Superannuation, the ultimate government cash cow?

[Judd]

I'm always fascinated by the alleged claim that a couple with $1m in superannuation are considered wealthy. Maybe or maybe not. Simple sums indicate that $1 at 5% is $50k pa. Tax free where the couple are 60+.

However, no one seem to be prepared to equate the $1m to the sum of the age pension plus supplement. A married couple of full age pension receive $1,106.20 pf and, if eligible, $49.40 pf supplement. A total of $1,155.60 pf. This is $30,045.60 pa . To earn that amount you would need capital of $600,912 earning 5% (30,045.60/.05), so in my view in that context $1m is not a massive amount in comparison.

Suppose it depends on how much you wish to contort reality and Governments seem to be good at doing that.

 

[FlyingFox]

I'm always fascinated by the alleged claim that a couple with $1m in superannuation are considered wealthy. Maybe or maybe not. Simple sums indicate that $1 at 5% is $50k pa. Tax free where the couple are 60+.

However, no one seem to be prepared to equate the $1m to the sum of the age pension plus supplement. A married couple of full age pension receive $1,106.20 pf and, if eligible, $49.40 pf supplement. A total of $1,155.60 pf. This is $30,045.60 pa . To earn that amount you would need capital of $600,912 earning 5% (30,045.60/.05), so in my view in that context $1m is not a massive amount in comparison.

Suppose it depends on how much you wish to contort reality and Governments seem to be good at doing that.

You should be doing the sums with principal plus interest and not interest only to have a fair comparison.

 

[Judd]

You should be doing the sums with principal plus interest and not interest only to have a fair comparison.

Fair point but I was working from the aspect that a couple on the age pension does not consume the notional capital value.

 

[drsmith]

In terms of increased taxes based on assets in the fund, I would imagine the assets test for a part pension would provide a lower limit.

Family situation,

Homeowners: Single $731 500, Couple (combined) $1 086 000.
Non-homeowners: Single $871 000, Couple (combined) $1 225 500.

http://www.humanservices.gov.au/customer/enablers/assets

This though is hardly super rich.

 

[FlyingFox]

Fair point but I was working from the aspect that a couple on the age pension does not consume the notional capital value.

How the accounting for that is done maybe quite complicated (I'm not an accountant or an economist so someone else please chime in) but frankly quite irrelevant. No nest egg is passed on for anyone on a pension.

The point of saving for retirement is pay for retirement and not to pass on a nest egg. If you can afford to leave a $1 million dollar nest egg, and I believe the stats will prove me correct, you should be considered wealthy.

Edit: I am assuming the person has their own paid off home.

 

[So_Cynical]

Given the average mortgage is around 350 k you would probably need an income of at least 100k or more to qualify for a loan. Then of course you would need probably 200k saved as well just to buy an average house in the suburbs of most of Australia's capital cities.

Correct, i live in Sydney and while i have enough for a 30% deposit on the average mortgage, i don't earn enough to actually pay off the loan.... what's that got to do with the 150K struggling statement :dunno: put simply if your household income is 150K+ and your struggling, your a tool or some sort of Muppet.

 

[Intrinsic Value]

Correct, i live in Sydney and while i have enough for a 30% deposit on the average mortgage, i don't earn enough to actually pay off the loan.... what's that got to do with the 150K struggling statement :dunno: put simply if your household income is 150K+ and your struggling, your a tool or some sort of Muppet.

The point my dear friend is that you are not rich on that income and indeed if you are paying off a mortgage on that income then you wouldn't have much left over at the end of the month.

 

[FlyingFox]

The point my dear friend is that you are not rich on that income and indeed if you are paying off a mortgage on that income then you wouldn't have much left over at the end of the month.

I think the differentiating point is that property and houses are overly expensive. If you bought before the boom and are even slightly financially oriented, then you have or are close to having a paid of property. At this point a $150K is a fair amount of money. Remember ~70% of Australians own their own home and edit: ~ half of these own them outright.

On the other hand, if you are young and want to buy your first property, then even at a $150K you may be struggling as your mortgage will chew in to a substantial portion of your income. However this group are still in the minority.

Also if you have a look at income distributions, $150 K puts you into the top 20% of incomes in Oz and it goes up very quickly, $185 K is close to 10% and $250 K is somewhere near the top 2-3% or less. Housing aside, if you are not considered wealthy on $250K then there is something very wrong.

 

[FxTrader]

Also if you have a look at income distributions, $150 K puts you into the top 20% of incomes in Oz and it goes up very quickly, $185 K is close to 10% and $250 K is somewhere near the top 2-3% or less. Housing aside, if you are not considered wealthy on $250K then there is something very wrong.

Terms like wealthy and rich are assigned arbitrary meanings and values usually based around some current income level. Wealth should really be measured in terms of assets, the passive income generated by these assets and any offsetting liabilities. If I owned 10 million dollars worth of real estate (debt free) but declared little or no income am I wealthy? I suspect most would say yes. Yet if I owned a 10 million house I could still collect the full aged pension in such a low income scenario.

The government has a problem, modelling the growth of the aged pension over time shows it to be unsustainable. Unfortunately, the superannuation system can be gamed by drawing it all out as a tax free lump sum on retirement and then structuring one's finances to draw a pension. So the intention of super being used as a retirement income stream is thwarted by a flaw in it's structure. Tinkering with tax thresholds does not solve the problem.

 

[McLovin]

Correct, i live in Sydney and while i have enough for a 30% deposit on the average mortgage, i don't earn enough to actually pay off the loan.... what's that got to do with the 150K struggling statement :dunno: put simply if your household income is 150K+ and your struggling, your a tool or some sort of Muppet.

Why does your inability to pay off a standard size mortgage in Sydney mean that someone earning $150k in Sydney wouldn't be struggling?

With a couple of kids and a mortgage even $250k is still very much middle class in Sydney.

Also if you have a look at income distributions, $150 K puts you into the top 20% of incomes in Oz and it goes up very quickly, $185 K is close to 10% and $250 K is somewhere near the top 2-3% or less. Housing aside, if you are not considered wealthy on $250K then there is something very wrong.

Most international cities have the same issues. In places like New York, London, Singapore, Hong Kong $250k won't buy you the same lifestyle as it would elsewhere. Sydney can't be compared to the rest of Australia, IMO.

 

[FlyingFox]

Terms like wealthy and rich are assigned arbitrary meanings and values usually based around some current income level.

Agree they are arbitrary but relative incomes are just one of the unbiased ways of making these comparisons for incomes. Since taxes are mainly on income, they tend to be used as a measure of wealth. Also this is the more applicable measure for the majority of the population as people with large sets of paid off assets are in the minority. At the last census if you had over $1 million of unencumbered assets as investments apart from your family home you were in the top 2% of the wealthy.

Wealth should really be measured in terms of assets, the passive income generated by these assets and any offsetting liabilities. If I owned 10 million dollars worth of real estate (debt free) but declared little or no income am I wealthy? I suspect most would say yes. Yet if I owned a 10 million house I could still collect the full aged pension in such a low income scenario.

I agree but the two tend to be interrelated. BTW you wouldn't pass the asset test for your pension and would not get one.

The government has a problem, modelling the growth of the aged pension over time shows it to be unsustainable. Unfortunately, the superannuation system can be gamed by drawing it all out as a tax free lump sum on retirement and then structuring one's finances to draw a pension. So the intention of super being used as a retirement income stream is thwarted by a flaw in it's structure. Tinkering with tax thresholds does not solve the problem.

Agreed. While tinkering the tax thresholds does not solve this, they will not change the structure as it will piss off more people and would be considered a retrospective change and possibly challenged in the courts etc. Also they can't apply this change to only those that have high super balances and not everyone. Personally the full lump sum option should not be available to anyone as long as super is subsidized.

If executed properly it may stop people from accumulating large tax free super holdings (more than needed for retirement) that they will get out tax free and pass on to their kids.

 

[FxTrader]

BTW you wouldn't pass the asset test for your pension and would not get one.

Your primary residence (family home) is exempt from the assets test assessment. I know a few people personally who own primary residences worth well over a million dollars and collect at least a part pension. They could easily sell and move into a more modest residence but they would lose their pension . This is what I mean by gaming the super system. I doubt the super architects considered the full impact of the now well known and deployed strategy of plowing as much lump sum cash into one's primary residence as will allow at least the collection of a part pension if not the full pension.

 

[FlyingFox]

Your primary residence (family home) is exempt from the assets test assessment. I know a few people personally who own primary residences worth well over a million dollars and collect at least a part pension.

That comment was made under the assumption that if you have 10 million worth of paid of property it would be more than one but point taken

They could easily sell and move into a more modest residence but they would lose their pension . This is what I mean by gaming the super system. I doubt the super architects considered the full impact of the now well known and deployed strategy of plowing as much lump sum cash into one's primary residence as will allow at least the collection of a part pension if not the full pension.

No they didn't. And more largesse was added to win votes over the years. The worst abuse was/is of concessional caps. Just an anecdotal situation, a know someone who was contributing all their salary up to $100 K into super (and upto 50k once this was lowered) because they were going to retire in a few years. This year they retired (from Oz at least), took the lump sump payment and moved to nz. Rough back of the envelope figure, this cost the tax payers 50-60 in lost revenue.

It's not just super but the whole taxation and welfare system in general. And it will not change because it is political suicide to do so. Look at the irritation the taxation of super has raised in the media and this forum in just the last week.

 

[Julia]

Your primary residence (family home) is exempt from the assets test assessment. I know a few people personally who own primary residences worth well over a million dollars and collect at least a part pension. They could easily sell and move into a more modest residence but they would lose their pension .

Might be time to only exempt the family home up to a certain value?
Then I suppose there would be much whining from those with property in eg Sydney compared to a family home in WopWop.

 

[drsmith]

If the government was genuine about long-term sustainability, it could look at reintroducing reasonable benefit limits and review access to further super tax benefits for any new contributions made by those who have formally retired (accessed their existing super benefit/government pension as part of a formal retirement).

 

[FlyingFox]

If the government was genuine about long-term sustainability, it could look at reintroducing reasonable benefit limits and review access to further super tax benefits for any new contributions made by those who have formally retired (accessed their existing super benefit/government pension as part of a formal retirement).

+10. Not that they will. Perhaps the simplest way of doing this is to make super inaccessible except via a pension scheme with the difference in retirement age and mean lifespan used as the lifetime of the pension. At least in this way the concessions can be justified.

 

[mylorman]

i know this may sound ignorant and the like but I have always maintained that superannuation is not the best option. I decided in my twenties to put money into starting my own business and prefer to think that my business will support me in my latter years .. after all who really wants to retire, be bored and have a heart attack anyway ? I dont see that I will stop working for myself just that my role will change and hopefully it will lead to a cushier job that pays excellent money. I will say that the current GFC hasnt helped with growth so sometimes it makes me wonder whats the point of it all anyway ... before i sunk money into super i would look at buying good property ... just my opinion for whatever it's worth
Cheers
PS how could the government resist keeping their hands off the huge super holdings that have accumulated ?

 

[drsmith]

PS how could the government resist keeping their hands off the huge super holdings that have accumulated ?

Depending on how desperate they get, it's what they hit before going after marginal income tax rates.

On ABC radio news late this afternoon I heard a segment with Bill Shorten defending current arrangements for up to 4-times average salary. DecQ AWOTE was $1396 or ~$73k pa. 4x is ~$292k. That's very close to a figure we've seen before and won't raise much for the government.

Perhaps they've found the water a little too cold for one's delicate pre-election budget toe.

 

[So_Cynical]

With a couple of kids and a mortgage even $250k is still very much middle class in Sydney.

Not in Penrith, in fact not anywhere west of Parra...anyone struggling on 150K is struggling because they have made financial commitments that were/are the cause of their struggle, Mc Mansion first home, 2 cars, etc.

 

[Julia]

Perhaps they've found the water a little too cold for one's delicate pre-election budget toe.

They have been doing what they always do - testing the electorate for reactions to various levels of change of legislation. They have been diligently leaking various options in order to generate discussion and gauge responses without making a single statement about what they are actually considering.

It has been a pretty successful strategy in that heaps of reaction has been garnered which will then allow them to pick a level of Super gouging that will only alienate those whose votes they were never going to get anyway.