Superannuation, the ultimate government cash cow?

[sydboy007]

There is no easy answer, other countries have different systems in place, maybe a combination of a few ideas.

The one thing that isn't going to work, is the system we have in place currently, where never working is a viable lifestyle choice. It is just as unaffordable as the current super system, eventually we run out of money to fund it.

It is a bit like a guy I know brought in and married a Thai girl, she then brought her children over, after obtaining Australian citizenship, she left. We just can't afford to keep providing lifetime welfare, to those who haven't contributed in any way.IMO

How that will be handled who knows, I believe in Germany you recieve a pension commensurate with the years you have worked. I don't know how it works in any detail.

Problem with a lot of pension systems is they're under funded. From the outside germany or France looks like an idylic life for pensioners, but it relied on a population ponzi and now that the number of workers to pensioners is not continuing to increase things are getting unsustainable.

Germany has a gross Govt debt of 82% of GDP and net debt of 57%, but I'd prob focus on the gross debt levels as who knows what the true value is of the bonds they hold. So in theory the Australian system may be safer as the money is technically separate from Govt revenue.

But as I've read a number of times one of the benefits of a SMSF is you own the assets. While you have a super balance will you be able to get your money in the future when the system is being drained of funds?

Would we have been better off following the norwegians with a SWF of some sorts to provide a base pensioner for all. Leaving it to individuals to save more should they want more than a basic lifestyle in their twilight years.

We have a very expensive pension saving system. $25B and counting. The FUM model needs to be discarded. Possibly the fees charged, and the tax expenditures involved, are reducing our ability to support the aged.

 

[sptrawler]

Problem with a lot of pension systems is they're under funded. From the outside germany or France looks like an idylic life for pensioners, but it relied on a population ponzi and now that the number of workers to pensioners is not continuing to increase things are getting unsustainable.

Germany has a gross Govt debt of 82% of GDP and net debt of 57%, but I'd prob focus on the gross debt levels as who knows what the true value is of the bonds they hold. So in theory the Australian system may be safer as the money is technically separate from Govt revenue.

But as I've read a number of times one of the benefits of a SMSF is you own the assets. While you have a super balance will you be able to get your money in the future when the system is being drained of funds?

Would we have been better off following the norwegians with a SWF of some sorts to provide a base pensioner for all. Leaving it to individuals to save more should they want more than a basic lifestyle in their twilight years.

We have a very expensive pension saving system. $25B and counting. The FUM model needs to be discarded. Possibly the fees charged, and the tax expenditures involved, are reducing our ability to support the aged.

I think it is a huge problem, currently more people are putting into super, than are drawing down so the system works somewhat ponzi like.

That balance will change in the next 10 - 15 years, my guess is there will be some super funds, that may be short of funds.

There are a lot of changes yet to be played out in super, and as you say, the age pension as it stands may become unaffordable.

My personal belief is that we will resurect the original system, and the government will take a percentage of your super, to fund your base pension. Then the remainder of your money, when drawn, is taxed as per income.

The current pension system is far too generous, therefore many are relying on it by choice.

I believe two and three pensioners living together, works very well, do the sums. People aren't stupid.

Interesting times ahead, I think.

 

[Vixs]

I think it is a huge problem, currently more people are putting into super, than are drawing down so the system works somewhat ponzi like.

That balance will change in the next 10 - 15 years, my guess is there will be some super funds, that may be short of funds.

There are a lot of changes yet to be played out in super, and as you say, the age pension as it stands may become unaffordable.

My personal belief is that we will resurect the original system, and the government will take a percentage of your super, to fund your base pension. Then the remainder of your money, when drawn, is taxed as per income.

The current pension system is far too generous, therefore many are relying on it by choice.

I believe two and three pensioners living together, works very well, do the sums. People aren't stupid.

Interesting times ahead, I think.

Hang on, what do you mean they will be short on funds? Your super is your super, whether it is sitting in SunSuper, Colonial First State or your SMSF. Those funds are yours, they aren't going to disappear. They're not unfunded pensions - the unfunded defined benefit pensions are a dying breed and are a different can of worms altogether which is why they haven't been open to new members for years and years.

If your point about super funds being short on funds was directed at the legacy defined benefit funds then i agree, some will be in trouble, but they were never funded by members assets so it's a different scenario to losing your own savings.

 

[Junior]

You guys have lost me with the 'short on funds' scenario. Super is a unit trust arrangement. You own those units. Your money is invested in underlying assets which are primarily liquid assets - cash, bonds, shares, listed property etc.

It's not like a bank deposit where they don't actually have the funds available to pay out if everyone tries to withdraw at once.

Defined benefit schemes are the exception...I think the primary example is the Government's PSS Super scheme. Future Fund was established to try and meet some of the future funding shortfall right?

 

[sptrawler]

You guys have lost me with the 'short on funds' scenario. Super is a unit trust arrangement. You own those units. Your money is invested in underlying assets which are primarily liquid assets - cash, bonds, shares, listed property etc.

It's not like a bank deposit where they don't actually have the funds available to pay out if everyone tries to withdraw at once.

Defined benefit schemes are the exception...I think the primary example is the Government's PSS Super scheme. Future Fund was established to try and meet some of the future funding shortfall right?

There has already been instances of investment companies going broke, in reality it is no difference to a super fund.
The funds are invested, people have a belief the information they are given is accurate, often it doesn't prove so.

I understand they are audited, but it wouldn't be the first time an audit has failed to uncover a problem.

In some ways, I think the fact a lot of the investors can't access their funds, could very easily compound any underlying problem.

Again it is only my personal belief, it isn't as though there hasn't been quite large financial companies, go under in the past.
In some cases it isn't the fact there isn't underlying investments to cover the unit value, it is the quality of that underlying investment that causes the problem.
As I said earlier everything is rosy, while there are more funds being poured in than taken out, also it's only my opinion.
You guys that work in the industry, obviously know a lot more than I, regarding the safeguards and checks that are in place.
How do these differ from the ones being used by financial investment companies, property trusts agribusiness trusts etc?

That's why I run my own SMSF, I know to the dollar, where my money is, and no one else can move it, touch it or reconfigure it.

 

[sydboy007]

Hang on, what do you mean they will be short on funds? Your super is your super, whether it is sitting in SunSuper, Colonial First State or your SMSF. Those funds are yours, they aren't going to disappear. They're not unfunded pensions - the unfunded defined benefit pensions are a dying breed and are a different can of worms altogether which is why they haven't been open to new members for years and years.

If your point about super funds being short on funds was directed at the legacy defined benefit funds then i agree, some will be in trouble, but they were never funded by members assets so it's a different scenario to losing your own savings.

Remember during the GFC a number of REITs and other managed funds closed off access to customers. For some it was years before they got their money, and sometimes the value of the assets was so low they didn't get a lot back.

Access to your money is at the discretion of the super fund trustee.

What happens to super once withdrawals are higher than contributions?

 

[qldfrog]

Your money is invested in underlying assets which are primarily liquid assets - cash, bonds, shares, listed property etc.

And what do you think happens as a trend when there are more outflow than inflow, some of your fund under super will be in volatile assets, these price could fall radicalement, as a result, the "good" assets are sold be it real estate , blue chips are sold, but hey so does the fund next door
and guess what your 20 and 40y old neighbours are paying too much tax to fund the pensionners and your heart attack surgery costs so they can not afford to chase the opportunity of buying back these bargains, so the price carry on going down;
Is that so extreme a view?

As a system, super builds a finance bubble with a known pin ready to pop it based on the age pyramid..
I have no SMSF but do agree this is the only way you would be actually sure "your funds" will remain available.

 

[Vixs]

Remember during the GFC a number of REITs and other managed funds closed off access to customers. For some it was years before they got their money, and sometimes the value of the assets was so low they didn't get a lot back.

Access to your money is at the discretion of the super fund trustee.

What happens to super once withdrawals are higher than contributions?

The failure of highly leveraged property funds and credit funds wasn't limited to super, it was a failure of the investments as a whole. A lot of those property funds have delivered pretty decent returns as they wound down in an orderly fashion. Property trusts are running lower levels of leverage in order to better manage liquidity so that they don't cop it that badly all over again, and property funds have been excellent performers over the last few years.

Superannuation funds have to manage their investment options based on their members. Funds like AustralianSuper, that benefit from being the default super fund nominated in approx 70 of the Modern Awards, rely on the fact that most of their members are younger, disengaged accumulators. As a result, what they call a 'balanced' portfolio is what many funds with an older member base may consider a growth portfolio. Their members have, on average, a longer investment horizon and therefore can afford more risk. That said, they need to be able to meet liquidity requirements, including rollovers and pension payments. If you get bulk withdrawals exceeding what they may have accounted for then they may have to sell some growth assets at an inopportune time, but that's what they do as part of their job, manage liquidity.

This can be a problem if your fund's assets aren't listed and don't trade regularly. If you have a tunnel, toll road, dam or power plant as an asset, you're going to end up in trouble if you need to sell down more assets than forecast. Industry funds are the perfect example - some even have their own corporate offices as assets of the fund. If your super is invested in listed assets you get the benefit of better liquidity and more accurate and regular valuations. You can control how it's invested, so if it concerns you, change it.

What happens to super funds when withdrawals exceed contributions? You sell the assets to fund the withdrawals. That's the whole point. It's no different in an industry or retail fund than it is in a SMSF. If you need more money than what's coming in, you sell the assets to provide cash for income.

Qldfrog, the demographic changes may be a problem down the road as we have more sellers than buyers. This is why it is so important that our bunch of total f***ing lemon politicians stop spending all their time fighting inevitable changes like same sex marriage and climate change and do their bloody jobs of building a prosperous nation with strong wage growth and high employment. If we can support high employment with good wages we can go a long way to having an orderly transition of wealth between generations. It is also a prime example of why we need to maintain the favourable tax treatment of superannuation, stop messing with accessibility of our super funds by age or lump sum vs income stream, deliver certainty and then educate people that this is their future. Any dollar in super taxed is a dollar that won't be available to invest.

We are wedded to the model of perpetual growth. If we move away from it, it will only get harder over time so decisive action needs to be taken, but if we are going to continue to embrace it we need to go all out on wage growth and employment, because the only money added to the money supply comes from borrowing and promising to repay it.

 

[Vixs]

As a system, super builds a finance bubble with a known pin ready to pop it based on the age pyramid..
I have no SMSF but do agree this is the only way you would be actually sure "your funds" will remain available.

You don't need an smsf to have control of your super. You can do it in normal funds by investing across different managers and asset classes yourself. If you want to make sure you have control over which assets are sold to pay your pension and when, you can do that already. People do it every day. The majority of people are flat out working out how compound interest works and what inflation is - they don't have the aptitude to take on the responsibility of managing an investment portfolio.

 

[qldfrog]

You don't need an smsf to have control of your super. You can do it in normal funds by investing across different managers and asset classes yourself. If you want to make sure you have control over which assets are sold to pay your pension and when, you can do that already. People do it every day. The majority of people are flat out working out how compound interest works and what inflation is - they don't have the aptitude to take on the responsibility of managing an investment portfolio.

Vixs, I do it but actually wonder what would happen in crisis mode;
my sunsuper account is managed indeed as I would with my colonial first state, but if sun sunper actually hit s..hit,
is amy cash 20% or whatever be really available....
but point taken you can, and i do, choose some of your destiny within a super fund

 

[Vixs]

Vixs, I do it but actually wonder what would happen in crisis mode;
my sunsuper account is managed indeed as I would with my colonial first state, but if sun sunper actually hit s..hit,
is amy cash 20% or whatever be really available....
but point taken you can, and i do, choose some of your destiny within a super fund

It all depends on what's important to you.

When pricing bonds one factor considered is liquidity premium - investors demand to be compensated with higher returns for the risks they take in purchasing an asset that may be more difficult to sell than a similar bond. You see the same thing in shares - private equity returns are usually quite attractive when things go well, but you may not be able to sell your stake when you need to without offloading at a massive loss. Property... the same.

Liquidity is a risk and investors should be compensated accordingly. As always, it looks great until the music stops. MTAA was the poster child for this issue a few years back, but as always, memories are shorter than business cycles.

Your cash should absolutely be available to you when you need it assuming you meet a condition of release. What you can't be sure of is what happens to unlisted assets that aren't marked to market price.

 

[sptrawler]

They're not unfunded pensions - the unfunded defined benefit pensions are a dying breed and are a different can of worms altogether which is why they haven't been open to new members for years and years.

.

The unfunded defined benefit pension is alive and thriving.

Married couple with $300,000 + full indexed $34,000 base pension, can of worms indeed.

 

[CanOz]

Not Australia, but relevant to the topic

(RU) Reportedly Russia govt looking to take funds from $26B pension system to ease funding crunch - press (related USD/RUB RSX) - Source TradeTheNews.com

 

[sptrawler]

Would we have been better off following the norwegians with a SWF of some sorts to provide a base pensioner for all. Leaving it to individuals to save more should they want more than a basic lifestyle in their twilight years.

.

There you go Syd, the U.K, Canada, N.Z system that we used to have.

I knew you would see sense in the end, it has been a long time coming.

 

[sydboy007]

Great to see that the Liberals are continuing to back Costello and Howard allowing SMSFs to borrow and gear up into property.

http://www.canberratimes.com.au/bus...-smsf-property-borrowing-20150820-gj4amh.html

Mr Frydenberg said he was troubled by stories of property spruikers pushing people to set up an SMSF so they could borrow against their retirement savings to make speculative property investments. However he said it was important to acknowledge that such events were the exception rather than the rule…

“To put it in context only 0.07 per cent, perhaps 6,500 properties, were held in an SMSF through a limited recourse borrowing arrangement in 2013,” he said.

“David Murray highlighted the risks associated with increased leverage in the financial system. Increased leverage always represents a risk and we recognise that. The government also recognises that most SMSFs do the right thing”…

Now just a little context to Frydenberg's claims that borrowing isn't really much of an issue. SMSFs are piling into Australian property, with investment up by 11% in the past year and by nearly 60% since 2011. Doesn't take growth at that rate for too much longer to turn the problem into a big one.

This is what the Govt's (ignored) Murray Inquiry had to recommend on the subject

Recommendation 8
Remove the exception to the general prohibition on direct borrowing for limited recourse borrowing arrangements by superannuation funds…

Further growth in superannuation funds’ direct borrowing would, over time, increase risk in the financial system… In addition, borrowing by superannuation funds implicitly transfers some of the downside risk to taxpayers, who underwrite adverse outcomes in the superannuation system through the provision of the Age Pension…

Borrowing by superannuation funds also allows members to circumvent contribution caps and accrue larger assets in the superannuation system in the long run…

It is also inconsistent with the objectives of superannuation to be a savings vehicle for retirement income. Restoring the original prohibition on direct borrowing by superannuation funds would preserve the strengths and benefits the superannuation system has delivered to individuals, the financial system and the economy, and limit the risks to taxpayers.

 

[sptrawler]

Great to see that the Liberals are continuing to back Costello and Howard allowing SMSFs to borrow and gear up into property.

http://www.canberratimes.com.au/bus...-smsf-property-borrowing-20150820-gj4amh.html



Now just a little context to Frydenberg's claims that borrowing isn't really much of an issue. SMSFs are piling into Australian property, with investment up by 11% in the past year and by nearly 60% since 2011. Doesn't take growth at that rate for too much longer to turn the problem into a big one.

This is what the Govt's (ignored) Murray Inquiry had to recommend on the subject

As per usual, your selective reporting shows your leanings.
The rules on SMSF's were relaxed in September 2007, Labor took office in November 2007, so they, in fact oversaw the implementation.
They didn't have any problem overturning the stuff up, that they brought about, when stopping SMSF's buying shares off the members. To lay the resultant problem at Howard/ Costello's feet is a bit rich, Labor were there for the first six years of SMSF's jumping in and buying residential property.

http://www.tlfc.com.au/expertise/pr...ty-with-your-self-managed-superannuation-fund

But as I have always said, I don't agree with a super fund borrowing money, that isn't what it was designed for.IMO

 

[sptrawler]

With regard SMSF's buying residential property, here vis a general article covering some of the issues.

http://www.smh.com.au/money/investing/is-an-smsf-property-investment-worth-it-20150825-gj7br9.html

Further to the article, from what I have read, you can only maintain the property, not improve it. I don't even think you can buy a house on a subdivisable block, knock it over and develop the block.
Junior and Vixs could probably clarify the actual rules.
It seems like a hell of a gamble for a hopeful capital appreciation. :1zhelp:

 

[sydboy007]

As per usual, your selective reporting shows your leanings.
The rules on SMSF's were relaxed in September 2007, Labor took office in November 2007, so they, in fact oversaw the implementation.
They didn't have any problem overturning the stuff up, that they brought about, when stopping SMSF's buying shares off the members. To lay the resultant problem at Howard/ Costello's feet is a bit rich, Labor were there for the first six years of SMSF's jumping in and buying residential property.

http://www.tlfc.com.au/expertise/pr...ty-with-your-self-managed-superannuation-fund

But as I have always said, I don't agree with a super fund borrowing money, that isn't what it was designed for.IMO

So basically you're saying the Howard Govt, that controlled both the lower and upper houses when they introduced new rules to allow SMSFs to borrow, can wash it's hand of any blame since Labor came to office just a couple of months later? The new rules were legislated before Labor took office. There was no way they could block the legislation before the election, and would have had to wait a minimum of July 1 2008 before the Coalition lost control of the senate.

Are you saying the Liberals would have supported change in the senate to allow Labor to roll back the borrowing rules? Working with MT on a carbon policy caused his leadership to implode, so I'm not sure that Labor would have been able to count on their support to undo some bad Howard & Costello policy. The current Libs have gone down the path of increasing the tapering rate for the pension assets test simply because Labor was talking about taxing super pension income over 75K a year. Politics over policy.

It's a bit like saying the person who makes the mess is no longer responsible because the person who saw the mess later didn't clean it up. Now there's a second person who's seen the mess and decided they don't need to clean it up either, so does the blame now shift from Labor back to the party that originally created the SMSF borrowing mess?

 

[Junior]

With regard SMSF's buying residential property, here vis a general article covering some of the issues.

http://www.smh.com.au/money/investing/is-an-smsf-property-investment-worth-it-20150825-gj7br9.html

Further to the article, from what I have read, you can only maintain the property, not improve it. I don't even think you can buy a house on a subdivisable block, knock it over and develop the block.
Junior and Vixs could probably clarify the actual rules.
It seems like a hell of a gamble for a hopeful capital appreciation. :1zhelp:

If an SMSF purchase residential property using an LRBA, they cannot improve/change the property or increase the borrowings beyond the initial loan.

If you wish to use SMSF to develop property, there are ways to do it using a trust and involving other parties. It's quite complex though.

 

[sptrawler]

If an SMSF purchase residential property using an LRBA, they cannot improve/change the property or increase the borrowings beyond the initial loan.

If you wish to use SMSF to develop property, there are ways to do it using a trust and involving other parties. It's quite complex though.

Thanks for the explanation Junior