Superannuation, the ultimate government cash cow?

[k.smith]

This article, probably explains my point better.

https://au.news.yahoo.com/thewest/wa/a/27959360/seniors-budget-pain-shock/

I think the last couple of paragraphs sum it up nicely.

Those at the sharp edge of the changes will be couples who want to retire after January 1, 2017, who own their own home and have assets outside their home totalling more than $823,000.

They stand to lose $14,467 a year in pension and the cost-of-living allowance. They face paying full freight for medication and will have their council and water rates discounts slashed.

Financial planners estimate this group will be more than $16,000 a year worse off


Add to this the fact, Labor has already said it will tax super earnings above $75,000 and I think this will cost Australia more than removing negative gearing.

Super funds will be choking on their weeties soon.IMO

SP, this needs a big rethink. That there will be winners and losers and the rights and wrongs of that is a big issue in itself, but putting the brakes on peoples incentive to SAVE I think is crazy.

http://www.afr.com/personal-finance...nd-not-save-before-retirement-20150515-gh1o80

''....Even if a 5 per cent rate of return on assets is assumed, the disparity in income between the haves and have-nots still looks supernatural.

A home-owning couple with $1 million of assets and, subsequently, no access to any pension stand to earn $50,000 a year, while a couple with $400,000 of savings and a part pension of $33,000 will receive $53,000 annually, ASFA's analysis shows.

Indeed, based on a 5 per cent rate of return, there is no incentive for a home-owning couple to save more than $200,000 for their retirement, unless they are confident they can amass closer to $1 million.

"If your lifestyle is dictated purely by income, there is no difference between retiring with $400,000 and $1.1 million," adds Lewis....

.....couples in their 50s and 60s with $500,000 of savings might choose to retire early, because they stand to earn more money than they would if they retired with $100,000 more.......

...''

 

[sptrawler]

SP, this needs a big rethink. That there will be winners and losers and the rights and wrongs of that is a big issue in itself, but putting the brakes on peoples incentive to SAVE I think is crazy.

http://www.afr.com/personal-finance...nd-not-save-before-retirement-20150515-gh1o80

''....Even if a 5 per cent rate of return on assets is assumed, the disparity in income between the haves and have-nots still looks supernatural.

A home-owning couple with $1 million of assets and, subsequently, no access to any pension stand to earn $50,000 a year, while a couple with $400,000 of savings and a part pension of $33,000 will receive $53,000 annually, ASFA's analysis shows.

Indeed, based on a 5 per cent rate of return, there is no incentive for a home-owning couple to save more than $200,000 for their retirement, unless they are confident they can amass closer to $1 million.

"If your lifestyle is dictated purely by income, there is no difference between retiring with $400,000 and $1.1 million," adds Lewis....

.....couples in their 50s and 60s with $500,000 of savings might choose to retire early, because they stand to earn more money than they would if they retired with $100,000 more.......

...''

It's worse than that Jim, it looks like the death of the super system as we know it.

That is probably why the LNP, have said they won't do anything to the super system, to try and prop it up.

Labor have said it is ripe for taxing, which makes it silly to park your money there, maybe forever.

One thing for sure, my head is spinning, running permutations. Fortunately I've always loved the game.

By the way, I think your statement: unless they can amass $1m, is a bit off the mark.

But what you are saying, is what I've been arguing for ages.lol

 

[k.smith]

I would very much like to know what forum members have to say about the following comments by M. Macklin (re Australian Democrats)

http://theconversation.com/the-100-...-retirement-bill-as-the-grey-vote-booms-41492

''....In the 1980, the Australian Democrats argued for a different superannuation system than the one introduced at that time. We argued that in the long term it was unsustainable. Our system was simpler and fairer.

We argued that everyone should be able to tell you exactly how the retirement system worked - instead of it being the preserve of highly specialised accountants.In essence the system was1. that there would be no tax deductions for money paid into superannuation (still not the case)2. that there would be no tax on money coming out of superannuation (introduced by Costello later)3. everyone would received the same Aged Pension regardless of income and this would be treated as normal taxable income (still not the case)

Instead of our simple system which everyone would be able to understand, we have a system close to breakdown which few comprehend. Why?...''

maybe I am missing something, but this seems so rational.

 

[Junior]

SP, this needs a big rethink. That there will be winners and losers and the rights and wrongs of that is a big issue in itself, but putting the brakes on peoples incentive to SAVE I think is crazy.

http://www.afr.com/personal-finance...nd-not-save-before-retirement-20150515-gh1o80

''....Even if a 5 per cent rate of return on assets is assumed, the disparity in income between the haves and have-nots still looks supernatural.

A home-owning couple with $1 million of assets and, subsequently, no access to any pension stand to earn $50,000 a year, while a couple with $400,000 of savings and a part pension of $33,000 will receive $53,000 annually, ASFA's analysis shows.

Indeed, based on a 5 per cent rate of return, there is no incentive for a home-owning couple to save more than $200,000 for their retirement, unless they are confident they can amass closer to $1 million.

"If your lifestyle is dictated purely by income, there is no difference between retiring with $400,000 and $1.1 million," adds Lewis....

.....couples in their 50s and 60s with $500,000 of savings might choose to retire early, because they stand to earn more money than they would if they retired with $100,000 more.......

...''

If you have $1,000,000 in capital, your lifestyle doesn't need to be 'dictated purely by income'. You have the flexibility to be able to draw down on capital if and when appropriate.

If investment markets have a great year, your $1,000,000 might turn into $1,150,000...you'll still receive $50,000 in income, and be able to make the decision to reinvest your profits, take a lump sum for a holiday or give yourself a pay rise. In years of poor returns you can choose to wait it out and stay invested.

If heavily reliant on age pension you don't have such flexibility. Your income levels are dictated by the government of the day. If an unexpected medical cost comes up, or you want to help your kids buy a house, your options are limited.

I know which situation I'd prefer to be in. The incentive to save, although eroded, is still there.

 

[sptrawler]

If you have $1,000,000 in capital, your lifestyle doesn't need to be 'dictated purely by income'. You have the flexibility to be able to draw down on capital if and when appropriate.

If investment markets have a great year, your $1,000,000 might turn into $1,150,000...you'll still receive $50,000 in income, and be able to make the decision to reinvest your profits, take a lump sum for a holiday or give yourself a pay rise. In years of poor returns you can choose to wait it out and stay invested.

If heavily reliant on age pension you don't have such flexibility. Your income levels are dictated by the government of the day. If an unexpected medical cost comes up, or you want to help your kids buy a house, your options are limited.

I know which situation I'd prefer to be in. The incentive to save, although eroded, is still there.

The problem is Junior, as per your example, the attractiveness is the flexibility it currently enjoys. Take that away and it becomes somewhat pointless.
This is especially the case when one considers the $18k tax free threshold outside super.
The rich will always exploit the limits of any system, whereas the masses have to assess, the system which provides the most flexibility.

I used the super system as it made sense, adding extra money all through my working life (I started putting money in in 1980) made perfect sense.
The case is much more difficult to argue now, unless some certainty and sustainability is implanted into super, confidence in it will quickly erode.
Companies like AMP, IOOF have risen recently, on the back of stronger equity markets and a surge in contributions.

IMO extra contributions into super will reduce markedly, due to the pension changes and the changes Labor propose.

Time will tell.

 

[sydboy007]

I would very much like to know what forum members have to say about the following comments by M. Macklin (re Australian Democrats)

http://theconversation.com/the-100-...-retirement-bill-as-the-grey-vote-booms-41492

''....In the 1980, the Australian Democrats argued for a different superannuation system than the one introduced at that time. We argued that in the long term it was unsustainable. Our system was simpler and fairer.

We argued that everyone should be able to tell you exactly how the retirement system worked - instead of it being the preserve of highly specialised accountants.In essence the system was1. that there would be no tax deductions for money paid into superannuation (still not the case)2. that there would be no tax on money coming out of superannuation (introduced by Costello later)3. everyone would received the same Aged Pension regardless of income and this would be treated as normal taxable income (still not the case)

Instead of our simple system which everyone would be able to understand, we have a system close to breakdown which few comprehend. Why?...''

maybe I am missing something, but this seems so rational.

Yes, puts everyone on an even footing and at least means the top few % get no tax deduction on the way in, though there's no mention on if any tax on fund earnings while in the accumulation stage. In the next year or 2 that tax expenditure will exceed the flat tax on concessional contributions, so if they had proposed no tax on earnings that would now be a reasonably giant hole in the budget, but I suppose if the earning are treated as taxable income like everyone else in the pension phase it will probably wash out.

The simplicity is probably what killed the idea. How do the poor financial planners make money when the average punter can actually understand the system.

 

[k.smith]

If you have $1,000,000 in capital, your lifestyle doesn't need to be 'dictated purely by income'. You have the flexibility to be able to draw down on capital if and when appropriate.

If investment markets have a great year, your $1,000,000 might turn into $1,150,000...you'll still receive $50,000 in income, and be able to make the decision to reinvest your profits, take a lump sum for a holiday or give yourself a pay rise. In years of poor returns you can choose to wait it out and stay invested.

If heavily reliant on age pension you don't have such flexibility. Your income levels are dictated by the government of the day. If an unexpected medical cost comes up, or you want to help your kids buy a house, your options are limited.

I know which situation I'd prefer to be in. The incentive to save, although eroded, is still there.

Yes, I bet most would prefer to be in a situation with $1,000,000 in super.
Even getting to $400,000 is a great achievement.
But the "penalty" for saving between that flexible $1,000,000 and pension-reliant $400,000 has suddenly doubled, from $1.50 to $3.00 less pension per $1000 per fortnight. Given that the likelihood of being able to save those hundreds of thousands between $400,000 to $1,000,000 will not be a realistic possibility for most of us, I think the whole purpose of saving further has just been shot in the foot.

 

[k.smith]

Yes, puts everyone on an even footing and at least means the top few % get no tax deduction on the way in, though there's no mention on if any tax on fund earnings while in the accumulation stage. In the next year or 2 that tax expenditure will exceed the flat tax on concessional contributions, so if they had proposed no tax on earnings that would now be a reasonably giant hole in the budget, but I suppose if the earning are treated as taxable income like everyone else in the pension phase it will probably wash out.

The simplicity is probably what killed the idea. How do the poor financial planners make money when the average punter can actually understand the system.

The more I think about it, the more sense it makes .
I think there is a better argument for society supporting a non-means tested, universal aged pension than for the same $billions supporting super tax concessions where benefits are so skewed in favour of the top end.
It would seem that the cost of tax on concessions and fund earnings are about 50/50

http://www.treasury.gov.au/Policy-T...alysis-of-superannuation-taxation-concessions

"...Value of tax concessions
The 2011 Tax Expenditure Statement estimates tax concessions on superannuation at approximately $32 billion in 2012-13. This is the second largest tax expenditure. Concessions on contributions are estimated at $16.5 billion and on superannuation earnings at $15.5 billion..."

It seems to me that a huge saving could be made.
If the aged pension costs around $40 bil, and around 80% of people aged 65+ get it, it would cost another $10 bil for everyone over 65 to get it, $50 bil ? Keep the tax on earnings in super at 15% and stop the concessions on contributions going in, saving around 50% of the total super tax concessions (see above)

The other bonus is that it would reduce the work load for Centrelink. All those aged pension applications, and maintaining the accounts for part-pensions when resources at ASIC and ATO are reducing.

 

[sptrawler]

The more I think about it, the more sense it makes .
I think there is a better argument for society supporting a non-means tested, universal aged pension than for the same $billions supporting super tax concessions where benefits are so skewed in favour of the top end.
.

Wow sounds just like the system we had, before the Government put super into consolidated revenue.

Sounds exactly like the U.K and Canadian system, which ours was like.lol

The more things change, the more they stay the same.

We have been through this numerous times, it really is getting boring.

 

[k.smith]

.....

The more things change, the more they stay the same.

We have been through this numerous times, it really is getting boring.

http://www.treasury.gov.au/Policy-T...alysis-of-superannuation-taxation-concessions

see table 2
The top 5% get 23.4% of contribution concessions, and contribution concessions account for around half of total super tax concessions. Saving this would go a long way to providing a non-means tested aged pension for all. I think it fair that all get the aged pension and that all income earned within super is taxed equally. The incentive to save should be the tax free income stream at retirement. Worrying about lump sum withdrawals would be an issue that would rest entirely with the saver! It would also be so much easier for people to grasp such a system. And... something needs to be done.

 

[craft]

The concessional contribution cap for an under 50 is $30,000.

Somebody earning $200,000 who salary sacrifices the maximum of $11,000 in addition to the $19,000 superannuation guarantee amount will obtain a tax concession on contributions of $10,200. They will pay total tax of $67,057p.a and probably set themselves up to never require the pension.

Somebody on $60,000 will probably not salary sacrifice so will only obtain a tax concession on contributions of $1,112. They will pay total tax of $13,102p.a they will probably never set themselves up to be fully self funded in retirement so will require transfer from other tax payers to support them to some extent in retirement. Unfortunately some in this last category will only see the $9,088 in theoretical tax concessions that the high income example gets and think that more burden should be placed there so that they as a recipient of the transfer system get a sweeter deal with more favourable pension assets tests or whatever the case may be.

Currently retirement funding is predominantly a transfer system. Somebody always pays for the benefits that others receive and the receivers always seem to think the payers should pay more. If the politicians listen to the whingers who think they don’t get enough from the system then retirement affordability goes to hell in a hand basket because unless we throw open our borders to new workers the future demographic can’t sustain the current rates of transfer. To avoid future transfers you have to aid capital accumulation for self sufficiency and the only way gov't can foster that is with a lower rate of tax on capital formation. The 'theoretical' tax concession argument is simplistic, wrong and dangerous.

 

[Junior]

Good post Craft.

The way this issue is commonly discussed, tax concessions are the same as government spending - which is really misleading.

High income earners have access to tax deductions via negative gearing and salary sacrifice into super, but they are generally still paying a huge amount of income tax through their working lives, which is then distributed back out to others who have paid far far less in income tax throughout their lives, in the form of Age Pensions and health care card which provides big discounts on a range of purchases.

Of course this is the way our society sustains itself and supports the lower-middle class, via a transfer system. My point is we should scale back on demonising high income earners, and quit describing tax concessions as being a burden on other taxpayers, who actually still pay far less tax and have a much lower average tax rate in the first place!!

There is not enough focus on bracket creep either, which is basically a tax hike every single year for workers at all income levels.

 

[sptrawler]

The concessional contribution cap for an under 50 is $30,000.

Somebody earning $200,000 who salary sacrifices the maximum of $11,000 in addition to the $19,000 superannuation guarantee amount will obtain a tax concession on contributions of $10,200. They will pay total tax of $67,057p.a and probably set themselves up to never require the pension.

Somebody on $60,000 will probably not salary sacrifice so will only obtain a tax concession on contributions of $1,112. They will pay total tax of $13,102p.a they will probably never set themselves up to be fully self funded in retirement so will require transfer from other tax payers to support them to some extent in retirement. Unfortunately some in this last category will only see the $9,088 in theoretical tax concessions that the high income example gets and think that more burden should be placed there so that they as a recipient of the transfer system get a sweeter deal with more favourable pension assets tests or whatever the case may be.

Currently retirement funding is predominantly a transfer system. Somebody always pays for the benefits that others receive and the receivers always seem to think the payers should pay more. If the politicians listen to the whingers who think they don’t get enough from the system then retirement affordability goes to hell in a hand basket because unless we throw open our borders to new workers the future demographic can’t sustain the current rates of transfer. To avoid future transfers you have to aid capital accumulation for self sufficiency and the only way gov't can foster that is with a lower rate of tax on capital formation. The 'theoretical' tax concession argument is simplistic, wrong and dangerous.

You would be supprised how many times this has been brought up in the thread, a lot of people won't accept the logic.
A classic example is the Government co contribution, to low income earners, to qualify for it you must earn a very low wage.
At that wage level, the tax payer is paying no net tax, after offsets and handouts.
So telling them if they put $500 in super the Government will match it, is stupid, they probably can't afford it. The Governments $500 just becomes another welfare payment and the recipient will no doubt end up on a full pension anyway.
So their money plus the Governments money, is tied up for years to achieve nothing, weird welfare system.

 

[craft]

Yes, I bet most would prefer to be in a situation with $1,000,000 in super.
Even getting to $400,000 is a great achievement.
But the "penalty" for saving between that flexible $1,000,000 and pension-reliant $400,000 has suddenly doubled, from $1.50 to $3.00 less pension per $1000 per fortnight. Given that the likelihood of being able to save those hundreds of thousands between $400,000 to $1,000,000 will not be a realistic possibility for most of us, I think the whole purpose of saving further has just been shot in the foot.

Perhaps the pension should (and I have no doubt eventually will) become a true safety net rather than middle class welfare, with the same assets tests and no taper as per unemployment benefits, then there would be plenty of incentive to push on from 375K savings and make the most of things for yourself.

 

[Junior]

Perhaps the pension should (and I have no doubt eventually will) become a true safety net rather than middle class welfare, with the same assets tests and no taper as per unemployment benefits, then there would be plenty of incentive to push on from 375K savings and make the most of things for yourself.

Agreed. I accept that there should be some benefits for retirees which aren't means tested (i.e. health care card, public transport concessions etc.), but I don't accept that everyone is entitled to a full age pension simply because they paid income tax all of their working lives.

It's nice in theory, but unsustainable in reality given this country's demographics, and the extreme short term thinking by our policy makers. The money simply won't be there when baby boomers retire en-masse.

 

[sptrawler]

Perhaps the pension should (and I have no doubt eventually will) become a true safety net rather than middle class welfare, with the same assets tests and no taper as per unemployment benefits, then there would be plenty of incentive to push on from 375K savings and make the most of things for yourself.

Agree 100%, far more equitable, welfare shouldn't be a lifestyle choice, people should be encouraged to aspire for more.
Once we sort that out, it will sort out a lot of our apathy and lack of endeavour, in all aspects and walks of life.IMO

 

[banco]

Perhaps the pension should (and I have no doubt eventually will) become a true safety net rather than middle class welfare, with the same assets tests and no taper as per unemployment benefits, then there would be plenty of incentive to push on from 375K savings and make the most of things for yourself.

The "no point going beyond 400k" assumes no big changes in government policy for 20 years or so despite the huge sums of money the baby boomers are going to cost.

 

[Pager]

The "no point going beyond 400k" assumes no big changes in government policy for 20 years or so despite the huge sums of money the baby boomers are going to cost.

And there lies the big question, and anyone basing retirement on the current government policy is going to be in for a shock a few years down the track.

Thought long and hard about this as im currently well over the $400K mark and at my present contribution rate, specifically the salary sacrifice and non concessional contributions I put in every year will comfortably exceed the magic million.

Have thought about stopping particularly the non concessional contributions I put in each year, as current policy favours me having less but there’s the big unknown “CURRENT POLICY” and that will in my opinion change and significantly so, better to assume I will get no state pension, than base assumptions on today.

 

[Junior]

And there lies the big question, and anyone basing retirement on the current government policy is going to be in for a shock a few years down the track.

Thought long and hard about this as im currently well over the $400K mark and at my present contribution rate, specifically the salary sacrifice and non concessional contributions I put in every year will comfortably exceed the magic million.

Have thought about stopping particularly the non concessional contributions I put in each year, as current policy favours me having less but there’s the big unknown “CURRENT POLICY” and that will in my opinion change and significantly so, better to assume I will get no state pension, than base assumptions on today.

I've always thought it best to 'hedge your bets'. Accumulate some wealth outside of super, as a backup in case the government drastically changes policy and you find it too much of your assets locked away in the super system.

Having said that, it would be very very brave/stupid of any government to further raise the preservation age, or heavily restrict lump sum super withdrawals, without grandfathering existing arrangements or having a long transitional period.

 

[christianrenel]

I've always thought it best to 'hedge your bets'. Accumulate some wealth outside of super, as a backup in case the government drastically changes policy and you find it too much of your assets locked away in the super system.

Having said that, it would be very very brave/stupid of any government to further raise the preservation age, or heavily restrict lump sum super withdrawals, without grandfathering existing arrangements or having a long transitional period.

I agree with the above comment, having all your wealth inside superannuation is not the best option. I am currently working on the following split 66% of my wealth in super and 33% outside of super. This gives flexbility into the future and I have not over committed to superannuation.


Kind Regards

christianrenel