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Superannuation, the ultimate government cash cow?

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* What's your definition of self funded?

* Is it forgoing lifestyle to enter retirement with a mortgage and use up all your super to pay it off and then get a full pension?

* I highlighted the US as an example of what the majority of countries do ie they don't provide generous tax advantage to private pension systems on both the contributions AND pension phases. The fact Australia does is one of the main reasons why our system is so expensive. They also limit the amount that can be contributed to just under 13K per year which seems a reasonable fair limit to receive a tax subsidy to save for retirement.

* Including the primary residence, or at least the value over say a certain limit would likely stop the super lump sum into mortgage payment from being as lucrative.
 

I don't know about the U.S, but the U.K and Canada pay a pension to everyone, irrespective of whether they have private super or not.

My definition of self funded, is an individual or couple, who have planned and organised their finances such that they will never have to access a Government pension.
It takes a long term plan and needs to commence as soon as they start working and it will include foregoing lifestyle.IMO
That is unless you fall into the silver spoon brigade, unfortunatelly I didn't.
 
sydboy007 said:
* What's your definition of self funded?
Click to expand...
Exactly what it says. And as sptrawler describes. ie being able to fund your own retirement without any dependence on your fellow taxpayer. Nothing at all as you describe in

* Is it forgoing lifestyle to enter retirement with a mortgage and use up all your super to pay it off and then get a full pension?
Click to expand...

How is that being self funded? If you're getting any pension then you fairly obviously are not self funded.
I don't understand your asking such a question.
 
SP and Julia

http://www.abs.gov.au/ausstats/abs@...238.0&issue=July 2012 to June 2013&num=&view=

Late last year the latest Retirement and Retirement Intentions survey by the Australian Bureau of Statistics (ABS) revealed that more than half of retirees withdraw their super as a lump sum, with many then blowing the windfall on their homes or a new car:

Of those who had made contributions, 55% had received all or part of their superannuation funds as a lump sum payment (54% of men and 57% of women). Many of those who received a lump sum payment used it to pay off or improve their existing home or purchase a new home (32% of men and 31% of women) or to buy or pay off a motor vehicle (14% of men and 11% of women).

How is it fair that those continuing to pay taxes are forced to pay higher taxes to cover the lost revenue of super tax concessions, then continue to pay higher taxes because there's no legal requirement to actually use a super balance to reduce your access to the pension, and if anything the whole system is designed to allow massive levels of wealth to be pumped into the the primary residence shielded from any tax consequences?

SP

Australia practically pays a pension to everyone, and those that don't receive one due to their accumulated wealth outside super have probably received more in super tax concessions than they would ever receive from a pension.

As noted by Treasurer Hockey on Budget night, “currently, an individual with a home and almost $800,000 in assets still qualifies for the age pension; a couple with a home and almost $1.1 million in assets also qualify for the age pension”. This level of taxpayer support is clearly more generous than necessary and allows precious tax dollars to flow to those that are not in genuine need.

SP and Julia

There aren't that many truly self funded retirees, and most have gotten there due to the generous tax concession provided within super.

Estimates are that by 2047 we will have seen a mighty increase from ~17% to a grand total of ~20% of all retirees being truly self funded. This due to super tax concessions that have been growing at a compound rate of 12% a year or 3 times faster than the cost of the pension. From 2016 or 2017 the cost of super tax concessions will be higher than the pension.

ASFA chief executive Pauline Vamos said the case for change was backed by findings that some personal super funds had swelled to $30m, with no tax *applied on the earnings.

Almost 9200 self-managed super funds have a balance of more than $5 million, a rise of 76 per cent in the past three years. Some have over $100 million. Given that 92 per cent of SMSFs have only one or two members, many could easily have an income from super of $500,000 a year or more, from age 60 when no tax applies.

The ‘Adequacy and the Australian Superannuation system’ paper forecasts that 75 per cent of retirees will still be eligible for all or some of the aged pension in 20 years time - yet super will soon cost more than the aged pension, so how does that work economically?

As a result of this poorly targeted tax concession, 36.1 per cent of the benefits go to the top 10 per cent of income earners, whereas the bottom 10 per cent don’t receive any assistance at all, but are instead penalised…

Treasury estimates that from the combined support of superannuation tax concessions and the age pension, most people (about 80 per cent) receive around $270,000 support over their lifetime. In contrast, the top 1 per cent of male income earners receives about $520,000 support over their lifetime, because of significant tax concessions to high-income earners.

There’s 3.5 million Australians earning less than $35,000 that don’t get tax concessions on their super contributions. THat's nearly 1/3 of the working population.

Treasury predicts superannuation tax breaks will cost $36.25 billion in 2014-15. The super concessions will in total cost $171 billion over the following three years - that's the down side of the compund growth.

The cost of the aged pension is forecast to have grown to just $72B in 10 years. Super tax concessions will be headed to double that.

How is a system designed to reduce the burden of the aged pension on the budget economically rational when it will be bleeding revenue at much higher rates? Surely there's something wrong with the current system and change needs to occur.
 
Syd you really are a citric type of person aren't you.

You use a post that I have put up previously, that said there is a shift AWAY from taking a lump sum and a move toward pensions. Yet you focus on the negative.
With regard SMSF only 3% take the money as a lump sum. You really are bending reality, as usual.

Obviously all the explanations by Ves, Craft and Junior haven't improved your understanding of the taxation system.

I certainly hope you don't apply your theology to your own long term financial roadmap.

The theory you espouse is based on the status quo going on ad infinitum, that's dumb, it will be modified.
The normal super balance is $150k, yet you throw up 9,200 that have obscene amounts costing us zillions of dollars.
Then you focus on the ones with $150k withdrawing it, to obtain the pension.
What you are really saying is do away with the super system.
It either costs too much, or people are pulling out their money, the only ones you don't pick on are the ones who have pi$$ed everything up and pull a government tax free indexed pension.WTF
How much do you think the the intergenerational welfare recipients, who won't move to areas of work are going to cost?

All your BS is in 2047 or in 20 years time, nothing will be anything like it is now, in 10 years time.
Jeez you really need to think about the reality, nothing stays the same, nothing is forever.
 
For someone retiring now, say they have less than $200k in super and not much in savings...they will likely be eligible for full Age Pension anyway. Whether they withdraw as a lump sum or an income stream is irrelevant.
 
Junior said:
For someone retiring now, say they have less than $200k in super and not much in savings...they will likely be eligible for full Age Pension anyway. Whether they withdraw as a lump sum or an income stream is irrelevant.
Click to expand...

Yes Junior, what Syd would like to see is, those with less than $200k not allowed to take it as a lump sum to pay off their debts and it should be counted against their pension.
 

If we don't talk about the potential costs of inaction are then nothing WILL CHANGE. By default the status quo remains until change is forced through.

So far the only changes to super have made the tax concessions more generous. Removal of RBLs has allowed the super system to morph from saving for a comfortable retirement to allow those with the resources to accumulate as much wealth within super so as to avoid paying tax when they hit age 60. Tax free super after 60 also massively increased the cost of super tax concessions. It's now about wealth protection within a minimally tax environment so it can be bequeathed to family.

So forgive me for worrying that our political leaders have so far not been taking appropriate actions to reign in the ballooning costs of the super system, and that forecasting the future based on current trends seems to be the logical course of action as the last decade has only seen Government action increase super tax concessions. When Labor tried to make super pensions over 100K taxable, Abbott blocked them, so even a small attempt to make the system less costly and fairer has been blocked ie the status quo has been entrenched.

If as Juniour says most people end up with sub 200K super balances, and even in 10 years a large amount of people will not have accumulated much more than this on getting to age 60, what was Howard's purpose in removing RBLs? RBLs were a very effective way to limit the cost of the super system, but now we're seeing the ultra wealthy making extreme use of SMSFs to receive hundreds of thousands of dollars in tax free super.
 
Syd, I don't disagree with a lot of your points.
What annoys me, is your preoccupation with telling people what should and shouldn't be done, with what is argueably their money.

Yet if it was suggested, that there be some form of control on what welfare recipients could spend their money on, i.e food and shelter not smokes and booze.

You would be at the front of the que screaming it is unfair, yet the welfare cost is by far the biggest tax drain in the country and there is no accountabilty on what it is spent on. Just people screaming it isn't enough.

If you think the tax breaks on super are unaffordable, wait untill the extended families, of those who can't be mentioned join the welfare que.lol

I would rather see all pensioners on a self funded tax free pension, than see most on a tax funded pension, now that is unaffordable.
Especially when anyone who has been here 5 years qualifies. Tell me another country that extends that kind of charity, someone has to pay for it.
You constantly suggest it should be the workers who have paid taxes and saved.
 
sptrawler said:
Syd, I don't disagree with a lot of your points.
What annoys me, is your preoccupation with telling people what should and shouldn't be done, with what is argueably their money.
Click to expand...

Isn't super exactly the same thing - the Govt telling you what you can do with your money? 9.25% of your income that you don't have any choice on how it is used for 40 up to odd years.

lets take the typical scenario where someone has been accumulating super for the last 20ish years. They've had to accept a reduced income over that period so had less money to pay the mortgage / rent and other expenses in life. They bank on the lump sum paying off the mortgage and relying on the aged pension as pretty much their sole source of income.

Is that a better outcome than no super, and reaching retirement with the mortgage paid off and relying on the pension as pretty much your retirement income? I'd argue it'd probably have been a cheaper way of doing things - no 1% or so in FUM fees going to the financial industry, less inherent risk as to what will happen with your money, and for most any investments that they do with the extra income is likely to involve a lot more conscious effort.

The lack of super tax concessions would also mean tax revenue is higher and the aged pension is likely to be more easily affordable at this point in time. IIRC an article I read recently was pushing the point that super is now reducing the cost of the aged pension by either $5B or $7B a year, though they glossed over the fact that this achievement is currently costing around $30B in tax revenue.


Actually I do support welfare recipients who have gotten into trouble by poor money management to have some restrictions on what they can spend their welfare on eg no booze or cigs. Sometimes one of the parents would probably like this as well because it's probably hard to stop the money drain happening when there's no limit on how much of it can go to the non essentials of life..


So what is your view on the optimal way to achieve this? IS the current super sytem optimally achieving the majority to be fully self funded retirees? If not, what changes would you advocate for?

My understanding is you have to have lived in Australia for a minimum of 10 years to be eligible for the aged pension.
 
Junior has addressed this point. "blowing the windfall"? why should they not use their Super to pay off their mortgage. Why would anyone want to go into retirement encumbered by mortgage payments? It's their money, their mortgage, their business, isn't it?

There aren't that many truly self funded retirees, and most have gotten there due to the generous tax concession provided within super.
Click to expand...
How do you know how most have 'gotten there'? Why could it equally not have been nothing to do with tax concessions, and rather making saving and investing a priority from an early age, taking on loans with interest rates around 22% on IP, often at the expense of holidays, social stuff, clothes etc., making do with frugal lifestyle, older model car?

You keep going over and over the same premise. I don't recall anyone disagreeing with the idea that eg
the family home should not be exempt from the assets test over a set level, and/or there should be a limit to the amount of wealth that can be eligible for the tax concessions.
Another option future governments might consider is the requirement for some of Super to be taken as an income stream, though I'd anticipate a considerable fight about that.
 

Then what is the point of the super system at this present time when the majority of participants :

* pay out a decent level of fees in the super system
* don't have super balance large enough to reduce their aged pension costs
* Those with larger balances find it relatively easy to structure there assets in such a ways as to access at least a partial pension and associated seniors card benefits.

The concept behind super was to help fund future pension liabilities. It isn't. It's cut people's incomes, and now siphoning some $18B a year from the non SMSF sector, while the SMSF sector is being billed another $3-5B a year.

Income taxes are higher than they would be without the super tax concessions.

The removal of RBLs has lead to an escalating cost of the system because high net worth families now view super as a tax minimisation system rather than as funding retirement. Almost 9200 self-managed super funds have a balance of more than $5 million, a rise of 76 per cent in the past three years. I doubt that growth rate will slow considering how tax effective super is.

Abbott sided with the roughly 16000 who were receiving super pensions over 100K to stop them being taxed. So if just 16000 individuals can lead to changes to reduce the cost of the system being blocked, what hope is there that the primary residence is ever going to be factored into eligibility for the aged pension? What chance of bringing RBLs back now the wealthy have a taste of what they can achieve within super?

If 75% of people will still get some form of pension in 20 years time then what's the point? Why feed the massive level of fees to the financial institutions for very little benefit to society? Wouldn't it be cheaper to just provide super as extra income to people, tax it and have the funds available for the pension? Helps to get rid of the $20B+ dead weight of fees. The Govt could say use the extra tax revenue to build up a pension fund to generate returns over time to help fund the pension - similar to Norway and Singapore.
 

That system was in place before the introduction of super, people didn't save, they spent everything they earned.
The secondry problem to that scenario, was the banks had to source all their funding from overseas, as we had no savings.
This situation left us exposed to fiscal shocks in overseas markets, as happened in the 1987 stock market crash.
The resultant fall out nearly sent three of our banks into insolvency, and so the enforced savings programe(super) was introduced.
The pretence was that workers would have money taken from their wage to give them a better standard of living in retirement.
But as can be seen from your perception, that isn't going to happen.


Absolutely for a short period of time, then people will remove all the funds they can from super, into a more favourable tax shelter.
Then what happens? The tax reciepts drop, people are only having the minimum contribution going in, more qualify for increased pension.




IMO it is critical that welfare is tightened, bringing in O/S workers, because our unemployed don't want to relocate. Tells you life is too good, that is a ridiculous situation, unless there is a good reason the unemployed should take on remote work.
Having a welfare system where anyone who can get here can have a taxpayer funded lifestyle, at the expense of our own population is stupid.



I tend to think the super pension system for those between 55 - 60 is quite good, where the taxable component is taxed with a 15% offset.
Also I agree with you, there should be a RBL where the super rich can't stick $5-10m in there, that's stupid .

However having said that, the RBL should be at a level that doesn't stop people aspiring to a terrific retirement.

The last 10 years in the property market, has shown me inflation can run out of control, it is just everything else hasn't caught up.
 

So you're proposing that the super system actually provides the banks with their main funding source? over 50% still comes from overseas and that's with a $1.8T in the super system, so it' not really making the system that much more stable. Consdiering the banks are at it again increasing their foreign SHORT TERM borrowings they're setting themselves up for more issues when the next crisis emerges. Short terminism is what got them into the situation they had to be saved by the Govt. This is as much an APRA regulatory failing as the banks being short sighted.


So all tax reform should be off the agenda because the behaviours your describing will pretty much occur whenever you change the relative tax merits of investments.


Please pop over to sydney for a couple of months, live on the equivalent of the doles while paying rent and living expenses then let me know your views on the "life style"


Why should I fund someone's terrific retirement? Why shoudl super be about a terrific retirement? When 75% of people entering retirement will still get some form of aged pension shouldn't the system be focused on that part of the market and not the upper extreme?

I'll leave the SMSF sector out for now since the issues I have with it are different to the industry / retail sector.

There's roughly $1.2T in the non SMSF super sector. It's currently costing us $18B a year to run - ~50% of the cost of the aged pension - but the TOTAL super system is only reducing the aged pension cost by at most $7B a year. I'll leave out the super tax concessions - they do add considerably to the cost of the system.

Due to the FUM model employed by the industry the costs involved are increasing at fund earnings + contributions - withdrawls each year. With the run up of markets last year I'd expect the fee gouge would be significantly over $18B now.

I don't believe the aged pension savings from the super system will ever exceed the fees charged to run it.

A fairer system would be to have set up a SWF 20 odd years ago and legislated a certain % of tax revenue had to be contributed every year. Set the access regime to be pretty generous so only say the top 10% in terms of wealth would not have access. Set the level of income to around $30K in todays dollars for a single and $45K for a couple (same % diff as the current aged pension) indexed to the CPI.

This system would surely cost less than $18B to run and would cost a lot less in taxation losses. In the 2012-13 year the Future fund had a MER of 0.67%. Ignoring the very real economies of scale to be achieved could see just $12B lost in fees instead of the $23B+ the current system is being bilked for. With $1.8T to throw around I'm sure the FUM model could be revoked and fixed rates for asset management brought it.
 

50% is still a lot better than the situation that prevailed pre 'super'



sydboy007 said:
So all tax reform should be off the agenda because the behaviours your describing will pretty much occur whenever you change the relative tax merits of investments..
Click to expand...

I think tax reform, will have as much chance of happening as Government spending reform, with the current political climate.

sydboy007 said:
Please pop over to sydney for a couple of months, live on the equivalent of the doles while paying rent and living expenses then let me know your views on the "life style".
Click to expand...

Please pop over to any other country in the world, other than the U.K and live on their welfare system.
I'm sure you would wish you were in Sydney on the dole.

Also like I said, why are we bringing in 457 visa cleaners, for the mining camps, when there is people on the dole in Sydney and every other capital city?



Why should anyone put anything into super, if not to improve their retirement fiscal position?
With a welfare state, you will always fund someone's terrific retirement.

 
sptrawler said:
50% is still a lot better than the situation that prevailed pre 'super'
Click to expand...

proof? Pre GFC local funding for banks was at 40%. Considering the high level of non cash investments of the retail and industry funds I'd find it unlikely that the super system provided much funding to local banks, unless you're going to include the frozen RMBS market.

sptrawler said:
I think tax reform, will have as much chance of happening as Government spending reform, with the current political climate.
Click to expand...

Plenty of reform going on. Carbon and mining taxes have been revoked. FOFA reforms gutted. LISC removed, super pensions over 100K tax free again. None of them have helped the long term structural balance of the budget though. The removal of the carbon tax is over $7B in lost revenue.

sptrawler said:
Also like I said, why are we bringing in 457 visa cleaners, for the mining camps, when there is people on the dole in Sydney and every other capital city?
Click to expand...

Considering the number of reports coming out on how the 457 system has been rorted with companies applying for a small number of visas and then employing tens to hundreds of times more woerks, do you have proof that locals even got a chance to apply, or has the 457 system been more about bringing in unskilled labour on the cheap and suppressing wages?


sptrawler said:
Why should anyone put anything into super, if not to improve their retirement fiscal position?
With a welfare state, you will always fund someone's terrific retirement.
Click to expand...

Your $2M super balance terrific retirement idea and mine of a comfortable 30K retirement income are pretty far apart. Bit like PPL versus the current Govt funded scheme.

Just reading in the paper today that Chile has been able to get default fund fees down to 0.2% since they started a competitive tendering system to manage the usually apathetic who's balances end up in the default fund. That's a policy change I'd support, but considering Abbott has been siding with the financial industry for the last year I doubt that's a worthy change that would come through.

You avoided the whole cost of the system though. Our super system is expensive. It doesn't provide a good cost benefit ratio, especially for those at the lower end of the income spectrum. Reports are starting to show that at the lower balance levels that fees end up reducing final balances by 25-50%. Someone on less than the median income would likely be better off receiving their super as income since whatever amount of super they will accumulate will likely be withdrawn as a lump sum and not reduce their access to the aged pension. So what value do they receive from the reasonably high level of fees they are paying?

If 1.2T costs $18B a year to manage, then in 10 years it's quite conceivable with the effects of compound growth and 9.25%+ contributions each year that fees in the non SMSF sector alone will be at a similar level to the cost of the aged pension. At that point why bother with the super system when it's not saving us money?

Abbott sided with the 16000 who were going to face a tax bill on their over 100K super pensions, so how likely do you think bringing back RBLs or some form of limit on super balances? While the number of accounts currently is small, the amount of tax leakage is massive, and with something like 30% compound annual growth in balances over $5M, the problem is quickly getting out of hand.
 

As usual Syd, we've done it to death again, and the world keeps turning. It was an interesting interlude as always, hope you have a great weekend.
 
Syd, re your
Your $2M super balance terrific retirement idea and mine of a comfortable 30K retirement income are pretty far apart
Click to expand...

I can't see too many people finding $30K, when inflation is factored in, being sufficient even at the start of their retirement, let alone after 20 or more years. Even if it were put into inflation adjusted environment, it wouldn't allow much for travel, upgrading car, home maintenance etc. You might be happy with that much but I'd guess most of the population might aspire to a little more if they're going to the effort of providing for their own retirement.
 
as a couple with kid, we live happily on 60k a year so 30k a year is very sufficient IMHO as long as you are debt free and do not waste your money;
I will not go down the path Syd takes: he has given all the argument.
But even if i could, I hardly put any of my money into super: just the mandatory 9 % (which I could avoid as director of my business).
Why do I prefer being taxed at now 51% instead of low super tax rate?
Because I see the current super system as a huge rort benefiting the 60y+ population.Let's call them baby boomer if we want;
I am not that young, have sizable income in the toptop centiles yet as opposed to what Syd would probably think ; I am not using that system;
the reason is that last year I learnt I will not be able to touch that money until 70 (well at the earliest until the next push) and was not surprised at all by the news

Superannuation is a generational wealth transfer ; similar to what the distribution system is/did in Europe;
It is fundamentally unsustainable and is only up and running as both parties have their hands in the trought:
labour via their union mates cashing on the industry funds and the right aka Abbott via their mates at AMP/Macquarie.
Syd is wrong to consider this as a class based " the rich benefit and the poor pay"
People on pension right now at 60+ are very lucky even if they may not admit it
It is a generational warfare where the system sacrifices the younger generations to carry on a status quo and a seat in government;
If you are below 55 not to say 55, in my opinion, consider that super contribution money poured in the drain!
 

Probably true, but the fact is very few people will end up with much more than that in todays dollars.

My argument is when the system is so expensive in terms of fees and tax leakage, why are we wasting so much on it

The median income is $47K. Even with the increase in employer contributions to 12% they wont have much in the kitty at retirement.

over a 45 year working life with 3% pay rises every year (possibly unrealistic in the current environment of wage stagnation) their final balance would be roughly $1.88M if their fund makes them 6% a year net of fees - about what most balanced funds aim for over the long term.

With inflation averaging 2.5% each year (mid band of the RBA target) we'd be looking at that 1.88M being worth closer to $630K in todays dollars.

a FUM fee model of 0.7% would have totalled nearly $170 or roughly $56.6K in todays dollars.

What happens if you're a part time worker who's just on 35K and continues on for 45 years?

The you're looking at roughly $470K at the end after forking out $42K in fees

You could argue people should top up their super, but with rents now a major share of income and mortgages taking even bigger slice, it's not particularly easy to save when you're at the lower end of the income scales.

Super pretty much benefits the top 30%.
 
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