Superannuation, the ultimate government cash cow?

Vixs · 13 February 2013

sydboy007 said:
I think the issue is focusing on super as begin the ONLY way to save for retirement.

The cost of the tax forgone on super is large. There is a cost with lower services / infrastructure spending or higher taxes.

By your argument once someone's super balance can pay them the equivalent of the aged pension for say 25 years then the system has done it's job?? Is it efficient to provide 20% of those contributing to super over 50% of the tax benefits?

You can save for retirement either in or out of super. If you aren't employing any gearing through investment loans, margin loans and geared property investment, you'd be better off for retirement savings purposes putting the money into super and having earnings taxed less.

I understand the cost of the tax foregone on the super is large, but the savings in future pension expenditure will also be large.

I don't know what the 'equivalent of the aged pension for 25 years' stuff is all about - the aged pension is not a comfortable retirement where one can enjoy themselves and help family with things like private tuition fees, or doting on grandchildren at Christmas. If that's all you want out of a self-funded pension that's fine, but I don't personally want to be eating sausages and mash and watching the 6 o'clock news for entertainment every night between leaving the workforce and dying. Money to live, not exist, would be nice.

As far as over 50% of the benefit going to 20% of the people? I don't think much about the tax system is fair at all - I think the rich already pay far too much to support the poor thanks to excessive middle class welfare that has done nothing but keep us one of the most expensive places in the world to live. I'm not that disappointed that the wealthy are getting a bigger percentage advantage, because it would still seem to me that these people pay more in taxes than a dozen people at the opposite end of the spectrum. What they earn is irrelevant, it's what they pay in taxes as a dollar amount that shouldn't be ignored.

sydboy007 · 13 February 2013

Vixs said:
I understand the cost of the tax foregone on the super is large, but the savings in future pension expenditure will also be large.

I don't know what the 'equivalent of the aged pension for 25 years' stuff is all about - the aged pension is not a comfortable retirement where one can enjoy themselves and help family with things like private tuition fees, or doting on grandchildren at Christmas. If that's all you want out of a self-funded pension that's fine, but I don't personally want to be eating sausages and mash and watching the 6 o'clock news for entertainment every night between leaving the workforce and dying. Money to live, not exist, would be nice.

As far as over 50% of the benefit going to 20% of the people? I don't think much about the tax system is fair at all - I think the rich already pay far too much to support the poor thanks to excessive middle class welfare that has done nothing but keep us one of the most expensive places in the world to live. I'm not that disappointed that the wealthy are getting a bigger percentage advantage, because it would still seem to me that these people pay more in taxes than a dozen people at the opposite end of the spectrum. What they earn is irrelevant, it's what they pay in taxes as a dollar amount that shouldn't be ignored.

So if someone has enough in super and other assets to not qualify for the pension, what purpose does it server to continue to provide a tax incentive to save more within super? Doesn't that just loose tax with little community wide benefit?

Seems you're arguing against a progressive tax system and would prefer a flat tax rate?

Totally agree with you that middle class welfare has been out of control for years. Don't see that changing much because neither side of politics sees any votes in cutting back the waste.

craft · 13 February 2013

medicowallet said:
These are the kinds of arguments left wingers tend to make.

How about providing the figures of how much net tax the bottom 36.9% of taxpayers paid and the what the top 20.4% paid.

It should NOT be everyone's right to freeload off high income earners all their life.

Heaven forbid a leader actually offering incentives for people to improve their income, as opposed to offering bribes to gain votes.

Your kind of logic, and unfortunately I guess this entitlement attitude is representative of the majority of low-medium income earners, is flawed and pathetic.

I wish people would make the kinds of sacrifices that high income earners make, as opposed to rewarding governments who flog the highest earners the most.

Sigh

MW

Seems like I must be a left wing capitalist – if there is such a thing.

Capitalism without intervention tends towards winner takes all outcomes. There may be problems with a progressive tax system and motivation at some levels but surely capitalist societies need a progressive tax scales for some sort of semblance of fairness and equity.

The excess money I make isn’t really a result of my efforts just an ability to read and play the system. I’m collecting economic rent that should be distributed to the community that creates it. I don’t want to take responsibility for the distribution of wealth beyond my needs and wants – I would far rather it be done through the taxation and transfer system.

No matter how low and flat the tax rate I could never make enough money to compensate for living in a massively unequitable community – the thought of having to live in a compound with bodyguards to avoid kidnap etc as they do in some countries is a very unpleasant thought.

So here either ends a call for balance or my left wing whinge, depending on your perspective.

McLovin · 13 February 2013

craft said:
No matter how low and flat the tax rate I could never make enough money to compensate for living in a massively unequitable community – the thought of having to live in a compound with bodyguards to avoid kidnap etc as they do in some countries is a very unpleasant thought.

That, my friend, is enlightened self-interest.

Julia · 13 February 2013

sydboy007 said:
i think what I've suggested removes a lot of the vagaries out of setting the end maximum balance. It shouldn't be too hard to determine what kind of balance would provide 23K pa for say 25 years with the ability to increase the payout by 5% each year.

I can't see just $23K p.a. being an acceptable level of income for most people in retirement.

Vixs said:
Super is the road to eliminating permanently and completely the government pension, or at least any further increases. This is an investment in the wealth of the country to allow the government to put a lid on one of its biggest expenses.

+1.

Some of the ideas focused on raiding the honeypot downright remove the incentive to save for your own retirement, and that is a huge issue for generations still 30 odd years from retirement

I agree about the need for considerable incentive as payoff for locking up contributions for so many years.
People are just not going to do it over the compulsory level. So we can have all the discussion we like about what might make sense in terms of government budgets, but if that discussion omits the human factor, it's a bit pointless.

So far, most discussion is just about providing an acceptable level of income in retirement, with a view to paying for daily cost of living, travel, entertainment, etc. I know none of us want to think about really old age where the odds are that we'll experience diminished physical or cognitive capacity and need help.
But, given the rising numbers of people who will be in that group, and governments' apparent lack of willingness to make adequate provision for care for such dependent folk, don't we also need to give some thought to having the capacity to pay for our own aged care?

I've volunteered in a few nursing homes over the years and they are very depressing places. There's an assumption that if a family member has to accept admission to such a facility, they will be properly cared for.
The reality is that such an expectation is optimistic.

So wouldn't most people much prefer to be able to afford to pay for someone to help them in their own home, perhaps receiving reduced payment in exchange for free accommodation?

Then there's the requirement for capital sums for maintenance, for gap payments where private insurance doesn't cover what can be hundreds of thousands in specialised medical care.

So all up, I suspect many have a less than realistic view of what level of capital and how much income it can generate will be needed if a person is going to have a sense of security in later years.

Or perhaps I'm just an obsessive pessimist.

DocK · 13 February 2013

Originally Posted by sydboy007

i think what I've suggested removes a lot of the vagaries out of setting the end maximum balance. It shouldn't be too hard to determine what kind of balance would provide 23K pa for say 25 years with the ability to increase the payout by 5% each year.

Julia said:
I can't see just $23K p.a. being an acceptable level of income for most people in retirement.

I agree about the need for considerable incentive as payoff for locking up contributions for so many years.
People are just not going to do it over the compulsory level. So we can have all the discussion we like about what might make sense in terms of government budgets, but if that discussion omits the human factor, it's a bit pointless.

So far, most discussion is just about providing an acceptable level of income in retirement, with a view to paying for daily cost of living, travel, entertainment, etc. I know none of us want to think about really old age where the odds are that we'll experience diminished physical or cognitive capacity and need help.
But, given the rising numbers of people who will be in that group, and governments' apparent lack of willingness to make adequate provision for care for such dependent folk, don't we also need to give some thought to having the capacity to pay for our own aged care?

I've volunteered in a few nursing homes over the years and they are very depressing places. There's an assumption that if a family member has to accept admission to such a facility, they will be properly cared for.
The reality is that such an expectation is optimistic.

So wouldn't most people much prefer to be able to afford to pay for someone to help them in their own home, perhaps receiving reduced payment in exchange for free accommodation?

Then there's the requirement for capital sums for maintenance, for gap payments where private insurance doesn't cover what can be hundreds of thousands in specialised medical care.

So all up, I suspect many have a less than realistic view of what level of capital and how much income it can generate will be needed if a person is going to have a sense of security in later years.

Or perhaps I'm just an obsessive pessimist.

I'm reading Sydboy's comments a little differently. My intepretation of his comment is that the tax breaks given to super should apply only to the portion that would replace a pension that the taxpayer would otherwise need to pay - hence his suggestion of $23K pa. There'd be nothing to prevent those who wish to contribute more doing so, but presumably Sydboy would prefer that they not receive preferential tax treatment for doing so. Likewise, nothing to stop people from saving for retirement outside of super. I don't think he's saying that $23k pa would make for a comfortable retirement, or even necessarily be adequate, but it would be equal to the amount that would otherwise be received via govt provided pension. I can follow his logic - most people would be sufficiently incentivised to put enough into super, or would accumulate enough via compulsory employer contributions, to provide a basic pension in retirement - therefore relieving the taxpayer of the burden of funding age pensions. Those that wish to ensure a higher level of security and comfort, and are able to put aside more, would be free to do so, but wouldn't receive any special tax treatment for doing so.

I can follow the logic - and part of me thinks it may indeed be a good thing for society as a whole if it went one step further and contributions and earnings within super were tax-free up to the level he's mentioned, so that most "working families" would find themselves self-funded to a very basic level. The problem of course is that the incentive to put away extra would be largely removed, so we could find ourselves with a nation of miserable retirees subsisting on a pittance and failing to contribute to the economy by spending the kid's inheritance, putting too much pressure on the public health system etc. I wonder how many would still save extra $$$s for their golden years if the tax advantages for doing so were removed??

DocK · 13 February 2013

Let's not forget also that the $23K pa that Sydboy is working with is the amount of pension that someone with absolutely no other income would receive - and is presumably what our gummint reckons is enough to live on. In reality I presume most retirees would have at least some interest or dividend income on top of that. I'm unsure how much one can earn before the pension cuts out entirely, but there'd be a good % of over 65's on a part-pension, rather than a full one wouldn't there?

I'd be interested in Sydboy's comments on how his vision for super would work in that scenario.

craft · 13 February 2013

One thought on these superannuation musings.

Previously system was intergenerational transfer – Now the system dictated by demographics is moving towards self funded.

People caught in this transformation period (ie current working generation) are effectively trying to fund two lots of pension systems – that’s a big ask especially if you want to do it without a fiscal imbalance for a while. In-between bashing the govt’s, some consideration of the magnitude of the task is probably appropriate.

sydboy007 · 13 February 2013

DocK said:
I'm reading Sydboy's comments a little differently. My intepretation of his comment is that the tax breaks given to super should apply only to the portion that would replace a pension that the taxpayer would otherwise need to pay - hence his suggestion of $23K pa.

Sums it up nicely. I will note that the 23K figure is around 8K more than the current pension.

Possible a fairer target would be an income equal to the minimum pay - $606 a week so 31500 pa.

DocK said:
Let's not forget also that the $23K pa that Sydboy is working with is the amount of pension that someone with absolutely no other income would receive - and is presumably what our gummint reckons is enough to live on. In reality I presume most retirees would have at least some interest or dividend income on top of that. I'm unsure how much one can earn before the pension cuts out entirely, but there'd be a good % of over 65's on a part-pension, rather than a full one wouldn't there?

I'd be interested in Sydboy's comments on how his vision for super would work in that scenario.

The current pension provides a tad over 17K a year. That's what YOU say is a reasonable amount for someone to live on in retirement. The Govt does what the people want, as so far I don't hear too many people asking for a large rise in pension payments.

My main argument is that the mor tax breaks to super, the higher income and corporate taxes have to be, or the lower the level of services we accept from the Govt. It's all a trade off.

craft said:
One thought on these superannuation musings.

Previously system was intergenerational transfer – Now the system dictated by demographics is moving towards self funded.

People caught in this transformation period (ie current working generation) are effectively trying to fund two lots of pension systems – that’s a big ask especially if you want to do it without a fiscal imbalance for a while. In-between bashing the govt’s, some consideration of the magnitude of the task is probably appropriate.

That's the other complex issue. I would argue Gen X and early Gen Y are in the difficult position of supporting the old system, while fully funding the new system. The problem wouldn't be so bad if super had been introduced a couple of decades earlier.

Another major flaw with super is that there's nothing to stop a person blowing their money then getting a pension. Shouldn't there be a limit to how much can taken as a lump sum? Shouldn't the over 60 be forced to set aside a particular amount that will limit their burden to tax payers?

sydboy007 · 13 February 2013

Julia said:
So far, most discussion is just about providing an acceptable level of income in retirement, with a view to paying for daily cost of living, travel, entertainment, etc. I know none of us want to think about really old age where the odds are that we'll experience diminished physical or cognitive capacity and need help.
But, given the rising numbers of people who will be in that group, and governments' apparent lack of willingness to make adequate provision for care for such dependent folk, don't we also need to give some thought to having the capacity to pay for our own aged care?

Good point. A lot of boomers have a primary residence. Should they have to use that to help with their bonds? What if a person has no other assets - quite a few elderly women are in that situation.

They are tricky questions that the politicians wont touch because it's too easy for the other side to scream about the elderly being kicked out of their homes by a cruel and callous Govt.

The sad fact is a lot of nursing homes are depressing places. My aunt used to work in one of the better ones for a good few years. She liked it, but found it emotionally draining as she would become attached to quite a few of the residents and was always mourning the passing away of someone.

At what point do we have to stop looking to the Govt for help and start to use the assets we build up over our lives to provide for a comfortable retirement? If you have a million dollar property is it unreasonable for taxpayers to expect you to use some of that value for a bond to get into an aged care facility?

Maybe as a society we need to agree on a minimum income that cuts out a level of luxuries - overseas travel is one - but still provides enough money to eat out and buy some gifts for the grandchildren without being overly generous. Once you get to that level then to have an income higher than this you need to operate in the non super world and pay normal tax rates.

I think this debate would be easier if the Govt would provide a summary each year of how much tax benefit we get from super. It wouldn't be hard with the ATO knowing the TFN assigned to each super account. If a person could see on their last statement they had received $8000 in tax breaks on their super it's easier to understand the huge $$$ the super system is requiring.

sptrawler · 13 February 2013

The only problem with this nice group hug, scenario where everyone gets to save enough to support their own pension.
But it should only provide for an income similar to the aged pension (I have noted Sydboy has softened up a bit on that) is that it doesn't take inflation into consideration.
When I started thinking about how much I would need to squirrel away, I was about 23years old, then I thought $600k would be magic, now I think it is nearer $2m.
When $600k was enough, a house and land package cost $30,000 in Rockingham about 30k's out of Perth. Now 36 years later a similar house and land package costs $400k.

Bringing this back on topic, it is a nice idea to think you can retire, with say $800k and be self funded.

However it wouldn't be many years before all those people are on a pension, even if you limit their access.

This will happen because the age pension will be raised, as inflation makes it less adequate.
Then the access to the $800k has to be increased to maintain the relativity.

Unless the government takes over superannuation completely, it will be an abysmal failure, most people will be on a government pension in no time.lol

Vixs · 13 February 2013

sydboy007 said:
Sums it up nicely. I will note that the 23K figure is around 8K more than the current pension.

Possible a fairer target would be an income equal to the minimum pay - $606 a week so 31500 pa.

Think about what you're suggesting - that all retirees should get the same amount as people working for minimum wage, just for being old. That is insane! There is no way that is equitable, necessary or even affordable.

sydboy007 said:
Another major flaw with super is that there's nothing to stop a person blowing their money then getting a pension. Shouldn't there be a limit to how much can taken as a lump sum? Shouldn't the over 60 be forced to set aside a particular amount that will limit their burden to tax payers?

That's a change that many are expecting to happen in the near future. I personally don't like it, and I don't feel the tax breaks are a big enough trade off to having that little control of my own funds, especially as they continue to shave away the tax benefits.

The current generation retiring without sufficient super to self fund will no doubt continue to take a lump sum and pay off debt - after all, it might be the best return they get on their money!

I think that this will resolve itself in the future once retiree average super balances are higher than outstanding liabilities. It also stands to reason for me that the pension will get progressively less generous as expected average balances increase. The people that blow their money because they have too much debt left on their bmw's and mcmansions will need to live off a pension that is lower than even today's. That should be disincentive enough, as long as they get some advice and can comprehend what that means.

sptrawler · 13 February 2013

sydboy007 said:
At what point do we have to stop looking to the Govt for help and start to use the assets we build up over our lives to provide for a comfortable retirement? If you have a million dollar property is it unreasonable for taxpayers to expect you to use some of that value for a bond to get into an aged care facility?
.

So how do you safeguard against that person, with the $1m property from selling it and spending it on cruises, for example.

Possibly one way would to be take a leger of a persons assetts at retirement age?
I mean if they have sold their house to enjoy the fruits of their labour are you saying they should be penalised in some way?

FxTrader · 13 February 2013

sptrawler said:
So how do you safeguard against that person, with the $1m property from selling it and spending it on cruises, for example.

Possibly one way would to be take a leger of a persons assetts at retirement age?
I mean if they have sold their house to enjoy the fruits of their labour are you saying they should be penalised in some way?

Probably more to the point is why sell the million dollar+ property at all since it doesn't count in the assets test for pension eligibility. I suspect that many boomers will weigh this all up with a financial adviser and decide to keep that expensive primary residence, collect a pension and use a reverse mortgage if necessary to tap into the equity. That makes more sense to me than a world cruise, blow the cash and then live in a rented flat on a pension check.

sptrawler · 13 February 2013

FxTrader said:
Probably more to the point is why sell the million dollar+ property at all since it doesn't count in the assets test for pension eligibility. I suspect that many boomers will weigh this all up with a financial adviser and decide to keep that expensive primary residence, collect a pension and use a reverse mortgage if necessary to tap into the equity. That makes more sense to me than a world cruise, blow the cash and then live in a rented flat on a pension check.

The point is Sydboy would have it count in an assett test, that's what I was responding to.

I personaly think, keeping the expensive primary residence is a recipe for disaster. Only my opinion, but I don't see the family home being exempt from assett valuation for much longer.
It will be difficult to sit on the side of Sydney harbour, sipping chardonay and say "I'm struggling to make ends meet".IMO

FxTrader · 13 February 2013

sptrawler said:
The point is Sydboy would have it count in an asset test, that's what I was responding to.

Brave indeed would be any political party that tries to add the primary residence to the pension assets test. It's political suicide and will be only more so as the population ages.

I personaly think, keeping the expensive primary residence is a recipe for disaster. Only my opinion, but I don't see the family home being exempt from assett valuation for much longer.
It will be difficult to sit on the side of Sydney harbour, sipping chardonay and say "I'm struggling to make ends meet".IMO

No one will say this, they will simply expect the check to show up in the mail indexed for inflation and vote for the party that adovocates this policy. I seriously doubt the current generation of retirees have anything to fear in relation to the primary residence exemption.

Julia · 13 February 2013

Vixs said:
Why are you so readily promoting more tax, more restrictions, more limitations and less freedom, based on individual perceptions and guesstimates about what is enough (which is entirely individual - I've got friends who have managed to support spouses completely and only earn $50k p.a., and I've got other friends who can't make ends meet with $150k)?

The eternal question. Some people manage money well and others don't.
My neighbours are a couple in their mid 30's, one child. She took a year off to have the child and now works half a week as a teacher. He is an electrician with Ergon Energy. So neither in any sort of massively high income bracket.

Next month they will move into their newly built house, completely debt free, value around $900K.
They will rent out the present house, also debt free, adding to the income from an IP, also debt free, purchased about 7 years ago. And they have just bought another IP, completely negatively geared.

They received no help from either set of parents.

How is that they have achieved so much on moderate incomes, while others are unable to even get up a deposit for the first PPOR?

Julia · 13 February 2013

DocK said:
I'm reading Sydboy's comments a little differently. My intepretation of his comment is that the tax breaks given to super should apply only to the portion that would replace a pension that the taxpayer would otherwise need to pay - hence his suggestion of $23K pa. There'd be nothing to prevent those who wish to contribute more doing so, but presumably Sydboy would prefer that they not receive preferential tax treatment for doing so. Likewise, nothing to stop people from saving for retirement outside of super. I don't think he's saying that $23k pa would make for a comfortable retirement, or even necessarily be adequate, but it would be equal to the amount that would otherwise be received via govt provided pension. I can follow his logic - most people would be sufficiently incentivised to put enough into super, or would accumulate enough via compulsory employer contributions, to provide a basic pension in retirement - therefore relieving the taxpayer of the burden of funding age pensions. Those that wish to ensure a higher level of security and comfort, and are able to put aside more, would be free to do so, but wouldn't receive any special tax treatment for doing so.

Yes, understood. I'm simply trying to broaden the discussion somewhat.

I can follow the logic - and part of me thinks it may indeed be a good thing for society as a whole if it went one step further and contributions and earnings within super were tax-free up to the level he's mentioned, so that most "working families" would find themselves self-funded to a very basic level. The problem of course is that the incentive to put away extra would be largely removed, so we could find ourselves with a nation of miserable retirees subsisting on a pittance and failing to contribute to the economy by spending the kid's inheritance, putting too much pressure on the public health system etc.

That is the point I was trying to make, in addition of course, to providing for the personal security and comfort of the retiree.

I wonder how many would still save extra $$$s for their golden years if the tax advantages for doing so were removed??

Given the minimal thought provided to these "golden years" by most people, along with simple lack of financial capacity to put away additional savings, probably very few.

There still seems to be a wide spread sense that "I've paid taxes all my life so as a result I expect a government funded age pension which will keep me in complete comfort". Along with, of course, first class medical treatment as and when required. There is imo going to have to be a considerable adjustment of expectation of entitlements as the proportion of retirees increases, and it will come down to the need to provide for yourself if you want a reasonable standard of living and an equally reasonable standard of health care.

sptrawler · 13 February 2013

FxTrader said:
No one will say this, they will simply expect the check to show up in the mail indexed for inflation and vote for the party that adovocates this policy. I seriously doubt the current generation of retirees have anything to fear in relation to the primary residence exemption.

The current generation don't have a problem, they either have nothing, or most of their super has been put in after tax.
The next generation are the ones who have all their contributions subsidised, they are the ones with the real problem.
I think a lot of what Sydboy wishes for will happen, just when he moves into retirement.
By that time the system will have been in place long enough for the outcomes to start reflecting the the inputs.

FxTrader · 13 February 2013

Julia said:
The eternal question. Some people manage money well and others don't.
My neighbours are a couple in their mid 30's, one child. She took a year off to have the child and now works half a week as a teacher. He is an electrician with Ergon Energy. So neither in any sort of massively high income bracket.

Next month they will move into their newly built house, completely debt free, value around $900K.
They will rent out the present house, also debt free, adding to the income from an IP, also debt free, purchased about 7 years ago. And they have just bought another IP, completely negatively geared.

They received no help from either set of parents.

How is that they have achieved so much on moderate incomes, while others are unable to even get up a deposit for the first PPOR?

An interesting example. Yes the unsustainable property price boom has made many property investors wealthy in Aus. The question is though is this wealth formula still applicable today, is it sustainable and how many could apply it successfully. Not nearly enough I suspect. Your neighbors have invested wisely and rode the boom, however I have friends in the US who went broke trying to follow the real estate to riches path.

For every success story there is another story of someone who followed a similar path and did not hit the mother load. In most cases, fortuitous market timing does not make one a wise investor just a fortunate one who chose to invest in the right asset class at the right time. The real skill is discerning trends and investing in them. Property price growth on the back of easy credit and ever higher household debt levels was one such trend that has arguably run its course.

Superannuation, the ultimate government cash cow?

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