Jack the Insider: no point in saving for your retirement any more

The Australian

14 December 2016

Jack the Insider

That great sector of the Australian community, retirees, is being set upon again by government. The issue has passed barely noticed in the media but the political consequences for the Turnbull Government are sure to be profound.

On January 1, 2017, changes to the aged care assets test will see more than 100,000 Australians lose their part pension payments in entirety.

More than 300,000 will have their pension payments cut.

There is a perception many retirees are rolling in money. They have assets many could only dream of. Perhaps that’s why the media has shunned the issue.

Let me ask the question, who among us could lose 20 per cent of our household incomes and come away unscathed?

It gets worse. With the loss of the pension, the government will also cancel retirees’ pensioner concession cards which allow them to enjoy discounts on council rates, car rego, energy bills and public transport tickets. Back of the envelope, that’s three grand per annum retirees will have to find.

Those in the gun on New Year’s Day 2017 are fretting. They have worked and paid their taxes all their lives. They are in their 70s and 80s. They have no other income or indeed any prospect of it other than their investment returns. This group of nearly half a million Australians are facing grave financial uncertainty with its contingent anxieties and worry.

Under the new arbitrarily determined figures, the government will start reducing pensions for retirees with assets, excluding the family home above

$250,000 for a single homeowner (up from $209,000); $375,000 for a homeowner couple (up from $296,500); $450,000 for a single non- homeowner (up from $360,500) and $575,000 for a non-homeowner couple (up from $448,000).

The cut off for any pension payment is now $542,500 for a single homeowner (down from $793,750); $816,000 for a homeowner couple (down from $1,178,500); $742,500 for a single non-home owner (down from $945,250) and $1,016,000 for a non-homeowner couple (down from ($1,178,500).

Many would view these figures and wonder why these retirees should receive any assistance from the government. It’s important to remember retirees at this sort of level are often asset rich but cash poor, living off modest returns from their investments. With interest rates at all times lows, they may as well keep their cash in a shoebox under the bed. With equities markets smacked by two global economic crises over the last twenty years, anyone who can grow their investments by more than the rate of inflation deserves a medal.

In practical terms those who have saved more for their retirements and managed their investments well are being punished. Assuming a 3.50 per cent rate of return on investment, a home owning retiree with $600,000 in assets excluding his or her home who now has no access to a pension payment stands to earn $21,000 a year, while a home owning retiree with $300,000 in assets excluding his or her home and a part pension of $18,904.60 will receive $29,404.60 annually. Go figure.

The government says these savings will reduce the budget deficit by $2.4 billion over the next four years. I think any sensible person would agree budget repair needs to be addressed but there is an in-built retrospectivity at work here. Retirees who used the existing limits to manage their income have found the goalposts have been moved.

Now that the rates and cut off points have been recalibrated, what does the government expect will happen? Clearly, many retirees will sell down their portfolios, cash out their super or spend it down. Some will sell their dwellings and tree or sea change it. Not that the cost of the family home comes into the calculations. It is only whether the retiree owns a home or not. Those with homes in the inner cities will have to contemplate a shift to places where crucial services like health care are scarce.

For the next generation of retirees, there is an active disincentive to save. There is a form of social engineering going on here. The government is telling the punters, don’t save or at least don’t save very much for your retirement or we will be into you.

This is the sort of policy we might expect to see in post-GFC Greece or Italy but here it is in Australia. The Turnbull government has fiddled with a retirement system to a point where they have actually provided a disincentive for people to save for their retirements.

I spoke to one retiree who has assets just below $600,000. He owns his own home. As of January 1 next year, he will lose his part pension and is staring at a loss of one fifth of his household income. I know the man well and I would not describe him as either rich or a rorter. He had saved sensibly for his retirement.

“I’ve voted Liberal all my life. What am I supposed to do now, vote Green?”

“Let’s not say anything we can’t take back, mate,” I joked. I had to tell him the Greens voted for the changes with the government while Labor opposed them.

“Well, my vote would have to go sideways.” he said.

There, in essence, is the problem with our political system and it signals the death of pluralism in this country. The culprits, the major parties, are the architects of their own demise but this issue is one the Coalition will carry like fetid baggage for years to come.

If a dyed-in-the-wool Liberal voter, who has voted Liberal all the way from Menzies to Turnbull is jumping off, I’d suggest the Coalition are in deeper trouble than they realise.