Category: Features

Retirees warn of hit to their incomes worth tens of billions of dollars

13 June 2020

Sydney Morning Herald

Shane Wright – Senior economics correspondent for The Age and The Sydney Morning Herald.

Retirees are facing a massive hit to more than $100 billion worth of vital income streams as the coronavirus pandemic crushes their superannuation, personal savings and share dividends.

Older Australians say the retirement system is in crisis and leaving them financially vulnerable, forcing them to call on the Morrison government to consider changes in areas such as the age pension, deeming rates and access to the Commonwealth Seniors Health Card.

The Alliance for a Fairer Retirement System, representing millions of retirees and older investors, has written to key finance and welfare ministers urging reforms including to measures previously introduced to take pressure off the federal budget.

In the letter, obtained by The Sun-Herald and The Sunday Age, the alliance says the coronavirus pandemic has dramatically hit retirees dependent on investment income to such an extent it now put the nation’s economic recovery at risk.

“Retiree spending, and willingness to spend, will have critical impacts on the economy in any post-stimulus recovery phase,” the alliance said.

“However, under the current market conditions, there is a risk older Australians will further withdraw from the economy, slowing the recovery. Retirees are unlikely to have the confidence to spend if they continue to face significant impacts on their income.”

Retirees are facing a string of inter-related hits to their finances. Company dividends are being slashed by many listed firms in a development that JPMorgan estimates will cut income to investors by $68 billion in 2020.

Falling interest rates, while beneficial to those with mortgages, are leaving people dependent on their savings cash-strapped.

Interest rates on savings and term deposits continue to fall. In the past week, the average rate on a five-year term deposit edged down to a fresh record low of 1.09 per cent.

On a one-year term deposit, the average interest rate fell a quarter of a percentage point last week to a record low of 1.2 per cent.

Income from rental properties have also collapsed with many tenants unable to cover their rent.

The alliance said it all meant many retired Australians’ incomes were being stripped away by the impact of the coronavirus and the situation “could extend for years”.

The government has already reduced the deeming rates – the assumed rate of return made on investments that affects the pension income test – due to the fall in global interest rates caused by central banks trying to protect their economies from the pandemic.

But the alliance wants the government to go further, starting with another cut in the deeming rate.

It also wants an automatic revaluation of assets used by Centrelink to determine the pension accessibility for retirees, arguing the last revaluation was done at the peak of the share market before the start of the pandemic.

The alliance has also called for the government to re-think the taper rate changes it introduced in 2017 that helped save billions in pension payments. The alliance says those changes now mean that couples who may have almost $900,000 in assets are up to $1000 a month worse off in income compared to a couple with $450,000 in assets.

While people of retirement age are entitled to the Commonwealth Seniors Health Card if they have an income of less than $55,808, the alliance argues many self-funded retirees are unaware of their eligibility to the scheme. It wants all retirees to have access to the card and for the government to promote its availability.

The federal government is nearing the end of a review of the retirement income system, prompted by a Productivity Commission review of the superannuation sector, although its reporting date has been pushed back to July 24 due to the pandemic’s impact on agencies.

Superannuation sapped of $13.5bn, APRA reports

The Australian Business Review

9 June 2020

Gerard Cockburn – Business Reporter

Billions of dollars continue to be leached from Australian super funds as early withdrawal requests near two million.

The latest figures released by the Australian Prudential Regulation Authority show $13.5bn has been drained from the country’s near $3 trillion retirement pool, by members requesting hardship payments due to COVID-19.

As at May 31, 1.96 million Australians had lodged withdrawals requests with the Australian Taxation Office, for an average payment of $7473.

 

The regulator’s weekly statistics highlight that the scheme has still been paying out more than $1bn per week, following the initial $8bn rush to access funds in its first week of operation.

In the week ending May 31, $1.3bn was paid out to account holders, while the previous week had $1.6bn withdrawn. The week ending May 17, also experienced a $1.6bn.

The early release of super scheme was implemented by the federal government in April, as a support measure to assist Australians who have been affected by the economic downturn induced by the pandemic.

People that have become unemployed or experienced a reduction in working hours are able to access up to $10,000 this current financial year and the 2021 financial year.

Liberal Senator Jane Hume said the estimated total payment figure from the ATO stands at $16bn.

“The early release of super is projected in total to be only around 1 per cent of Australian superannuation assets,” Ms Hume said.

“While it’s confronting to see so many Australians in hardship, it’s been pleasing to see the money flowing to people who really need it.”

Ms Hume noted if the scheme was not implemented, people facing financial hardship would be forced into more expensive forms of financing such as credit card or personal loan debt.

Data from APRA showed 95 per cent of claims were being paid within five business days, while the median processing time is 3.3 days.

APRA said it is contacting funds which are not paying members in the recommended five business days turnaround period.

Members of major industry funds continue to make up the bulk of withdrawal requests, as a large proportion of members are employed in sectors that were significantly impacted during the shutdown.

AustralianSuper, Hostplus, Sunsuper, Rest and Cbus constitute $6.5bn of the total funds paid out to members.

AustralianSuper has paid out $1.8bn to 240,455 members, the largest of any fund. The average request from an AustralianSuper account holder is $7,473.

Sunsuper has received 206,899 withdrawal requests, already handing out $1.4bn to approximately 195,000 members.

Hospitality and event focused fund Hostplus dished out $1.3bn to more than 180,000 members, as at May 31.

Approximately 3 per cent of funds under management have been withdrawn from Hostplus.

$1.2bn has been paid out by retail workers industry fund Rest, while $764m has been sapped from Cbus.

Rest chief executive Vicki Doyle said the major fund is “well placed” to cope with the large outflow of funds, but noted ongoing uncertainty caused by COVID-19 will impact its long term investment capabilities.

“It’s important that a short term approach to the current crisis does not create a longer term crisis for Australia’s retirement savings,” Ms Doyle said.

“If members’ super is regularly called upon to provide short-term fiscal support to the economy, it changes the way we invest on behalf of our members.”

SMSFs suffer $70bn hit in virus shock

The Australian Business Review

27 May 2020

Gerard Cockburn – Business Reporter

Self-managed super funds suffered a $70bn hit from the market turmoil in the March quarter, putting further strain on the retirement savings of investors already battling a crash in interest rates and a rental freeze.

New figures released by financial regulator APRA outline the damage to superannuation with nearly $230bn sliced from to the nation’s super pool, putting the sector back 12 months in total assets under management.

Industry funds, which are generally more exposed to infrastructure, suffered a $54bn hit to asset values in the three months to the end of March, while retail super funds with their higher exposure to riskier assets such as shares were savaged with an $80bn drop in asset values.

But SMSF investors, who generally are exposed to property, shares and cash, suffered the worst hit since the global financial crisis with total assets falling by 9.4 per cent in the March quarter.

The global meltdown in markets triggered an aggressive policy response from central banks around the world, slashing already rock bottom interest rates to new lows.

APRA’s latest figures show the country’s $3 trillion superannuation industry contracted 7.7 per cent, with $227.8bn being lost over the March quarter.

The figures don’t capture the federal government’s early withdrawal of super scheme, which allows Australians to access up to $10,000 both this financial year and the next.

Industry funds are expected to see an additional outflow of funds into the June quarter.

National Senior Australia chief advocate Ian Henschke, said self-funded retirees were still coming to terms with the economic shocks sparked by COVID-19, with some members only just recovering from losses incurred during the global financial crisis.

“They (self-funded retirees) feel they are being forgotten and must simply accept this,” Mr Henschke said.

“They are not necessarily wealthy, but receive little or no assistance and despite the huge hit to their income are not eligible for the pension because their asset values have changed little so far.”

Mr Henschke noted some SMSF retirees were being forced to sell shares at low prices just to supplement foregone income — including relief on rental properties — further diminishing the size of their portfolios.

SMSF Association policy manager Franco Morelli said APRA’s figures were lower than expected within the industry, which had estimated the hit to the sector could see assets fall by as much as 30 per cent.

“The next quarter up to June will be interesting, as there is so much uncertainty,” Mr Morelli said.

However, he said the SMSF sector could react quicker to rebalance than other sectors. “We have a much larger cohort of individuals allocated to more liquid funds,” Mr Morelli said.

The halving of the pension drawdown rate by the federal government in March has helped self-funded retirees to top up their pension.

Total superannuation assets at the end of the March quarter stood at $2.73 trillion — nearly twice the nation’s economic output.

Public sector funds were the relative best performers during the March quarter with total assets falling just under $10bn to $523.6bn.

Industry funds make up the single biggest sector with $717bn under management, while the collective assets held by SMSFs fell back to $675.6bn. Retail funds totalled $558bn at the end of March.

Superannuation contributions rose 6.9 per cent to $121.1bn compared to the same quarter in the previous year, while the total paid in benefits was $85.8bn, a rise of 14.5 per cent.

Net inflow of funds compared to March last year increased by 27.7 per cent to $45.4bn.

Self-managed Independent Superannuation Funds Association managing director Michael Lorimer said the impacts to financial markets were experienced at the tail end of the quarter. He said APRA’s next round of data would likely show some signs of recovery, as market performance had started to rebound.

Early release regime cracks open the superannuation system

The Australian Business Review

22 May 2020

James Kirby – Wealth Editor

The controversial decision to allow early access to superannuation has lit a fuse. Suddenly everything is on the table. Is the system actually successful? Would investors be better off putting their money elsewhere?

It has also opened doors that were previously shut for the government. Having broken the taboo of “upsetting the super system”, more changes will come. As actuary Michael Rice puts it: “We now have a huge debt and the government will be looking to pay it off, so superannuation will not be as sacred as it was in the past.”

In effect, the super system has been cracked open — a target for everyone on the left and right of public policy but perhaps most squarely in the sights of the Australian Taxation Office.

With $15bn already flowing out of super, there has been consternation around younger people taking out everything they have saved — roughly 100,000 have drained their accounts.

Under the terms of the scheme, anyone of any age can take out a total of $20,000 over the next two financial years.

But perhaps the unexpected dimension of this story so far is the realisation that so few people understand that super is their own money kept locked away in a tax-protected environment until retirement.

In recent weeks I have been running a free Q&A Facebook webcast and it’s alarming that so many people know so little about how the system works. Despite a quarter of a century of mandatory contributions, ­people who are well versed in property or share investing still don’t realise that super is not an investment choice but a tax framework in which you can make investment choices.

There are highly resilient myths about self-managed super funds: speculation that people “need their super” to access property developments or at worst that they can somehow have a new home through super. (In general, you don’t “need” super for property, you need access to capital. You can’t use your super for your home — the family home is already a tax shelter being exempt as a primary residence from capital gains tax.)

But the questions around early super release schemes are the most intriguing, largely because the subject is brand new.

One recurring question is: “Can you take the money out of super and buy your first home?” The answer here is yes — there are no rules on what you do with the funds. That’s why there have been reports of people using newly released super money for online gambling.

In principle I’ve been against the early release of super because younger people will pay a huge price in the long run for missing out on the compounding effect of investing over their working life.

But now that the early release proposal has become reality, there have been situations where I am forced to consider the issue more deeply.

Until this crisis broke, the biggest issue for younger people is not so much paying mortgages (where interest rates are at historic lows) but getting the deposit for homes.

In some cases a person may well be better off getting $20,000 to complete a deposit on their first home rather than having that money in super. There are benefits in home ownership that spread far wider than we can immediately calculate just as there are some super funds that perform less successfully than others.

Dilemmas in the super system are rarely simple to solve. No wonder policy specialists are now scouring the system for more potential opportunities.

At Pitcher Partners, Brad Twentyman has promoted a proposal that the 9.5 per cent super guarantee contribution could be cut in half during these difficult times so that all workers have more money to spend.

If this proposal was successful while the early release scheme is running, we would have money literally draining out of the front and back end of the super system: is that the best way forward? The debate on these issues will intensify ahead of the release of the Retirement Income Review in July.

Before the government trawls the system for new tax revenue it urgently needs two changes. First, we need a huge improvement in education around the system — it should be taught in schools and in every workplace.

Second, the system needs incentives. There is a black spot for super savings between $400,000 and $700,000 — on a week to week income basis many people in this zone may be better off on a full government pension. This is the biggest failing in the system, it has to be re-engineered.

Retirees facing financial as well as health risks in coronavirus pandemic

The Australian

21 May 2020

Peter Van Onselen

Spare a thought for self-funded retirees in these difficult times. Not only are they in the age bracket most at risk from the virus, but their financial wellbeing in retirement is being put at substantial risk.

The collapse in the stock market, including among most blue chip stocks, is just the start of their financial pain. These big businesses, even if they survive, aren’t likely to pay out the dividends they once did for years to come, if ever.

The financial plans of self-funded retirees are built around dividend projections which therefore no longer apply, and with interest rates so low its not as though they can simply transfer their saving into cash accounts and do any better.

The RBA cash rate is at a record low.

The difficulties self-funded retirees face in low interest rate environments is the flip side to the benefits those of us with homes loans get from lower rates for borrowing.

Lower interest rates has become a way of life, but the prospects of rates surging north again anytime soon seems unlikely. Even if it does happen, it will only be in conjunction with inflation, which erodes spending power at the same time.

On the policy front, there isn’t much there for self-funded retirees to cushion the blow. While Jobseeker and JobKeeper are doling out tens of billions of taxpayers dollars to keep working age Australians in jobs or at least above the poverty line, self-funded retirees are getting no such support.

Even pensioners have received a boost to their pensions to help them get through these tough times. But the self-funded retirees who voted en-masse against Bill Shorten and his franking credits policy have become the forgotten people among Coalition supporters.

Their loyalty hasn’t translated into being looked after now. And because Labor is still licking its wounds from last year’s May election defeat, it hasn’t exactly been inclined to highlight their plight and put pressure on the government to do something to help this large voting cohort.

Rather, Labor has focused its attention on the plight of many casuals who are missing out on JobKeeper, and the university sector which isn’t eligible for the payments. Or childcare users who would benefit from free childcare continuing for longer. Or workers for foreign companies ineligible for JobKeeper. Or indeed anyone who might benefit from Newstart not returning to the low levels it was pegged at previously.

What about self-funded retirees? They truly are the forgotten people in this crisis. Taken for granted by a government that would not have won the last election had it not been for their support. Forgotten by an opposition that has written them off politically.

While I have long been critical of the unsustainable tax breaks for many older Australians, especially those with very large savings, the self-funded retirees who only just miss out on a part pension and concession card benefits are the ones caught in the middle right now.

As Ian Henschke from National Seniors has pointed out, some self-funded retirees — because of this crisis — are now drawing on an annual payout from their investments lower than the annual pension. To survive they would need to draw down their savings right at a time when their value has been halved. He wants to see discussion about legislating a universal pension in the wake of this crisis to ensure that can’t happen.

Whether that is a long-term solution or not is debatable — indeed whether it is fiscally viable is highly debatable. But there is little doubt this cohort of senior Australians deserves more than the cold shoulder.

Especially from a Coalition government.

Peter van Onselen is a professor of politics and public policy at the University of Western Australia and Griffith University.

Superannuation drawn into political crossfire in coronavirus crisis

The Australian

19 April 2020

John Durie

Scott Morrison may well get his wish if private equity, backed by industry superannuation fund money, does bid for Virgin Australia, but not the way the Prime Minister intended, which has once again politicised super.

For the super sector, that is the problem of being the creation of politicians that has meant being subject to their often hypocritical whims to suit the purpose of the day. A few weeks ago the government thought it was clever opening the way for people to withdraw money early from their superannuation.

Josh Frydenberg noted “it’s your money” so you can get ­access to it if you are caught in a ­financial mess because of the government-imposed shutdown.

When the industry funds said they could face losses of up to $50bn in cash withdrawals, the Minister for Superannuation, Jane Hume, saw it as another leg in the push to consolidate superannuation funds.

Hume argued that some funds like Hostplus and REST were too reliant on the hospitality and retail sectors and, like others, had a concentrated pool from which to raise funds because industry fund contributions were often tied to industry industrial relations awards.

Diversification, she said, should be the rule in membership and investment strategy.

Then Morrison came up with the bright idea that specialist industry superannuation funds had plenty of cash so someone like the TWU, with a heavy dose of Virgin Australia workers, should be diverting funds into the airline.

The three pronouncements from the relevant ministers underlines the political bias against industry funds, breathtaking hypocrisy and, more importantly, a dangerous ignorance about how funds manage their money.

By law, managers must invest for the long term to boost member returns and this fiduciary duty would by definition prevent a fund making a national interest investment because that would suit the prime minister of the day.

When the government opened the door to early withdrawal of funds last month it not only risked members losing up to $84,0000 in lifetime savings but risked the funds losing the ability to invest to support corporate Australia.

Somehow all of this was forgotten by Morrison.

That said, it would not surprise if an industry fund like AustralianSuper provided capital to support a private equity bid for Virgin.

AustralianSuper has a stated policy of owning bigger stakes in fewer companies, which is why it backed BGH’s successful bid for Navitas and unsuccessful bid for Healthscope.

AustralianSuper investment chief Mark Delaney is keen to use the fund’s equity investments to support Australian companies with long-term capital.

This would be most company boards’ dream come true.

It would help if Canberra maintained a more consistent approach to superannuation even amid these extraordinary times.

Why SMSFs need government help too

Australian Financial Review

13 April 2020

Elio D’Amato

There has been an unprecedented spending initiative by the government to prop up the economy and its citizens through a virtual shutdown for the next six to 12 months. But although self-managed superannuation funds (SMSFs) will probably be hit hard through this crisis, we’re not hearing much about help for them.

An SMSF retiree’s asset balance is vital because it is from this that future income is generated to help fund living costs and expenses. Periods such as this can cause great anxiety while doing irreparable damage to future income streams as asset values plummet, particularly if there is a prolonged period of volatility.

Compounding the stress is that many retirees were lured to the sharemarket because there was nowhere else to generate a reliable income stream. But in the recent wave of dividend deferrals and cancellations, dividend-income expectations are being cut significantly.

The Australian Prudential Regulation Authority (APRA) delivered a regulatory mandate to cut dividends as it cautioned banks and insurance companies on paying out too much in dividends. This relief lever was seized quickly by the Bank of Queensland at the time of its half-year result.

Unlike share prices that are subject to sentiment, dividends paid by a company tend to reflect the economic reality a business faces. With declines in profitability and free cash flow expected for the coming six to 12 months, the income reality from the sharemarket for retirees on a risk-adjusted basis is bleak.

The outlook for other asset classes in which SMSFs traditionally invest doesn’t look much better. The property market is at risk of seeing its income dry up, leaving many retirees in the lurch. With the rising call for government-mandated rent deferrals, the SMSF property investor who previously received 4 per cent rental returns is likely to be affected significantly.

Further, investors in property trusts, exchange-traded funds (ETFs) and listed and unlisted funds could face a freeze on their distributions should conditions and asset values deteriorate further.

And let’s not forget those who sought the safety of cash and term deposits in the recent turmoil – $1 million held in cash-like products returns an absolute maximum $15,000 a year, well below the regular JobSeeker payment. With interest rates to remain lower for much longer, there is little in the way of hope.

Huge fall in earnings

Should economic and investment conditions worsen, an SMSF retiree could potentially see earnings fall by well over 60 per cent. For SMSFs on the margin, this could fall well below the age pension and JobSeeker payment level.

According to the SMSF Association, there are 560,000 SMSFs comprised of 1.1 million members. The Australian Taxation Office (ATO), in its last published SMSF quarterly statistical report for the three months ended September 30, showed that 37.1 per cent of all SMSF members were of retirement age, which equates to more than 400,000 individuals.

The federal government’s decision to reduce the minimum SMSF pension withdrawal requirement by 50 per cent is important – particularly as this amount is calculated based on the asset value at the start of the financial year.

But another part of the government’s support package was to drop the deeming rate used in the income test to determine qualification for financial support such as the age pension. Without going into the technicalities, the decrease in deeming rate means a reduction in accessible income that would result in those who receive a part pension being able to receive more and, in theory, potentially help some SMSF members on the margin to be eligible for at least a part pension.

The statistics, however, show that for SMSFs, this will probably not be the case. In the ATO report, while there is no breakdown as to whether the SMSFs are in accumulation or pension phase, the median average balance of all SMSFs per member was $408,237. The reality is that older SMSF members tend to have larger balances and therefore would most likely be disqualified from receiving the age pension as they fail the assets test.

Before this correction, an SMSF retiree couple with $1.2 million between them, who owned their own home and earned an income of 5 per cent on a balanced portfolio of assets, would derive in total $60,000 income for the year ($2307 a fortnight). A 60 per cent drop in future income results in $923 a fortnight, which is more than $370, or 30 per cent, less than the age pension.

Of course, where asset values do fall below the upper asset threshold ($869,500 in the case of a married couple who own their own home), they will qualify for a part pension under the current rules. But it is important to note that asset values in property and unlisted trusts often lag, with revaluations conducted sparingly.

Although the income hit of suspended distributions will probably be felt early, any asset revalue relief from non-shares assets may be some time in coming – supporting the idea of immediate income support in the near term.

SMSF retirees who fail the assets test will have no option but to dip into their savings, rendering the government drop in the minimum pension withdrawal level totally useless. This drawdown will result in a lower asset base for future income generation, making it more difficult for them to be self-sustaining and increasing the future burden on government.

Short-term assistance

For the same duration that JobSeeker, JobKeeper and other spending initiatives are implemented, a possible aid package to SMSF retirees might include the assets test being waived and a regular ongoing payment equal to a minimum of 50 per cent of the current full age pension.

Although this in a few cases may still fall short of past income levels, it would provide urgent short-term income relief. It would reduce the need for excess drawdowns on assets when prices are challenged and/or liquidity dries up.

Further, for those who under normal circumstances pass the assets test, but receive a part pension due to other income generation, for the same period they could automatically be eligible for the full pension to compensate for loss of income.

The main intention would be to deliver some basic support to the large number of forgotten SMSF members whose income even when investments were stable was inadequate.

Industry funds’ pathetic plea shows the jig is up

The Australian

31 March 2020

Janet Albrechtsen

Many people are recycling ­Warren Buffett’s famous quote that it’s only when the tide goes out that we discover who has been swimming naked. And for good reason: one Australian industry is looking pretty ugly right now, its mismanagement and hubris expose­d by this current crisis. The naked swimmers are the trustees of the biggest industry superannuation funds and their directors.

This sector rode so high and mighty in the good times that it demanded that the corporate sector­, especially the banks, take money from their owners and give it to causes deemed worthy by these industry super funds.

In the midst of this crisis, while the banks are honourably bailing out their customers, these sanctimonious industry super funds demand­ that ordinary Aust­ralians rescue them and their members from the consequences of the sector’s arrogance.

The biggest question is how this group has been protected from scrutiny and sensible regul­ation for so long, and what can be done to end its immunity from the kind of critical examination the rest of the financial sector has alwa­ys faced.

Consider the causes of the arroganc­e and power of large industry­ super funds. They have been coddled by an industrial relation­s club that mandates that it be showered with never-ending torrents of new money. Of the 530 super funds listed in modern­ industrial awards, 96.6 per cent are industry super funds. That’s some gravy train.

With that guaranteed inflow of cash, it’s hardly surprising that industr­y super funds have grown fat and lazy about risk. They made two critical assumptions. First, that these vast inflows would alway­s exceed the outflows they had to pay pensioners and superannuants. And second, they could keep less of their assets in cash or liquid assets to meet redemp­tions.

In fact, they doubled down on this bet by plunging members’ money into illiquid assets — they filled their portfolios with infrastructure, real estate, private equity­ and other forms of long-term assets that can’t be easily and quickly sold to meet redemptions.

These assets can’t be easily valued­ either — experts will tell you that the valuation of illiquid assets is essentially guesswork. If you don’t have a deep and liquid market into which to sell an asset, you really have no idea what that asset would fetch if and when the time came to sell.

The fact the valuation of illiquid assets is open to huge ­variation was a terrific advantage in so many ways for industry ­insiders during the good times.

Industry super funds could use boomtime assumptions to prod­uce inflated valuations to prop up their performance relative to retai­l funds that don’t have the same guaranteed gravy train of inflows to invest in unlisted long-term asset classes.

That gives the industry funds one heck of a competitive edge and those inflated performance figures make for handsome ­bonuse­s for employees of industry funds and asset managers such as IFM.

This apparent outperformance by industry super funds seems to have anaesthetised the Australian Prudential Regulation Authority and many others. They have been able to resist sensible regulation by pointing to their “healthy” performance, and they have received exemptions from the kind of stock-standard rules that govern other trustees of public money.

The upshot is that many industry super funds have ridiculously large boards stuffed full of union or industry association nominees who obligingly pass their directors’ fees back to their nominating union (where, lo and behold, it might find its way to the ALP) or industry association.

But now the music has stopped. What these big industry funds have sold to members as “balanced” funds doesn’t look so balanced any more.

The current crisis has exposed illiquidity issues. Many of their members have lost their jobs or lost hours of work, drying up the guaranteed flow of new super­annuation contributions.

And the Morrison government has announced an emergency and temporary exemption allowing members in financial trouble to withdraw up to $10,000 a year from superannuation for each of the next two years.

The liquidity problem facing industry super funds has been compounded by the fact many members have been switching from what the industry funds call “balanced” options into cash options, requiring funds to liquid­ate long-term assets in the “balanced­” options.

This new environment has forced industry funds to slash questionable valuations of illiquid assets in their “balanced” funds to avoid redeeming member­s or members who switch out of balanced funds into cash options getting a windfall at the expense of members who remain in the “balanced” funds.

So the jig is up. When comparisons between industry super funds and retail funds are adjusted for risk — as they should be — industry super funds don’t look so healthy after all.

Now that the tide has gone out, we can see two issues with greater clarity. First, trustees of industry super funds haven’t done a stellar job of managing risk through the full economic cycle, through good times and bad.

There was too much compla­c­ency from more than two decades of uninterrupted economic growth. And maybe some naivety too: Australian industry funds are relatively new, emerging only in the 1980s after the introduction of compulsory superannuation payments.

Second, APRA stands condemned for letting industry super funds get away with second-rate governance and poor management of risk through the full econo­mic cycle.

Consider the hypocrisy of these super funds now wanting a bailout to deal with a liquidity problem of their own making during­ the boom times. For years, noisy industry funds have sanctimoniously demanded that company boards give up some profit to benefit society.

Now their mismanagement has exposed risks that their members­ may not have been told about. And the same industry funds want the Reserve Bank of Australia (aka the taxpayer) to bail out their members to protect their boards from claims of mismanagement. The industry funds no doubt will point to the help the government is giving the banks as a preceden­t for a bailout.

However, they should remember that the quid pro quo for banks getting government help is the banks meeting a stringent set of capital and liquidity rules, not to mention governance requirements such as a majority of independent directors. Do these funds want a similar regime instead of the namby-pamby one that applies­ now?

To date, and to its credit, the Morrison government has resisted their calls. Scott Morrison and Josh Frydenberg should stand even stronger, demanding APRA lift its game. How did the industry fund sector escape scrutiny of its dirty little secrets for so long?

Part of the reason is sheer thuggery. Industry Super ­Aust­ralia, the representative body for industry super funds, tried to silenc­e Andrew Bragg a few years ago when he was at the Business Council of Australia for exposing the unholy links between unions and industry fund. Bragg, now a senator, is leading the push to reform­ industry super.

The voting power, and buying power, of huge industry funds is another part of the answer. Their special pleading and scare tactics to ensure they can keep feasting on members’ funds by having the super guarantee charge contribution increased from 9.5 per cent to 12 per cent is the rest of the answer.

The pathetic plea for a taxpayer­-funded bailout from mismanaged industry super funds is compelling evidence that ­workers should be allowed to keep more, not less, of their hard-earned money rather than be forced to shovel more into industry funds and their mates.

Coronavirus: Perks and loopholes can’t endure as we run up debt

The Australian

30 March 2020

Adam Creighton

The young and poor have little say in society but they are incurring the bulk of the costs from the shutdown.

Whether it’s their incomes, their schooling or their ability to enjoy life, the sacrifices that students and so-called generations X and Y are making for the over-75s are very significant. Unlike the Spanish flu 90 years ago, it seems coronavirus is of little threat to the vast majority.

The $320bn the government and Reserve Bank have allocated so far to staunch the self-imposed economic carnage will have to be paid for. The plunge in tax revenues could well be as significant as the increase in outlays, leaving a gap that will test governments’ ability to borrow. There’s already $400 trillion of debt sloshing around the world.

And the bill will come long after those whom the younger generations have tried to protect have died. It’s reasonable to give some thought now to how the costs will be shared.

Policies that were thought fair and reasonable only months ago will start to look unfair, even absurd. The government will face stark choices about how to allocate the burden. Will it crush the productive sector of the economy with even more income tax?

Everyone will suffer in degrees during this crisis, but it’s only fair that those who are being saved, ­especially if they are financially equipped, pay a disproportionate burden of the cost.

(It’s true retirees have seen huge falls in their superannuation balances, but once a vaccine is found in a year or two, their accounts are likely to roar back to life.)

The Commonwealth Seniors Health Card, which is a benefit for retirees who are too well-off to quality for the Age Pension, should be immediately dumped.

How can we have people ­queuing up for soup in Sydney’s Martin Place (as was the case on Sunday night), while taxpayers fork out hundreds of millions of dollars a year to ensure cheap medicines and transport for those who can easily afford them anyway?

Scrapping the seniors and pensions tax offset, which provides a tax-free threshold of about $33,000 for over-65s and about $58,000 for couples, is also a no-brainer. Naturally, these two changes will cause some discomfort for those affected, but nothing compared with the chaos ­recently foisted on millions.

It’s obvious the superannuation guarantee should be suspended for the rest of the year, as I’ve argued repeatedly. The government is forgoing almost $20bn a year in tax by keeping it when it needs the revenue urgently.

Coronavirus: Economic bailouts

CountryBailout amountAdditions
USA$A3.2 trillion+ $A810bn for layoffs
Germany$A1.3 trillion+ $A89bn for layoffs
UK$A627bn+ 80% of salaries up to $2390/month for layoffs
Japan$A437bn+ cash payments and travel subsidies for layoffs
Australia$320bn+ workers and sole traders can access $10,000 tax free from superannuation, + $1500 per fortnight for workers
Canada$A121bn+ $2000/month for 4 months for layoffs
South Korea$A66bn
Norway$A15.2bn+ 100% of salary for 20 days / 80% if self-employed for layoffs
New Zealand$A11.5bn+ wages covered for people who need to self-isolate

As of March 31, 2020

Rather than taxing younger generations or workers to oblivion, it’s best to ­curtail generous arrangements, at least temporarily. These tax increase would have relatively little or no impact on disposable incomes; indeed, in the case of suspending the super guarantee, take-home pay would increase for millions of workers.

Other options might include a significant inheritance tax imposed, say, for the next 20 years to help defray the gargantuan tax burden that has just been put on everyone who is not going to die in that period.

Tax-free earnings on superannuation in the retirement phase should cease, at least temporarily. Currently, the earnings of superannuation funds for retirees face zero taxation.

Everyone else pays 15 per cent tax. It should be the same for everyone (as the Henry tax review recommended, by the way). Fifteen per cent is still a lot more generous than marginal income tax rates.

Cancelling the refundability of franking credits — for everyone, not just self-funded retirees — is another option.

To be sure, this would cause real pain, given some retirees quite reasonably have structured their affairs around them. But this is a crisis.

There are some economic bright sides for younger people. If a house price crash eventuates, those with jobs and to obtain credit will be more easily able to afford a home.

Whether house prices fall for long remains to be seen, though. In times of uncertainty, gold and property tend to be relatively attractive assets and immune from inflation.

And significant inflation may well be on the horizon. The borrowing lobby in society is much more politically powerful than the lending lobby. That is, the constituency that benefits from inflation (anyone with debt) is greater than those who wouldn’t.

What’s more, a niche group of economists reckons the central bank can give us all money directly — say, $10,000 each straight into our bank accounts — without undermining the economic system.

It’s known as Modern Monetary Theory and, understandably, it is becoming popular.

“There’s no such thing as a free lunch” was branded into me through years of economics study. It’s hard to imagine that we can just make new money out of thin air without serious long-term costs to the economic system, or certainly respect for it.

Why would anyone bother working or saving?

The fiscal situation is looking so dire a future government might well give MMT a try. It’s so ­seductive. They should be wary, though. A great inflation has unpredictable consequences, which history suggests can be terrible.

Nevertheless, if inflation does break out, the burden of the economic shutdown would play out very differently. It would remove the government and private debt burden, obviating the need for the various tax increases suggested above. Anyone with significant cash or deposit holdings would be wiped out.

For now, however, this is all academic.

As in an ordinary war, the young are doing the heavy lifting and face a massive tax burden. It could be a bit less burdensome if reasonable, temporary tax increases were imposed for the over-65s to help defray the costs.

It’s important to keep perspective. Roughly 165,000 people die in Australia each year; about 3000 from influenza.

Meanwhile, the economy is being destroyed — real and permanent damage — for uncertain benefit.

If we totally shut down the economy, as many are advocating, when does it reopen? And if it reopens and the virus emerges again, is it shut down once more?

It’s patently not possible to keep turning an economy on and off every few months without ­destroying civilisation.

Treasury to analyse if taking compulsory super guarantee to 12pc will hurt wages

The Australian

5 March 2020

Michael Roddan

The Morrison government has commissioned the Australian National University to analyse whether wages will be harmed if the scheduled increase in the superannuation guarantee to 12 per cent is allowed to go ahead.

Appearing before a Senate Estimates committee on Thursday, Robb Preston, the manager of Treasury’s retirement income policy division, revealed the government’s key economic department had contracted a number of independent economic researchers to provide analysis of the superannuation system for Scott Morrison’s retirement income review.

Mr Preston said the ANU’s tax and transfer policy institute, a well-respected policy research unit headed by Professor Robert Breunig, would be providing Treasury with modelling of the relationship between wages and the superannuation guarantee (SG).

The SG is legislated to rise from 9.5 to 12 per cent by 2024, but critics have warned that forcing workers to carve off more savings into nest eggs will cull wages growth, cost the federal budget billions in foregone revenue thanks to generous super tax concessions, and mainly benefit wealthy retirees.

Mr Preston said modelling of how changes in the superannuation guarantee affected rates of voluntary saving would be provided by Monash University, while Curtin University would be examining how the superannuation system affected pre-retirement behaviour.

Actuarial firm Rice Warner will also be providing Treasury with “long-run” modelling estimates of the retirement income system.READ MORE:Workers ‘pay for increases in super’|Stay calm: super giants|Higher super to ‘benefit the wealthiest retirees’

“The panel is very interested in understanding the trends ­affecting the retirement income system going forward,” Mr Preston said.

“We’re endeavouring to take a very comprehensive approach to our work,” he said.

“We’re planning to release a report to government by 30 June,” he said. Australian Taxation Office deputy commissioner James O’Halloran on Thursday said the government revenue agency disqualified some 300 self-managed superannuation fund trustees every year, noting there were a small number of funds engaged in “tax mischief”.

“In terms of criminality, there are instances perhaps where a SMSF might be carrying out the avoidance or minimisation of tax,” Mr O’Halloran told Estimates.

Labor, the ACTU and the $700bn industry fund sector have argued for the higher rate.

The independent Grattan Institute has come under criticism from the super sector after it argued raising the super guarantee to 12 per cent would cost the budget $2bn a year in tax concessions, hurt low-income workers and fail to drive a meaningful increase in retirement income or result in a lower age pension bill.

Confidential Treasury modelling of the super system, obtained under Freedom of Information laws and reported by The Australian last year, is “broadly consistent” with the Grattan Institute ’s findings.

According to the documents, Treasury also warned increasing the super guarantee rate would cost workers wage rises and would exacerbate the gender income gap, a position also recently argued by the Australian Council of Social Service.

The Age Pension is the biggest government expenditure at nearly $50bn a year . In 2002 it cost 2.9 per cent of GDP and is tipped to hit 4.6 per cent by 2042.

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