (say, within 5 years of retirement). Such individuals are unable to mitigate their circumstances, and the ‘pay cut’ in most instances will be not only financially stressful, but also emotionally stressful. As much as possible, I believe we should not change the rules for retired Australians who have limited opportunity to make up the loss of income.
I consider, as do many Australians, that both political parties have betrayed the current batch of retirees. The Liberals introduced a harsher Age Pension assets test to existing retirees, and an immediate limit on super benefits in retirement phase. While the ALP has announced its intention to abolish franking credits refunds; a policy directed largely towards self-funded retirees, and/or Australians running SMSFs (although other Australians are also affected).
Can we blame retirees for expensive housing? As an important aside, yes, housing affordability is a serious issue in this country which we certainly need to address, but blaming retired Australians for this issue seems illogical and mean-spirited. Housing was indeed cheaper when our current batch of retirees bought homes, but the modest houses they mainly bought (even though some may have subsequently upgraded or downsized) are not the houses Australians are expecting to buy today. Rising house prices has everything to do with population growth, limited land availability, and also relatively high expectations for housing size and amenities. Further, the housing issue cannot be separated from the very high standard of living enjoyed by the current younger generations in terms of accommodation, food, technology, entertainment and travel. The younger generations enjoy a standard of living that was not experienced by previous generations in their younger years, and a standard of living that is in place largely as a result of the efforts of previous generations. (I discuss the generational wars and housing supply and demand, at the end of this article.)
Punishing retirees who did what they were told
Over the past decade, the constant theme from both Coalition and ALP governments is how lucky the older generation is in Australia, and how much wealth they hold compared with the younger generation.
I don’t disagree that Australia, compared to many other countries, has a great standard of living for most Australians, although ‘single older women who rent’ is one of the poorest categories of Australians, especially those living solely on the Age Pension.
I am not really sure what policy imposter (a certain think tank comes to mind) started the theory that because older Australians have more money than younger Australians, that in itself is a bad thing. I would hope that an Australian in their sixties or seventies or eighties has accumulated sufficient assets to support a large portion of their retirement, and if they have not accumulated enough savings, then the Age Pension is available to supplement or fully support such an Australian.
Merely cutting retirement incentives is not robust, strategic long-term retirement policy. We want older Australians to have accumulated assets to support their retirement. Suggesting that because they have done what they were expected to do, they should then be punished with retrospective Age Pension and superannuation policies, and selective franking credits policy, is, in my opinion, lazy policy, advised by out-of-touch advisers and egged on by a group of Australians who believe that the younger generations are immediately entitled to a lifestyle that the older generations took 30 to 40 years to create.
If a retired Australian has superannuation savings or non-superannuation savings, and they rely mainly on those savings (super pension, interest, dividends, franking credits) to live, then they did what they were asked to do. Such Australians heeded the key message of successive governments. The key message was you need to save for your retirement rather than relying solely on the Age Pension.
Note that around 70% of Australians over the age of 65 already receive a full or part Age Pension, which confirms the sentiment that our retired population deserves support from the younger working population, just as taxpayers support other Australians too young to work, or physically or mentally unable to work.
Of course, the level of support determined sustainable may change over time, but such changes should be introduced over time, and not apply to current retirees.
Recent governments, and financial industry, largely ignored our older generations
I am dismayed that recent governments have been obsessed with demonising older generations who built this country after two world wars and the Depression. These generations are the ‘Frugal’ generation (sometimes called the Silent generation), Baby Boomers, and to a much lesser extent, Generation X. At the risk of being simplistic, the Frugals were born in the 1920s, 1930s and very early 1940s. Baby Boomers were born from mid-1940s to early 1960s, and Generation X were largely born post-1961 (although some argue post-1963).
Note: Baby Boomers are really two distinct groups – the True Baby Boomers (born from 1946 to around 1955) and the Shadow Baby Boomers (from 1956 to 1961-ish, or 1963-ish). Most Shadow Baby Boomers have not yet retired, while nearly all True Baby Boomers have entered retirement.
I am also dismayed that since the mid-1980s (when productivity super was introduced for many workers) and since 1992 (when Superannuation Guarantee was introduced), and since 2007 (when the super rules were simplified to make the system accessible to everyone, rather than just those who could afford financial advice), subsequent successive governments have otherwise stood still in helping Australians build decent retirement balances. In fact, in the past 10 years, since we launched SuperGuide in 2009, both sides of politics have made saving for retirement more difficult, rather than easier.
The federal government is not solely to blame of course. Australians have had a complacent superannuation industry, more interested it seems in warring between themselves, or protecting the special treatment the super industry (and financial advising industry) receives from successive governments rather than lobby for Australian retirees and super savers. What has the super industry done to empower Australians to create a comfortable and secure retirement?
Here we are, in 2019, dealing with the findings from a Royal Commission into the banking, financial services and superannuation industries, where banks and other financial organisations have dishonestly and incompetently failed to act in the best interests of customers and clients (but that’s another article). Here we are, in 2019, with the industry super fund sector refusing to embrace good corporate governance by opposing mandated independent directors while entertaining the idea of becoming quasi-banks for corporate Australia (but again, that’s another article).
Not long after we launched SuperGuide, and amid the low point of the Global Financial Crisis (early 2009), the ALP government at the time slashed super contributions caps, rather than providing some leeway for older Australians to rebuild their devastated super accounts. The ALP was also deaf to the possibility of allowing older Australians to re-contribute to superannuation accounts post-retirement (to make up for major capital losses and slashing of retirement balances). Concurrently, the ALP was demonising retirees and also Australians who ran self-managed super funds. Sadly, by targeting SMSFs and older Australians, the ALP was targeting the segment of the population that was hardest hit by the Global Financial Crisis (GFC). And those retirees who were hit hardest by the GFC, often suffered in silence and returned to work to supplement devastated savings.
More recently (2017), the Liberal government has hit this same segment of the population with retrospective and harsher Age Pension and superannuation policies. And now in 2019, the ALP promises to abolish franking credits refunds to this same segment of the population, and other affected Australians.
Generational politics and the era of entitlement
Just for the record, I am not a Baby Boomer. I am part of a ‘younger’ generation (but obviously not part of the youngest generations). I am part of the oldest cohort of Generation X, and we now have at least 4 generations that follow Generation X.
Most of my generation entered the workforce in the middle of a recession, unemployment was a major problem (including for Baby Boomers), some of us had a parent/s out of work due to the recession, property was already an affordability issue, the sharemarket had not yet fully recovered from the 1987 crash, interest rates were much higher than they are now, and compulsory super (SG) had not yet been introduced, or was in the process of being introduced. Generation X however missed both world wars, the Korean war, the Vietnam war (although we may have had fathers or uncles who were conscripted to fight), and we enjoyed a relatively stable economic environment (apart from the 1990s recession and the Global Financial Crisis).
The cost of living is definitely higher nowadays due to the much higher standard of living enjoyed and expected by everyone. When I left university and started my first career job, the internet was not in homes, getting take-away coffee every morning was not yet a ‘thing’, and mobile phones were still big bricks and only used by business owners, and some senior executives.
Internet is now ubiquitous in terms of home use and mobile phone use, and when streaming films and TV shows. Everyone seems to want a kitchen straight out of a design magazine, and luxury cars and luxurious homes generally have now become a standard expectation rather than an eventual possibility.
Of course, housing affordability continues to be a major issue for Australians younger than Baby Boomers, but the younger generations are also enjoying a standard of living that is unprecedented, and that previous generations never enjoyed.
We now have youngish commentators, politicians and think tanks espousing weak arguments for why retirees are living it up, and that money should be clawed back in some way. In my view, that is just political bullying of a now-vulnerable segment of the population, reinforced by some of the misleading language used by politicians.
For example, Chris Bowen when referring to the ALP’s proposed ban on franking credits refunds says “Labor is cracking down on a loophole that gives tax refunds to people who have a lot of wealth but don’t pay any income tax”. One, franking credits refunds is not a loophole; it was actively introduced as a policy by the Liberals, on the back of ALP’s introduction of franking credits, and has been considered normal practice for many years. Second, many recipients of the refunds are not wealthy people, although many may own their own home.
Retired Australians are not to blame for the current working generations’ dilemma in saving for retirement, or for housing affordability. Although housing affordability is not the main purpose of this article, I am surprised by how politicians, certain commentators and some younger people are targeting our older citizens. Why are so many people getting worked up about an older couple, or an older individual owning their own home (after, say, 50-plus years), and who have saved all of their lives so they can try to have financial independence (or part independence) in their later years. We should thank them, and congratulate them.
Every generation has experienced advantages and disadvantages, and I do not believe the federal government should be blaming our retirees for events outside of their control (and then taking from our retirees by implementing harsher Age Pension assets test, caps on retirement balances, lower caps on super contributions, potential removal of franking credits refunds) when those retirees cannot mitigate their circumstances.
Why the GFC is still hurting our retirees
In my view, the Global Financial Crisis hit Baby Boomers and the ‘Frugal’ generation the hardest, and many are still trying to recover financially, 11 to 12 years later.
Millions of words have been written about the Global Financial Crisis, but very few practical words have been devoted to the plight of retirees, plus those Australians who were on the cusp of retirement when the GFC hit, and those Australians who were planning ahead for their retirement.
At the time of the GFC, many self-funded retirees lost up to half of their accumulated wealth invested via the sharemarket, while a significant number had assets frozen in mortgage funds. Even the safe haven of cash was (and still is) paying interest at a rate that is not much more than the inflation rate. The opportunity for accumulating real wealth was clearly looking grim 11 to 12 years ago.
Although investment markets have improved considerably since then, federal government superannuation and Age Pension policies have savaged most of the benefits salvaged from a market recovery.
Obviously, investing is for the long term and eventually markets do recover, but during the GFC, some retirees were forced to sell assets to live because they no longer had a working income, which meant rebuilding an asset base for retirement became problematic.
If you are a long-term shareholder, then you would be aware that the market has not truly recovered since the GFC. For example, the high point of the S&P/ASX200 was October 2017 (6754.1), and the low-point during the GFC was February 2009 (3344.5) – halved! Eleven years from the October 2017 highs, the S&P/ASX200 sat at 5830.30 (October 2018) – still nowhere near the pre-GFC highs. At the time of writing, the S&P/ASX200 sits at 6175 (17 March 2019), still well below its high from 11.5 years ago. The All Ordinaries index follows a nearly identical trend.
Important: The S&P/ASX200 and the All Ordinaries index has tread water for a long time, which is another reason why dividends, and franked dividends have become so important for retired Australians.
A major problem for non-working retirees then, and now, is that once the money has gone from super, you can’t get the money back into super. And there are those retirees who have never had the opportunity to take advantage of super. If you’re a woman in your sixties, seventies or eighties, you may not even had the opportunity to join a super fund.
The forgotten retirees in this ‘political bullying’ election strategy are those who were too old to fully take advantage of the tax-free super rules introduced from July 2007, and then had dramatically reduced personal share portfolios due to the sharemarket downturn, and are now grappling with harsher Age Pension rules, caps on superannuation retirement balances and the threat of the removal of franking credits refunds.
Australia’s retirees are the backbone of Australia’s sharemarket, and an important source of capital for companies, and savings for banks. Retirees control a significant chunk of the top 200 ASX companies, and are major contributors to the relative stability of our financial markets. For example, Australians running their own self-managed super funds control about 10% of the Australian sharemarket. Many retirees rely on company dividends for income, and franking credits for tax management.
Regardless of which party wins the 2019 Federal Election, please leave retirees alone. I believe that any new policies introduced, should not detrimentally affect the income of Australians who have retired, or who are within 5 years from retirement.
Skate.