Tony French. 

The prospects for many retirees aren’t very optimistic these days, no thanks to the bearish stock market we’ve been experiencing. Many are close to retirement and wondering if their savings will be enough for them to retire on. They may be facing some unattractive options and possible lifestyle changes in the near future. To be in their shoes could mean contemplating about coming out of retirement and getting a job in this poor economy, or maybe executing a reverse mortgage if there’s enough equity in one’s home to draw from. What a way to be repaid for a lifetime of work?
And they reminisce over better days. What a way to be repaid for a lifetime of work?, Alex Proimos, flickr cc.

When is enough not enough? The answer is when we’re talking about superannuation, and how much money during a working lifetime we need to squirrel away to fund a comfortable or what some have loftily called a ‘dignified’ retirement. To our credit, however, that’s what all Australians expect.

Currently, the debate is that some of us have too much stashed in our (self-managed) super funds – more than what the rest think should keep us financially comfortable in retirement (cruises included). The ‘gilded’ few retirees may disagree, saying you can never have enough put away for a ‘rainy day’. But what is agreed by almost everyone is that being reliant on a Centrelink aged pension is not ‘dignified’; nor, as memorably put to me by one of my clients, does is enable us to avoid being “destined to eat dog food”.

So, work-based (compulsory) and more recently self-managed (voluntary) superannuation schemes have appeared such that the inevitability of an aged pension for many might be avoided, and if needed at all would be at most a ‘supplement’ to savings. Whether compulsory or voluntary, super schemes have the twin advantage for government of saving it money and reducing the number of people otherwise living on a safety-netted poverty pension, and, incidentally, dog food.

Finance, Tax Credits, flickr cc.

Overnight, almost a superannuation ‘industry’ has ballooned, and continues to inflate. So, think here of the Michelin Man, swelling steroidally with members’ contributions (rapidly reaching two trillion dollars). Peter Costello can take much of the credit for connecting the compressor, for there are now 550,000 self-managed super funds (SMSFs) holding almost $600 billion in assets for their one million members (representing by value 30% of  the super pool).

Some success story, one pumped by favourable tax treatment of contributions going in, concessionary tax treatment of those contributions while inside the fund, and, as if to explain the Michelin Man’s beaming smile, tax-free income when it emerges in retirement.

Paralleling this growth is a burgeoning ‘financial services’ industry (worth $21 billion a year according to the Grattan Institute), which has unashamedly been spruiking that each one of us needs at least $1 million in super for a dignified retirement. Too much, you think? Well, some financial advisers are now saying that sum is too low; it’s $2 million you need if you really want to avoid the pet-food aisles at your local supermarket.

How achievable is such a retirement savings goal? For 475 Australians, it’s a cakewalk, for according to the ATO, they have more than $10 million in their funds, while another 24,000 have over $2 million. Collectively, they probably do not need supermarkets. The remaining 500,000 or so members in SMSFs with a sub-million balance (average being $524,000) will presumably selectively patronise supermarkets.

The reality is that most workers collect $100,000 at retirement. For them, a million dollar baby, let alone a half-million dollar baby, are illusory. That’s because compulsory super is relatively recent, and the contributions inadequate at the current 9.5%, with the planned rise to 12% stalled by government and business.

A partial Centrelink age pension is the reality for most workers, but a full age pension is still short of the $58,500 necessary annually for a couple (assuming good health and home ownership) to live ‘comfortably’. On the other hand, the average annual income of the ‘fabulous 475’ was $1.5 million – tax free.

What, if anything, needs to be done to redress such inequality? Nothing, says Tony Abbott whose government ‘will not ever’ increase taxes or impose restrictions on superannuation accounts. Why? Because, it’s your money and not the government’s ‘piggybank’ to rob when required. This was in response to Labor foreshadowing reforming super tax concessions.

There is, though, bipartisan agreement that ‘pressure’ needs to be taken off the aged pension system. Some pressure-relieving suggestions, then:

  • The super contribution for all workers needs to be progressively lifted to 15% of  gross wages, and to include casual workers and contractors who, as otherwise low-paid workers, usually miss out on super contributions.
  • Encourage workers to make additional contributions to their superannuation, and make them tax deductible, like the contributions made by members of SMSFs. If uncertain about future investment performance, most Industry funds have a better investment record than other ‘retail’ funds. And in 2013 both funds did better than SMSFs.
  • The family home should be included in the age pension assets test. In my inner city neighbourhood many pensioners are living in poverty but in million dollar plus homes, and both they and their homes are deteriorating. So, equity in the home could be tapped by way of a reverse mortgage to government to fund renovations, ensure better living with an increased pension, all to be repaid following death or prior sale of the property.
  • Cap super accounts at $2 million, or alternatively tax payments in excess of $150,000 a year (a figure providing twice the average weekly earnings) and introduce a capital gains tax when the fund moves from ‘accumulation’ to ‘pension’ phase.
  • Discourage SMSFs from becoming estate planning devices which move assets tax free to descendants. Super is supposed to provide for our own retirement, the accumulated capital being spent by us and not preserved for future generations. But I know this is difficult for my generation. We baby boomers have been thrifty; we have ‘hoovered’ up assets, and we know we can’t spend it all before we die, so we want ‘deadhand’ control over what happens to our assets once we are a memory. We expect generations X and Y to dissipate our dough.

I recall a super saver couple with an $11 million super fund account (admittedly pre-GFC) telling me they were incapable of spending the $500,000 they earned tax-free annually, and they didn’t like the people their children had married.

  • Such ‘surplus’ super, could be directed into philanthropy. One of the members of a super fund could be a charity; and to encourage donations, why not make them tax deductible?
  • And never forget that ‘death is a cashing-out event’. Yes, upon death, your super fund balance should go to your spouse (and women who generally have inadequate super now constitute 47% of SMSF membership), so, non-dependents; adult children and everyone else should be ineligible, and if in receipt, then taxed at more than the (avoidable) 30% rate.

Attending a recent estate planning and superannuation conference, I did a quick survey of those around me, asking what if any changes they thought should be made to superannuation. Without exception, I was told super was too generously tax treated (particularly the tax-free pension), and that there should either be a tax on excessive pensions, or a cap on the amounts held in funds.

My respondents cheerfully admitted any rules curbing this would more than likely be circumvented (after all that was their job), and that, capital being mobile, they could flee the country. A common observation was that super moneys, instead of being predominately punted on the share market as at present, could be used to fund State infrastructure in the form of bonds.

They also pointed out that super money is locked away for a long time, and conditions of access to it limited by old(er) age or prior terminal illness. So, incentives to save are required if people are to be encouraged to help fund their future retirement incomes. And those incentives are essentially tax incentives.

There was unanimous support to end that glorious Australian rort of ‘blowing the wad’, whereby you conspicuously and speedily spend all your work super, then retire onto an aged pension (it’s my entitlement, you know). It should not be – sorry, mate; from now on it’s a work-based pension for you.

The recent National Reform Summit concluded that reform of tax and super is urgent, and that a comprehensive review of retirement income policy is necessary and must consider potential changes to super taxes, age pension rules, health, and housing. The conclusion received unanimous support.

Don’t expect changes any time soon, however.

I have to disclose that I have a SMSF – ‘Tony’s Good Time Fund’ (irony intended).

Tony French is a Melbourne lawyer, and a member of the SPC board.


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