Superannuation, the ultimate government cash cow?

[Vixs]

I thought I may as well check out what the pension for a couple is currently, well surprise it is $34,000.

That is the same as 3.4% on $1million in super, the only problem is the 3.4% in super is probably going lower and the $34,000 pension is going up faster than wages.

Why would anybody put anything into super, when Syd and myself started debating the issue a couple of years ago, the pension was $32,000.

It is obvious where the smart money is, or isn't.

On current trends the Government pension will make most SMSF pensions look like poor relatives.

The smart money are most definitely not reliant on the age pension to pay their bills. What kind of life is that?

A couple with $1m in super, assuming no other significant financial assets, could also be collecting about $11,600 p.a. from the age pension. Assuming they aren't keeping their $1m in cash long-term they'd be getting more than 3.4%...even a conservative multi-manager fund from CFS has a 10 year return of 6.3% in pension phase right now.

You don't need to exclude the age pension for people with superannuation and vice versa. While many people receive the full pension, a lot of Australians are on a part pension.

 

[sptrawler]

The smart money are most definitely not reliant on the age pension to pay their bills. What kind of life is that?

A couple with $1m in super, assuming no other significant financial assets, could also be collecting about $11,600 p.a. from the age pension. Assuming they aren't keeping their $1m in cash long-term they'd be getting more than 3.4%...even a conservative multi-manager fund from CFS has a 10 year return of 6.3% in pension phase right now.

You don't need to exclude the age pension for people with superannuation and vice versa. While many people receive the full pension, a lot of Australians are on a part pension.

The talk currently is dropping the cut off to around $800k

The point I'm making is, it takes most average working couples a lot of personal sacrifice to get $1m in super.

Why would that be better, than saving say $300k in super, and getting a full pension?

This also frees up the $700k to spend and or or invest as one wishes, as it is accessible, rather than locked up in super 'lucky dip' system.
The $700k doesn't disappear if it isn't put in super, it is either spent on lifestyle, or redirected to other tax free asets.
Don't get me wrong I'm self funded, but if I was starting out again now, I would not be walking the same path.
Unless some certainty can be placed in the super system, confidence and belief in the value of super, will quickly fall away.

 

[banco]

The talk currently is dropping the cut off to around $800k

The point I'm making is, it takes most average working couples a lot of personal sacrifice to get $1m in super.

Why would that be better, than saving say $300k in super, and getting a full pension?

This also frees up the $700k to spend and or or invest as one wishes, as it is accessible, rather than locked up in super 'lucky dip' system.
The $700k doesn't disappear if it isn't put in super, it is either spent on lifestyle, or redirected to other tax free asets.
Don't get me wrong I'm self funded, but if I was starting out again now, I would not be walking the same path.
Unless some certainty can be placed in the super system, confidence and belief in the value of super, will quickly fall away.

Well given it's compulsory there's no great requirement for people to love the super system.

 

[sptrawler]

Well given it's compulsory there's no great requirement for people to love the super system.

Yes that's true, I was really only talking about putting extra money in super, as a retirement vehicle.

As per usual, the rich have over used it, and the plebs will be punished.

 

[sydboy007]

i'm going to have to read it another time or two to see if I agree with what the writer is saying, but at first glance I can see the logic of his argument. Not sure I agree, but food for thought

http://www.macrobusiness.com.au/2015/05/self-censoring-superannuation/

The reason for that view is that there was never an economic logic for a compulsory superannuation system in the first place.

The modern superannuation system was introduced in 1992 to relieve pressure on the age pension system by forcing all workers to save for retirement. But forced saving does nothing to address the fundamental problem of a shrinking workforce – all the income streams drawn down from superannuation upon retirement rely on purchases of assets from those currently working. The net effect is exactly the same as if the working population simply gave retirees money through the tax system. Any problems with the age pensions system due to demographic change also affect the superannuation system.

This lower rate of growth of goods and services must still be shared amongst all workers and retirees. Who get what out of the economic pie depends on who has which rights – which claims on incomes streams in any form, either assets, public pensions, or wages. Under a public pension system workers give up some of their rights to wages by paying taxes which would go directly to the pensions of the retired. Under a private superannuation system, workers give up some of the rights to wages to buy assets, which would be sold by retirees who had previously accumulated them, in order to provide a retirement income. The net effect of both of these schemes is identical.

the asset classes that dominate the super system, like Australian shares, will see fewer buyers and more sellers, depressing the inflated prices and reducing the investment income of superannuation account holders. With lower account balances more funding will be needed from public pensions anyway. To be clear about this asset price effect, does anyone think the share market, or even the property market, would be at its current value without the massive inflow of funds from the compulsory super system?

 

[banco]

i'm going to have to read it another time or two to see if I agree with what the writer is saying, but at first glance I can see the logic of his argument. Not sure I agree, but food for thought

http://www.macrobusiness.com.au/2015/05/self-censoring-superannuation/

This assumes that superfunds etc. don't have any overseas exposure.

 

[DavidK]

The only thing that changes in the spreadsheet is the tax rate.

View attachment 62374

The lower the return the longer it takes to get to tax paid breakeven but hopefully the example gives you the gist. Overall tax foregone by the government over a typical superannuation time frame, with typical return will be nothing like the simplistic snap shot notional tax concessional calculations that are bandied around.

30% earning s ?!?

 

[qldfrog]

This assumes that superfunds etc. don't have any overseas exposure.

That helps but the trouble is the US, Europe and even China later on will face the same issue at the same time, i would even say before Australia so the slow drain out of funds in real dollar term will happen on a similar period.
And this is where the money is.
I do not believe we will see again these big long term market increases.
i hope being proven wrong but i do not expect much return in my own retirement plans

 

[sptrawler]

I do not believe we will see again these big long term market increases.
i hope being proven wrong but i do not expect much return in my own retirement plans

Which again makes the idea of taxing it, which in turn depletes it quicker, the wrong way to go. It would be massively inefficient. IMO
The idea of limits, on the amount you can have in super, is much more sensible.IMO

Then any amount above that, has to be returned to the normal tax scheme.
The limit that can be held in super then can be indexed, stagnated or reduced as required to suit the fiscal climate of the day.
When in the accumulation phase, the limit, stops people abusing the system.

 

[Ves]

Syd you keep sing the same tune.

Here’s the thing – I have already contributed much more in actual tax dollars paid to the government via my super fund with the flat tax rate at 15% on earnings then I would have if the earnings tax rate was full marginal. I have to compound the tax concessions up because I don’t have access – Yes I have a larger balance because of the concessions but the gov’t has made a good investment by taking a 15% cut on the ongoing compounding of the tax concessions rather than an upfront 45%. I think your tax concession argument is seriously flawed.

Hi craft

I understand the theory (and agree over a long enough time frame there will always be a break even in cumulative tax paid because the higher taxed balance will suffer from return drag, whilst the concessionally taxed balance will compound faster and eventually pay more and more tax on a higher base balance).

However, aside from major outliers (ie. compounding at 30%pa or massive starting balances) it would appear that most people in reality would be dead long before reaching the cumulative tax break even point.

Am I doing something wrong?

 

[craft]

Hi craft

I understand the theory (and agree over a long enough time frame there will always be a break even in cumulative tax paid because the higher taxed balance will suffer from return drag, whilst the concessionally taxed balance will compound faster and eventually pay more and more tax on a higher base balance).

However, aside from major outliers (ie. compounding at 30%pa or massive starting balances) it would appear that most people in reality would be dead long before reaching the cumulative tax break even point.

Am I doing something wrong?

Principles are best seen at the extremes. The average return may never reach payback but the principle shows how the static tax concession argument is bogus – the tax concession has to be modelled over a lifetime.

Whilst 30% may be an outlier to show the principle – so too are the large balances that look the worst under a static tax concession calculation.

 

[Ves]

Distilled in it's most basic terms it is an argument of short term (pay more tax now) or long-term (pay a lot more tax later). I note that it seems to be a common theme re the generational argument surrounding government debt, except the two sides of the political spectrum seem to be strangely reversed.

By taking a snapshot of the concessions at point A (now) it is entirely likely that we are not examining the impact of changing the rules when we arrive at point B, point C and even point D.

Thanks, it is a point well made and one I honestly haven't come across before....

 

[McLovin]

Thanks, it is a point well made and one I honestly haven't come across before....

Maybe because our minds are trained to think in terms of present values, rather than raw values?

Craft's point makes a lot of sense when you think about when the super system is supposed take pressure off the tax system (ie when the superannuant reaches retirement).

 

[ghotib]

I don't know if this scenario is relevant to the thread exactly, but I'd be interested in people's comments.

My mother moved into an excellent nursing home last year. She could only do that because her two children paid the $500K bond for her. There was a bit of a rush because the offer of a place doesn't stay open very long, and none of us thought about possible implications. But I've just turned 65, and realised that Mum's bond probably counts as my non-performing asset, which will affect my husband's and my entitlements to a gummint (part) pension.

I'd do it again and my generous spouse says he would too. But???? How do you think about this sort of situation from a policy perspective?

 

[sydboy007]

I don't know if this scenario is relevant to the thread exactly, but I'd be interested in people's comments.

My mother moved into an excellent nursing home last year. She could only do that because her two children paid the $500K bond for her. There was a bit of a rush because the offer of a place doesn't stay open very long, and none of us thought about possible implications. But I've just turned 65, and realised that Mum's bond probably counts as my non-performing asset, which will affect my husband's and my entitlements to a gummint (part) pension.

I'd do it again and my generous spouse says he would too. But???? How do you think about this sort of situation from a policy perspective?

What assets did your mother have prior to moving into aged care? What his before July 1 2014. Seems the rules change since this date. Under the prior rules

My understanding was you cannot be asked to pay an accommodation bond that will leave you with less than $46,000 in assets (from 20 March 2015 to 19 September 2015) - at least under the old rules.

It's a tough area to deal with. How much is social responsibility and how much family? My mum and her siblings are likely to face a similar issue in the next few years with my gran, but at least my gran has her house to sell to help with any kind of bond that's needed, though how that will interact with her pension is beyond me. The whole welfare system is ripe for simplification, especially in terms of making the information far more accessible.

 

[sptrawler]

The talk currently is dropping the cut off to around $800k

The point I'm making is, it takes most average working couples a lot of personal sacrifice to get $1m in super.

Why would that be better, than saving say $300k in super, and getting a full pension?

This also frees up the $700k to spend and or or invest as one wishes, as it is accessible, rather than locked up in super 'lucky dip' system.
The $700k doesn't disappear if it isn't put in super, it is either spent on lifestyle, or redirected to other tax free asets.
Don't get me wrong I'm self funded, but if I was starting out again now, I would not be walking the same path.
Unless some certainty can be placed in the super system, confidence and belief in the value of super, will quickly fall away.

Well that looks like the norm, save like hell to get $800k and get no pension.

Or spend and enjoy yourself and leave $300k in the kitty and get a full pension.

It's a no brainer.

The other option is to put extra money into super, on the hope that Labor get in, they've already said they will hammer it.

Can't wait to see the fiscal backlash, on this relatively small adjustment, to the goal posts.

Realistically the Government may as well reintroduce death duties, which Keating removed.

Then they can just tax the proceeds of the estate at 40%, no problems if you have little the tax is small, if you have zillions that's great.lol

Seems a better way, than tweaking at the edges, much fairer.

Those who earn it spend it, or the Government take a slab of it.lol

 

[k.smith]

Well that looks like the norm, save like hell to get $800k and get no pension.

Or spend and enjoy yourself and leave $300k in the kitty and get a full pension.

It's a no brainer.

The other option is to put extra money into super, on the hope that Labor get in, they've already said they will hammer it.

Can't wait to see the fiscal backlash, on this relatively small adjustment, to the goal posts.

Realistically the Government may as well reintroduce death duties, which Keating removed.

Then they can just tax the proceeds of the estate at 40%, no problems if you have little the tax is small, if you have zillions that's great.lol

Seems a better way, than tweaking at the edges, much fairer.

Those who earn it spend it, or the Government take a slab of it.lol

Why would anyone with $375k of assets be motivated to SAVE any further, be it in super or anywhere else?
Every $1000 saved means a pension reduction of $78 per year
With interest rates at record lows, even a return of 4% ( $40 ) on the $1000 results in a loss of $38
Extend this example to $100,000 and that means $7800 less in pension, interest earnings of $4000 which means an end result of $3800 less in annual income for one's efforts.
The benefits of the tax concessions of depositing $1000 into super are in the tax year the deposit is made, for average contributors approx $150. For people like me trying to build up a retirement fund, this is starting to feel like a trap, and I am wondering whether it is all worth the effort.
For the top end, who need never to rely on government pensions, nothing has changed. Their $1000 concessional contributions save them around $300+ in the year the contribution is made. The rich will keep getting richer.

So what to do?
Stop making concessional contributions and start spending?
Pay that $150 extra tax, spend the $1000, and circulate the $$$ into the economy? Is that the direction we are being pushed into?

 

[sydboy007]

Well that looks like the norm, save like hell to get $800k and get no pension.

Or spend and enjoy yourself and leave $300k in the kitty and get a full pension.

It's a no brainer.

Why would anyone with $375k of assets be motivated to SAVE any further, be it in super or anywhere else?

So what to do?
Stop making concessional contributions and start spending?
Pay that $150 extra tax, spend the $1000, and circulate the $$$ into the economy? Is that the direction we are being pushed into?

You seem to have forgotten the invisible primary residence.

Just borrow at 100% I/O and get the most expensive house you can afford.

Keep trading up till retirement.

Then sit on that $2M house while basking in the knowledge you beat the Govt and have access to the full pension.

 

[Knobby22]

You seem to have forgotten the invisible primary residence.

Just borrow at 100% I/O and get the most expensive house you can afford.

Keep trading up till retirement.

Then sit on that $2M house while basking in the knowledge you beat the Govt and have access to the full pension.

Yes, that's my tactic, except I've always been a bit careful on how much I borrow...to my detriment.

 

[k.smith]

You seem to have forgotten the invisible primary residence.

Just borrow at 100% I/O and get the most expensive house you can afford.

Keep trading up till retirement.

Then sit on that $2M house while basking in the knowledge you beat the Govt and have access to the full pension.

Syd, I hadn't forgotten about the issue re the house. Ours is a modest HOME, worth nowhere near $1mil+, and home being the operative word. It gave us some feeling of security in those dark days in 2008, when we lost around 80% of our retirement nest egg in managed investment schemes. So although I hear what you are saying, it is not an avenue that I want to pursue. I think it very sad that savers are being placed in a situation where they may resort to such a strategy.
Since our terrible losses in 2008, and until just recently, we lived on less than a single man's age pension (without ever receiving a cent from the government) and allocated all our remaining very modest income back into re-saving in rock solid investments. Financial responsibility was programmed into me from the time I was born.

So I am peeved that it seems that our savings over the last year in particular, (+$375,000k) have been getting us nowhere.
I see the media today is full of the promises made that super will not be touched...
eg
http://www.afr.com/news/policy/budg...change-super-says-tony-abbott-20150513-gh0czj

and am cynical, because way this looks to me, they don't need to touch super. Just look at what is happening !

So what is the better option? A guaranteed, indexed government pension and $375k tucked away, or keep slogging and sacrificing to put away a lump sum without getting the pension? Super will go on, the wealthy will get wealthier, but many ordinary people will soon see that the climb to financial independence is too steep. Trouble is, the government imo will not care one way or the other. Every $1000 not put into super will be taxed at the full marginal tax rate. +++. big save on concessions +++ and it will go round in the retail sector+++.

I think it absolutely CRAZY.