Category: Newspaper/Blog Articles/Hansard

We will assume you’re in a relationship, that you’re both aged at least 65 and own your home without debt. Our main area of focus will be your super assets, which is your major investment. In all our case studies we will assume you want a super pension from a non-public sector super fund which will pay you 5 per cent income — that is, you are happy to live off an average 5 per cent return on your total savings. Let’s also assume that all income is paid to you tax-free.

For the sake of simplicity we will assume that this super pension started after December 2014, which means the account balance is ‘‘deemed’’ under Centrelink’s income test.

Apart from your home and your super, you own $50,000 worth of personal-use assets, including your car. You have no other assets. All of our examples will consider the assets test thresholds that will apply from 1 January 2017.

Case study 1
You have $1.6 million in super assets. In this particular case you will receive no age pension and therefore your income is $80,000 per annum.

Case study 2
Let’s say you have $200,000 in super assets. Your super pension will pay you $10,000 and you will be eligible for the full age pension of $34,382, including the pension and energy supplements. Total income is therefore $44,382.

Case study 3
What happens if you have $500,000 in super assets? Well you receive total income of $45,732 — a part-age pension of $20,732 and $25,000 from their super pension.

Case study 4
What about $700,000 of super assets? They will receive a super pension of $35,000 and a part-age pension of $5132 which means their income is $40,132.

Case study 5
How about $1 million in super assets? They receive no age pension and need to live off all their super pension of $40,000.

What does all this mean? At it’s very worst it means you can have less assets but more income each year!

The perfect formula

What’s the sweet spot? It would seem to be about $339,143 in super assets. At this level your total income will be $50,236.

Let’s compare the income a couple with $500,000 in super assets receives ($45,732) with the $80,000 income a couple will receive if they have $1.6 million in super. Those with the higher balance have more than three times the assets but only receive 75 per cent more income.

The government says it is changing the super system to make it fairer and more equitable. These are the reasons for the $1.6m pension cap, the $250,000 income threshold for higher contributions tax, the lower contribution caps and the refund of contributions tax for lower income earners. Based on all our cases above, do these arguments really hold?

For those earning anywhere between 80 per cent and about 180 per cent of average wages — that is between $65,000 and $150,000 — it takes a lot of effort and sacrifice over many years to save a meaningful amount of money towards retirement.

After looking at our case studies, why would you bother saving anything more than compulsory super and living in the best home you can afford that it is very well maintained?

Anyone earning $50,000 each year, which increases at 2 per cent each year, and their super grows by 5 per cent after all taxes, fees and charges and receives compulsory super, will have $400,000 in super assets after 31 years of work. At that point if they were to retire they would receive 100 per cent of their pre-retirement income. Clearly there is a distinct disincentive for people in this situation to work for longer or to try to earn a higher salary.

The government wouldn’t be keen but maybe we need to go back to the drawing board. New Zealand has a universal age pension — called NZ Super — set at about 65 per cent of average wages and is subject to income tax. It is paid from age 65 regardless of your income.

The Australian

1 October 2016

David Uren Economics Editor Canberra

Falling world interest rates have pushed up the cost of servicing the lucrative public service ­defined-benefit superannuation pensions by $66 billion over the past year.

The final budget outcome for 2015-16 shows a sum of $314bn would be required to cover public sector superannuation liabilities at the government bond rate of 2.7 per cent, up from $248bn a year ago.

The government’s deteriorat­ing financial position is also shown by the rise in net debt, up by 18.5 per cent to $296bn over the past year.

The final budget outcome shows the overall deficit for 2015-16 was $39.6bn, worse than the $35.1bn predicted when it was announced by Joe Hockey in May last year but $300m better than the most recent Treasury update in this year’s budget ­papers.

Both spending and revenue dipped in the final six weeks of the financial year; however, the gains on the spending side of the budget were largely one-offs, such as Victoria’s failure to get its application for funds from the asset recycling fund in on time, whereas weakness in revenue will carry into this year’s budget.

Deloitte Access Economics partner Chris Richardson said the budget outcome contained worrying trends as the government started work compiling its mid-year budget statement sched­uled for December.

“Yet again, we’re seeing signs that income weakness is eating not just into the most high-profile bit of the budget — the company tax take — but also the personal income tax take as well,” he said. “A hit to wages is continuing to weigh on the budget.”

The government closed the major defined-benefit pension scheme to new entrants in 2005 and set up the Future Fund to help cover outstanding liabilities. However, falling global interest rates are pushing up the amount the government is required to set aside in its financial accounts and making it harder for the Future Fund to meet its growth targets.

The Future Fund holds $122bn and is unlikely to get any further government contributions until the budget returns to surplus.

The final budget outcome’s measure of the public service superannuation liability is 50 per cent bigger than the estimate contained in the budget, which was based on an actuarial calculation that assumes inflation returns to 2.5 per cent and an average 6 per cent return is achieved.

This is similar to the Future Fund’s mandate, which requires it to earn 4.5-5.5 per cent more than the inflation rate, a target fund chairman Peter Costello said could only hope to be achieved by taking excessive risks.

The final budget outcome, similar to a company’s annual ­report, has to ­follow accounting standards which say the cost of meeting the generous fixed public sector superannuation pension payments needs to be based on the cost for the government to ­borrow the funds required.

Mr Richardson said that while interest rates were falling it made investment returns look good because share and bond prices were pushed higher. But ultimately, the low returns made it harder to meet fixed commitments, a problem shared by insurance companies, aged-care homes and retirees.

“We have made promises that are now more expensive to fulfil because the future returns are horrendous,” he said.

The final budget outcome shows it will be difficult for the government to meet its revenue forecasts.

Company tax raised only $62.9bn, $1.8bn less than predicted and the lowest since 2009-10. BHP Billiton and Rio Tinto, two of the largest taxpayers, have ­reported a halving in profits since the end of the financial year, so company tax will struggle to achieve the 9.7 per cent growth required to hit the $69bn revenue predicted in the budget.

Personal income taxes were $1.3bn lower than Treasury predicted in the budget, mainly ­because of lower pay-as-you-go tax deductions in large companies. Refunds were also higher than Treasury expected, which Mr Richardson said could reflect cash-strapped employees pushing harder with their tax claims.

The Australian

27 September 2016

Tony Negline Wealth Columnist

Despite some very good work the government’s recent changes to super look like they will bring a string of unintended consequences.

In fact I believe they contain significant landmines that will be expensive for super funds and investors to deal with.

If they proceed as announced they will lead to a string of court cases, because people will have made innocent mistakes and no doubt they will seek redress, as they will almost certainly find themselves facing penalty charges.

The $500,000 lifetime cap is gone and the annual cap and its three-year-in-advance rule have been returned, but with lower limits. The new annual lifetime cap from July next year will be $100,000 and the three-year bring-forward will be $300,000. (Yes, the government has given ground and should be congratulated for doing this).

The old annual cap of $180,000 will now apply until June 30, and if eligible, you can contribute $540,000 before that date.

A range of three-year bring-forward transitional rules will apply in other situations. If a three-year period commenced in 2015-16 then $460,000 can be contributed in 2016, 2017 and 2018 financial years before tax penalties will apply. If the three-year period commences in the 2017 financial year then $380,000 can be contributed in the 2017, 2018 and 2019 financial years.These new rules are really complex, so getting some advice might be essential

l. But anyone who has the financial resources available now and is allowed by the super rules should seriously consider taking advantage of the $180,000 annual cap or its equivalent transitional three-year amount before these opportunities are gone.

Pity the people in the following category — they were aged under 65 but had contributed more than $500,000 in non-concessional contributions between July 2007 and the May budget; they held off making any additional contributions because of the government’s original policy even though they would have liked to put more after-tax money into super. Now they’re aged over 65 — or soon will be — and can make more super contributions under the government’s revised rules, but must also now satisfy a work test that will now remain in place.

How do they solve this problem if they can’t satisfy this work test?

The number of people impacted here will be small, but does that mean they don’t deserve some fairness? The government has adopted an extreme utilitarian approach. That is, let’s whack a few people so the majority can benefit.

This latest compromise by the Turnbull government contains a new element: you will be allowed to make non-concessional contributions if your total super balances are less than $1.6 million. When your balance is close to $1.6m then you can only contribute money so that you don’t exceed this new cap. The $1.6m amount will be indexed by consumer price inflation.

This step sounds simple and just seems to be an extension of the maximum amount you can initially put into a super pension. I can assure you that in practice this is something very different and will be very complex.

The super balance will be determined on June 30 each year for the next financial year. But many super investors do not know their super balance for many months after the end of the financial year, which means they will have to wait some time before being eligible to contribute. In 2011 the Gillard government tried to put in place a similar system but gave up after it became too difficult to implement.

Overall, I see these new contribution rules as very complex. The annual contribution cap system is very unwieldy and should be replaced with a lifetime cap system that is an appropriate amount and has appropriate transitional arrangements.

The Australian

16 September 2016

Editorial

In April last year, former treasurer Peter Costello warned of unintended consequences facing policymakers. “Increasing superannuation tax will make negative gearing more attractive again,” he wrote in The Daily Telegraph. Abolition of the $500,000 lifetime cap means we are less likely to see a shift of funds away from superannuation into other more bankable investments. The government went wrong in its budget in May when it approached the rules on superannuation not as retirement income policy but as an ill-considered revenue grab. As such, it was difficult to defend and became one of the reasons for the Coalition’s lacklustre campaign leading up to the July 2 election.

The effect of the superannuation changes would have been to blunt the incentives for self-funding retirees, a class needed to take the pressure off the (already unsustainable) Age Pension. The changes also sent a destabilising message: that governments could change the rules of the long-term investment game that superannuation represents. It was not just the $500,000 lifetime cap that rankled but its retrospectivity. Soon after the budget, a former senior public servant, Terence O’Brien, crystallised the problem in a letter to this newspaper: “A 60-year-old can today expect to live past 90, so superannuation needs to finance a further 30 years of sustained retirement living standards, ideally in a predictable taxation environment. There might be 20 to 25 governments over that 70 years of a typical worker’s saving and retirement, so it is important that there be some sense of fundamental ‘rules of the game’ governing superannuation rule-making and taxation — a ‘superannuation charter’, if you will.”

Paul Keating’s superannuation changes of the 1980s were grandfathered so as not to disadvantage people who had relied on the old rules when making investment decisions. So, too, were John Howard’s 2004 changes affecting the superannuation of MPs. Scott Morrison and Kelly O’Dwyer, then assistant treasurer, failed to convince when they insisted that the $500,000 lifetime cap was not in truth retrospective. Now, at least, there is the basis for restoring trust in the integrity of the system. And, in a political sense, there is the basis within the Coalition for renewed confidence in Mr Turnbull now that the superannuation policy has been shifted from the spurious “fairness” of the centre-left closer to a commonsense position on the centre-right. It was Mr Costello, again, who had put his finger on the problem. “The Coalition is flirting with higher tax on superannuation,” he wrote last December. “The longer it does so, the more it will give ground to Labor on the issue.” Even so, political posturing aside, there should be enough overlap in substance by now for Mr Turnbull to broker an agreement on superannuation with Bill Shorten. Opposition Treasury spokesman Chris Bowen had focused his criticism on the retrospectivity of Coalition policy, a policy to which Labor gave tacit approval by building its savings into its own costings for the election campaign.

In question time yesterday, struggling to be heard above the hyperpartisan ruckus, Mr Turnbull gave the opposition credit for its compromise on Tuesday’s omnibus savings bill. The Prime Minister said he wanted Australians to know that “with a little less grandstanding, a little less name-calling, a little more constructive negotiation, we (in parliament) can achieve great things for Australia”. As usual, the tone of question time suggested anything but consensus. Even so, the Prime Minister has little option other than the path of negotiation and compromise. Politics is the art of the possible and what is possible for Mr Turnbull is heavily constrained by the parliament elected on July 2.

As the Prime Minister put it in a Fairfax Media report yesterday: “The Australian people have elected the parliament that we’ve got and we are determined to work with it.” He suggested that negotiation could allow the passage of the double-dissolution trigger bills — for the Australian Building and Construction Commission and the Registered Organisations Commission — without the need to call a joint sitting of parliament. And the same spirit of compromise may see the government split its $48.7bn company tax package to pass on savings straight away to small business.

The Australian

12 September 2016

Henry Ergas

There is a fundamental defect in the government’s superannuation proposals that has been entirely overlooked. Instead of growing in line with average earnings, the $1.6 million “transfer balance” cap, which limits the amount that can be held in the withdrawal phase, is only indexed to consumer prices.

As real wages rise over time, the cap will therefore fall relative to earnings, reducing the system’s allowed replacement rate (that is, the ratio of pre-retirement to post-retirement income) and steadily increasing the effective tax rate on privately funded retirement incomes.

To make matters worse, the age pension is, and will no doubt remain, indexed much more generously, rising in line with the higher of consumer prices or nominal wages. As a result, the government’s proposals ensure that the capped replacement rate under superannuation will fall not only in absolute terms, but also compared to the age pension.

The proposal would, in other words, punish increasingly severely those people who save for themselves relative to those whose retirement is paid for by taxpayers. And the effect is far from trivial, since compounding means even small differences in growth rates soon translate into large differences in outcomes.

Assume, for example, that initially, the $1.6m is sufficient to buy an annuity one and a half times greater than the pension, and that real wages and consumer prices each increase by 2 per cent a year. Within 10 years, the maximum annuity that can be purchased will have fallen to just a quarter more than the age pension, while in 20 years, it will barely equal the pension.

At that point, anyone relying on the withdrawal account will, despite saving for decades, be no better off than a person who did not save at all.

And adding insult to injury, it is of course those self-funded retirees who, during their working life, will have paid the taxes that finance the age pension others are enjoying.

Instead of frankly acknowledging those effects, the government’s claim is that the initial $1.6m is generous, implying that its progressive erosion as a share of typical middle income earnings is of no consequence. To make that claim, its unpublished briefing to backbenchers assumes a return on investment in retirement of 5.5 per cent and compares the resulting income stream to the age pension.

That comparison is nonsensical. The age pension is effectively an annuity that rises in value as the economy expands and incomes grow. While there is some political risk associated with that annuity, experience suggests it is slight, making it close to a sure thing, both in absolute and compared to the uncertainties that plague the superannuation regime.

As a result, the proper comparison is between the value of the age pension and the income stream a superannuant would secure investing the $1.6m in assets whose yield is also a sure thing, i.e. government bonds, net of the fees incurred in purchasing and periodically renewing that portfolio. With the commonwealth bond rate reaching a record low of 1.82 per cent in August, the resulting relativity would look far less favourable to self-funded retirees than the government claims. And of course, as the difference in indexation arrangements played itself out, the relativity would deteriorate further.

In short, it may be that the greatest effects of the proposed changes would initially be on a small number of wealthy retirees, as the government argues.

What is certain, however, is that the indexation arrangements will soon spread the damage to an ever greater swath of middle Australia, in the process redistributing income from those who save to those who don’t.

Unfortunately, the redistribution does not end there. As part of its package, the government intends to recycle a large share of the revenue it collects into subsidising the superannuation accounts of people on low incomes.

However, using the superannuation system, with its high transactions costs, to boost low incomes makes no sense: a carefully targeted increase in the pension some years down the road (when the accounts that would have received the subsidies would have matured) can achieve the same outcome at far lower expense to taxpayers.

But one person’s excess costs are always another person’s windfall income: with that other person being, in this case, the industry super funds, who will largely garner the fees taxpayers subsidise.

Moreover, the recipients of the transfers will also be grateful, although they are likely to thank Labor, which initially put the payments in place, rather than the Coalition, for the largesse. Little wonder then that the government’s proposals are endorsed in whole or in part by its bitterest opponents.

The pity is that instead of using what little political capital it has to address our superannuation system’s myriad weaknesses, the government is squandering it on changes that undermine the system’s ability to serve what ought to be its purpose — facilitating the transfer of income from working life to retirement.

Bringing that missed opportunity into sharp perspective is the great merit of Rebecca Weisser’s paper on superannuation reform released today by the Institute of Public Affairs. As the paper emphasises, these are not solely economic issues: they go to whether we want a society that rewards self-reliance or that punishes it.

So far, for all its statements about the taxed and the taxed not, the government shows no sign of understanding what is at stake.

“Stuff your pension!”, Phillip Larkin famously wanted to shout in his poem Toad.

But despite belittling the aspirations for financial security in old age that he saw as profoundly middle class, even Larkin recognised “that’s the stuff dreams are made on”.

As those dreams take another battering, an efficient and equitable retirement income system seems more distant than ever.

The Australian

12 September 2016

Sarah Martin Political Reporter Canberra @msmarto

Both major parties are condemning middle-income Australians to a dependency on the Aged Pension by targeting superannuation for budget repair, a report from the Institute of Public Affairs says.

As the government prepares to tweak its election commitment to rein in superannuation concessions , the free-market think tank says the government’s “desperation” for new revenue sources, as outlined in its $6 billion superannuation tax package, will undermine future retirement incomes.

The release of the report comes as Scott Morrison seeks to reach a consensus with Coalition backbenchers on the shape of the government’s super reforms, with MPs arguing for the Treasurer to lift the cap on non-concessional contributions from the proposed $500,000 to $1 million.

Mr Morrison has faced a barrage of criticism from backbench MPs about the reform package, including from former prime minister Tony Abbott, who argued that the “deeply unpopular” changes were an attack on aspirational voters and the Liberal Party base.

Institute director of policy Simon Breheny said instead of targeting retirement income to fund spending commitments, the government should cut superannuation taxes of middle Australians to encourage savings.

Mr Breheny said middle income earners could expect to have a retirement income equal to 58 per cent of their pre-retirement earnings, compared with nearly 90 per cent for low-income earners .

“The poor have the pension, the rich have alternative investments and the middle class will miss out again. The objective of the superannuation system should be for people to maintain their living standards in retirement, not imply that they should be grateful to be tied to the Age Pension,” Mr Breheny said.

The paper, written by Rebecca Weisser and Henry Ergas, recommends abolishing taxes on contributions and earnings to give incentive for retirement savings.

It also proposes taxing end benefits in retirement at an individual’s marginal income tax rate, prioritising the reduction of fees and charges and making it easier for people to access private, defined benefit pensions.

“Unfortunately, proposed changes to superannuation from both the government and the opposition worsen, rather than fix the system’s myriad weaknesses,” the report says. “Superannuation reforms should be judged by the effect that they have on helping each individual to accumulate sufficient funds to maintain their living standards in retirement.”

The report also concludes that the government’s proposal to introduce a cap on non-concessional contributions and lower the concessional contribution cap will “make a bad situation worse” .

“What is clear is that governments should not tax retirement savings at rates that make it difficult or impossible for savers to secure reasonable living standards in retirement based on the living standards they achieved during their working life. Nor should government taxes on retirement savings distort consumption decisions , undermining the quality of life in old age and reducing overall economic efficiency.”

The government has released draft legislation for the first tranche of the super package, which excludes the most controversial elements of the proposed changes.

A draft bill for the remaining measures, including a $1.6m cap on tax-free pension accounts and a $25,000 annual limit on pre-tax contributions is expected to be released next month once a compromise position is agreed to by the Coalition partyroom and backbench economics committee.

Herald Sun

9 September 2016

Anthony Keane

POLITICIANS are being urged to cut back some of their own superannuation tax breaks before hitting the retirement savings of millions of ordinary Australians.

As MPs argue about restricting how much money people can put into super, a new analysis by financial strategists Marinis Financial Group estimates that more than $1.5 billion a year could be saved if they remove an ”obscene” tax break for retired politicians and other public servants.

Hundreds of thousands of public servants with defined benefit superannuation schemes, which were closed to new members by the mid-2000s, were granted a 10 per cent tax offset on their retirement pension income a decade ago even though members paid no tax on their super contributions or fund earnings during their working years.

“They’re among the most generous schemes in Australia, and probably the world, and they don’t need an extra free kick,” Marinis Financial Group managing director Theo Marinis said.

“The pensions they are getting have never, ever been taxed, anywhere, but politicians want to start clobbering people who have been taxed the whole way.”

Defined benefit pensions typically pay a percentage of a person’s previous salary for the rest of their life, unlike most Australians’ super which is a finite amount that drops as it gets spent in retirement.

“Politicians and public servants in untaxed schemes receiving defined benefit pensions cannot double dip. They automatically receive their pension each fortnight, usually automatically indexed to CPI, with no exposure to market volatility,” said Mr Marinis, a former Treasury official.

Australia’s Future Fund, now worth $123 billion, was created to pay public servant superannuation pensions, but some say it is not large enough to cover the huge future cost.

Finance commentator Robert Gottliebsen has been campaigning against defined benefit scheme “rorts” and last week renewed his call for a parliamentary inquiry.

“The cost of those defined benefit pensions is rising by $6 billion a year and there is a $400bn to $600bn shortfall. That increase in costs is conveniently buried and not included in budget figures but it’s a real cost,” he said.

Public sector superannuation specialist Laurie Ebert said some senior public servants were “avoiding tax from beginning to end” and said the system should be changed.

“I doubt that it would happen,” he said. “They’re not going to give it up easily.”

Mr Marinis said politicians made little mention of these schemes “because it affects them”.

He said the tax concessions could be stopped by a simple change to the Tax Act. “You are not supposed to give tax concessions to somebody who hasn’t already paid tax on their super.