17 December 2016
My biggest fear for 2017 is that more and more people are going to believe “there’s no point in saving for your retirement any more”. It’s a fallacy, of course, but that won’t stop the argument taking off.
And it’s stoked by the terrible mistakes the government and Treasury have made in the details of reforms coming through next year in pensions and superannuation.
In essence, the incentive to save and invest has been removed for too many people; the system has actually been attacked from the inside.
In turn, that means two things:
- From a national perspective, the super system will deteriorate as more pressure rises on public
- From an individual perspective, the prospect of being completely independent financially — surely the healthiest goal — has just got
Along with the growing perception that super is a game that’s finished, there is a parallel notion that running your own super, in a self-managed superannuation fund, is now too much trouble, and it’s not difficult to see why.
There is clear evidence there will be multiple situations where someone who has saved less will do better — in terms of annual income (private and government pension) — under the new system. This is a huge error; in fact, it is inexcusable.
Treasury did not sufficiently model these changes.
Just look at this example we recently published from Tony Negline, a superannuation specialist:
Take a couple who owns their own home. They are both over 65, with no mortgage, $50,000 worth of household assets and substantial superannuation investments. On these superannuation assets, Negline assumed a healthy return on investment of 5 per cent.
Assuming one couple has $500,000 in assets and another has $700,000 in assets, the way the numbers work it is the couple with $500,000 who will do better under the new system.
The $500,000 couple will receive $25,000 from their super investments and a part pension of $20,372 — total annual income $45,372.
The $700,000 couple will receive $35,000 from their superannuation investments and a part pension of $5,132 — total income $40,132.
Let’s just spell that out — the couple with $200,000 less saved in retirement will have an annual income that is $5000 better under the new rules.
It will not take long for word of these examples to spread through the community, not to mention the political constituencies of Australia.
Now, don’t for a moment think this is one example concocted to justify criticism of a reform package that was seen by many as a political win for the Coalition.
There are plenty of examples. On pensions, The Australian columnist Jack the Insider published an entirely separate example with a much reduced estimated rate of return of 3.5 per cent (rather than Negline’s 5 per cent) on superannuation investments. He found a homeowning retiree with $600,000 in assets (excluding their home) who now has no access to a pension payment will earn an estimated $21,000 a year.
In contrast, a homeowning retiree with $300,000 in assets (excluding their family home) and a part pension of $18,904.60 will receive $29,404 annually.
Let’s spell that one out, too: the person with half the investment assets of another — $300,000 against $600,000 — gets $8000 more a year from the saving and retirement system.
The only way forward
In 2017 the worst scenario here is that tens of thousands of older Australians simply splash their money on anything — boats, holidays — to get their assets down to a level that they will do better under the system.
The system in turns breaks under the strain and the government responds by further measures that make the system less attractive in an ever deteriorating cycle.
Unless the Turnbull government goes back to the drawing board and makes serious amendments to the reforms, the flaws in the system will feed criticism and despondency.
There is a real risk now the line “It’s not worth saving for your retirement” moves from the superannuation chat forums to the main street.
What’s an investor to do?
The key is surely to believe in your own ability to build self-dependency whatever the system throws up.
Yes, certain people will have a better annual income from playing the system to perfection, but if you want financial independence you are not going to get it trying to save less or invest less successfully.
Moreover, the kernel of the argument against saving for super is based on the notion that you live off your super earnings — which you can choose to do but you don’t have to.
What’s more, if you want to have super that you control, that’s not just for living but for any expense or opportunity that looms for you or your family, then super is still the best way for a huge amount of people.
If you want your future decided by some Treasury official — who doubtless is on a government defined pension — give up trying.