The Australian

17 October 2017

Judith Sloan – Contributing Economics Editor

The superannuation funds, the trustees, the fund managers and the workers more generally who are employed in the industry think compulsory superannuation is the bee’s knees. But the reality is that superannuation is a dud product for pretty much every present and past superannuation member and, deep down, the government knows this.

In effect, compulsory superannuation is a tax-gathering mechanism that knocks off many people’s entitlement to the Age Pension, full or part, while forcing them to forgo valuable current consumption — think buying a house, paying school fees, taking a holiday.

It is a form of compulsory saving that is taxed on the way in, taxed while it is earning, and taxed, implicitly or explicitly, on the way out.

We should be clear on one thing: governments should use compulsion as sparingly as possible. Think compulsory vaccination, compulsory schooling, compulsory military service, compulsory helmet-wearing for cyclists. Sometimes these interventions are debatable, and rightly so.

The arguments that were used to justify the introduction of compulsory superannuation were twofold: Australia needed to raise its rate of savings, as well as overcome people’s short-sightedness in order to provide for a comfortable, dignified retirement. The alternative was to compel people to save to achieve this outcome.

The first rationale was quickly discredited and is no longer used as an economic argument. The second line of reasoning has a series of weaknesses, most of which were discussed last week by former treasurer Peter Costello.

Costello, now the chairman of the Future Fund, made the point that the system of compulsory superannuation is reaching maturity but is failing to meet its intended objectives. The present final balances of superannuants are relatively meagre, on average $148,000 for men aged 60 to 64 and $124,000 for women.

He notes that the average balance for men and women is worth “less than the value of six years of the Age Pension”. Nice, but no cigar.

Moreover, 80 per cent of those 65 or older rely on the pension, in full or in part.

And even in the context of a lift in the rate of the superannuation guarantee charge — from the existing 9.5 per cent to 12 per cent, heaven forbid — the rate of reliance on the pension doesn’t change overall, although more retirees will be on part pensions.

But here’s the real kicker. Because of the way the income and earnings tests for the pension work, there is an effective 50 per cent tax rate on higher superannuation balances after a certain point. In other words, for every extra dollar you have in your superannuation account, you lose 50c of income from the pension. This is a shocking deal.

What super amounts to is a compulsion on citizens to knock off their entitlement to the pension while having their contributions and fund earnings taxed in the meantime.

It really is highway robbery — and I haven’t even mentioned the excessive fees and charges by the funds that are part and parcel of the way the system operates.

It gets worse. For citizens whose incomes are high enough potentially for them to become self-funded retirees, this government has decided to increase their tax burden and limit concessional contributions to the point that many will simply give up the quest and shoot for the pension, at least in part. This is seriously dumb.

The package of superannuation taxation measures implemented by Revenue and Financial Services Minister Kelly O’Dwyer is so complex and counter-productive that the likely medium-term outcome is less net revenue (and I’m not even talking here about doing your political base in the eye — which is, of course, seriously stupid).

And don’t you just love this: one law insists that employers must pay 9.5 per cent of a worker’s pay into superannuation and another law insists that the worker must remove any amount above $25,000 a year if the worker’s superannuation balance is high enough.

But the government seems incapable of doing anything about this inconsistency.

Indeed, apart from raising taxes and vastly increasing the regulatory burden on superan­nuation, particularly self-managed superannuation schemes, O’Dwyer has been incapable of effecting any real reform of a system replete with perverse features.

For instance, her effort to achieve a better balance of trustees of superannuation funds, with one-third of directors (including the chair) being independent, has come to nothing. She has been faffing about in relation to what should happen to the default arrangements — these give an egregious leg-up to the union industry super funds. There is a long list of other required changes, including enforcement of the sole purpose test for super funds, but it remains just that — a list.

This is where the importance of Costello’s speech comes in. He is proposing that the Future Fund, or a body similar to it, be used as the destination for default funds, which are the superannuation contributions made on behalf of workers who don’t make an explicit choice.

It is estimated that upwards of 75 per cent of workers who could make a choice don’t. Note, however, that in most enterprise agreements (which cover close to 40 per cent of workers), a single superannuation scheme is generally nominated and it is the one associated with the trade union linked to the workplace. (Kelly, you must outlaw this — put it at the top of your list.)

Let’s be clear, Costello is not proposing the nationalisation of superannuation. Rather, he is saying it would make sense for the default funds to flow to a national investment body — think Canada, Singapore — where the economies of scale and scope can ensure lower fees and charges as well as a global reach of investment. One of the biggest flaws of the investment side of our system is the overweight position of local equities, particularly the big banks.

Sadly, it seems unlikely that our system of compulsory superannuation will be dismantled anytime soon, even though it cheats so many people. In all likelihood it has induced higher levels of household debt as people anticipate being able to use their final superannuation balances to pay down outstanding debts, including mortgages.

The key now is to ensure that the super charge remains where it is (at 9.5 per cent); that we have a better way of directing default funds; and that the raft of other reform measures is acted on — sooner rather than later.

The Australian

14 October 2017

James Gerrard

A new estimate for a comfortable retirement puts the mark at $824,000

How much is enough for a comfortable retirement? The estimates keep climbing higher. The actuarial consultant Accurium Ltd has now lifted its estimate from $702,000 to $824,000, but is this on the mark?

The actuaries argue lower investment returns are here to stay and consequently many SMSF trustees are now further away from achieving their retirement goals than ever before.

So what does a “comfortable” retirement look like?

The Association of Super Funds of Australia says “it enables an older, healthy retiree to be involved in a broad range of leisure and recreational activities and to have a good standard of living through the purchase of such things as household goods, private health insurance, a reasonable car, good clothes, a range of electronic equipment, and domestic and occasionally international holiday travel”: That’s a pretty thorough definition.

Now, in terms of what it costs to be comfortable, they calculate that if you’re single you’ll need an annual income of $43,695 and for a couple, you’ll need $60,063.

If you have $824,000 at age 65, assuming you can get 7 per cent investment return, that’s enough to get a couple through a comfortable 20-year retirement before depleting super to zero. Coincidentally, the Australian government actuary calculates that the average life expectancy for a 65-year-old is approximately 20 years so that’s all fine if you’re planning to die when the government says you should, but if you plan to bat beyond the averages, you may need to some tricks up your sleeve.

A big ask for anyone

For those who aspire to retire in their fifties, Accurium calculates that you’ll be pushing north of $1.2 million in super to allow this. And if you want it all, that is, to retire in your fifties and live off $100,000 a year, you’ll need to put away $2.6m in super. Putting aside the sheer difficulty of saving $2.6m on most people’s wages, the main problem is that the government will only let you contribute $25,000 a year into super via pre-tax contributions. For a single person to contribute $2.6m using pre-tax contributions, it would take 104 years, which doesn’t leave much time to enjoy retirement.

But coming back to the question posed — or at least prompted by the actuaries — is it possible to have a comfortable retirement with less than $824,000?

Sydney financial planner Peter Lambert thinks so and says there are several things that can help prolong the longevity of our retirement funds.

Centrelink kicks in as your super balance falls. Mr Lambert says “if you own your house and have more than $821,500 in assets, don’t expect anything from the government. However, once you start to dip below this amount in assets, you’re likely to pick up a part Age Pension in addition to the pension concession card, which can cut your expenses by thousands with concessions on medicines, utilities and rates”.

Another factor is the significant difference in outcomes made by small differences in investment returns. On a simplistic level, if one were to invest their whole super in National Australia Bank shares, which pay a grossed-up dividend of 9 per cent, the

$824,000 calculated by Accurium would last 30 years instead of 20. In other words, if you can get a better investment return, you don’t need the $824,000. You could drop your retirement savings goal by $150,000 to $674,000 by making an extra 2 per cent a year from your investments.

The Bureau of Statistics show that 82 per cent of couples over the age of 65 own their house outright. This also gives most retirees flexibility and options to save less for retirement. Effective downsizing can free up hundreds of thousands of dollars. Alternatively, renting a room on Airbnb has become popular for many of my retired clients over recent years and can add hundreds of dollars a week in income. Lastly, some people may opt to take out reverse mortgages or equity-release products to maintain their retirement lifestyle without having to sell their house.

Open doors to income

For those willing to open up their doors to strangers, an extension to the Airbnb strategy means that you can end up making a profit while on holiday. My parents-in-law are spending a month overseas and have rented their house out while away. Even though they are staying in five-star hotels and enjoying the best that Southeast Asia has to offer, they’ve been surprised that the short-term rental income they’re getting on their Sydney home is more than covering their airfares, hotels and spending money. In short, they’re thinking about taking more holidays.

There’s also a growing trend in people working for longer. Workforce participation has doubled over the past 15 years for older Australians, with 12.6 per cent working past the age of 65 and most loving what they do, reducing the amount they will need to accumulate for retirement.

If $2.6m seems like an impossible amount to save, let alone $824,000, by the age of 65, then don’t worry. Although modelling and projections have been conducted to show what lump sum is required to enjoy a comfortable retirement, it’s not the be all and end all.

What the numbers don’t show are the many considerations and options that people have to still enjoy that prized comfortable retirement but with lower amounts of money saved up in super.

James Gerrard is the principal and director of the Sydney financial planning firm FinancialAdvisor.com.au

The Australian

26 August 2017

Glenda Korporaal

The federal government would not be making any more changes to the tax treatment of superannuation, the federal Minister for Financial Services, Kelly O’Dwyer, said yesterday.

“The Coalition has done the job that we needed to do on the taxation of superannuation,” she said at a speech to the Tax Institute in Sydney. “The job has been finished and legislated.

“We have no further plans.”

The undertaking paves the way for super to become an issue in the next federal election, with O’Dwyer arguing that the government’s opponents will be the ones promising higher taxes on super.

But there is also expected to be some scepticism about the longevity of the promise, given that former Prime Minister Tony Abbott won the 2013 election with a promise of no unexpected negative changes to super — a promise broken by the Turnbull government in the budget of May 2016.

Changes that came into effect this July have cut the annual contributions that can go into super on a concessional basis from $35,000 to $25,000 a year. The amount that can be put into super on a post- tax basis has been cut from $180,000 to $100,000 a year.

The changes also set a cap of $1.6 million on the amount of money that can go into a super account that is tax-free in retirement mode. The changes have also reduced the attraction of transition-to- retirement plans.

While the tougher measures are estimated to raise some $6 billion a year, the package also included a range of concessions worth some $3bn, including making it easier for people with low super balances to add several years’ worth of “catch up” contributions from next year.

The government also removed the “10 per cent rule”, making it easier for people who work part-time or in small businesses to get a tax deduction for their super contributions.

Ms O’Dwyer’s promises of no further tax changes will be welcome by the industry, which has been complaining that constant tinkering has undermined confidence in the system.

She said the federal government “legislated a comprehensive package of structural reforms to the tax treatment of super to improve the sustainability, flexibility and integrity of the system.

“The measures ensure that superannuation tax concessions are well-targeted and balance the need to encourage people to save to become self-reliant with the need to ensure long-term sustainability.”

She said there would be no more changes to taxation of super but other changes to improve governance were planned.

While the government has claimed the super changes only had a negative effect on a small percentage of people, the extent of the changes provoked strong criticism from some people with larger super balances who had been actively putting substantial sums of money into super ahead of their retirement.

Ms O’Dwyer told The Weekend Australian that future governments might look at the five-year intergenerational reports as a platform to examine the sustainability of the super system.

Ms O’Dwyer said the tax undertaking would “give Australians certainty and the industry stability about the Coalition’s superannuation tax policy”. “It stands in stark contrast to the Labor Party and the Greens, who will slug superannuants significantly more in tax as they prepare for their retirement,” she said.

She said the Greens’ “so-called ‘progressive super’ tax plan” would “seek to extract up to $11bn in extra taxes over four years”.

“Labor have admitted that their superannuation policy will cost superannuants an additional $1.4bn,” she said.

Emphasis added by Save Our Super