Four players in the super class war

Former ACTU boss and Reserve Bank director, Bill Kelty, is right, a vicious class warfare has broken out in Australian superannuation. He is also right that it must be stopped. 

So today I want to go further than yesterday (The ugly economics of Swan's super slug, March 27) and classify superannuation beneficiaries into “classes”. 

I have isolated four major classes — the Rich Czars, the Hawke-Keating jewels, the Pretenders and the Battlers. There is also a small group I call the big silent savers who have more than $2 million to $3 million in superannuation because in the past they took advantage of the clear rules, and did not blow their savings in the share market. Most paid a lot of tax to get the money into funds.

The Rich Czars

These are the long serving senior public servants, politicians and university hierarchies who in past years awarded themselves and their spouses generous lifetime inflation-indexed pensions that are today worth truly enormous sums. They contributed relatively small amounts of their own money. Junior public servants and new public servants don’t receive the same generosity but past politicians and public servants have promised themselves such staggering amounts that there is a $210 billion Commonwealth-State shortfall. The Rich Czars have engaged in the biggest tax rort in the country (Canberra's great superannuation rort, October 1 2012). The Rich Czars have not read history and do not want others to challenge their status and so played a big role in the early Howard years in convincing the government to abandon completing the Keating dream of lifting superannuation contributions so that more people got out of the lower classes. I hope this is wrong but it would seems that the Rich Czars may now realise that unless they attack those classes below them there will not be enough money to cover the $210 billion plus short fall in funding their superannuation tax rorts.

However, I must emphasise that I can’t believe that the the Rich Czars deliberately misled when they justified a recent attack on the lower classes using figures that were mathematically incorrect, bloated the anticipated returns to make the mathematically incorrect figures even worse and forgot to include the government pension savings. The totally incorrect figures were simply an example of public servant and ministerial mistakes which have become prevalent in so many areas. Of course they were not motivated by Kelty’s class warfare (How Treasury mucked up its super sums, February 8).

The Hawke-Keating Jewels

These are people that saved hard so that unlike all other classes they would not be a burden on the public purse. To be in this class you need at least $800,000 but, as I explained yesterday, $800,000 is not enough. If we assume a 5 per cent return, $800,000 will produce an income of only $40,000 a year. Given there is no inflation protection the family will have to dip into their capital unless they die early or keep working. But it’s a good start. If you have $1.5 million to $2 million, your pension earnings on the basis of a 5 per cent return are between $75,000 and $100,000. As members of this class get older they will need to use their capital but they have secured themselves against using the government pension. They are not rich. But the Czars who are almost entirely dependent on the public purse for their wealth, classify the Hawke Keating Jewels as rich as part of the Kelty’s class warfare.

The Pretenders

These are people with between $500,000 and $750,000. They think that they can avoid being dependent on government pensions but unless they keep working they will not make it because the income from the money they have is not sufficient and will they will have to use their capital.

The Battlers

Unfortunately they are in the majority. Their ranks would now be much less but the Rich Czars stopped the Howard government from implementing the Keating contribution dream. More recently the Rich Czars put severe contribution clamps on superannuation. Unless they have other assets outside the family home (and many do) the battlers arrange with financial planners to organise their affairs to maximise the amount they gain from the government pension. Holidays, gifts to children etc. are part of the game.

Finally thanks to the many, many contributors for the magnificent and enriching conversation that stemmed from yesterday’s commentary (The ugly economics of Swan's super slug, March 27)

I am going to conclude with repeating just one conversation commentary because shows the situation among the Hawke-Keating Jewels whom the Czars class as “ rich”.

Brent Walker, writes:

I am 69. I have in excess of $2m in my super fund for my wife and I. I contributed much of the money to super as salary sacrifice when there was a super surcharge tax of 15% to pay off the debt left by the Keating government. So much of it was taxed at 30% on the way in. Now this government want to tax me again and for the same reason — that is because Labor governments are incompetent managers of money.
As to the arguments about whether you need $2m or so to retire. People arguing that you don't need that much forget that your pension theoretically should be indexed at AWE (like the old age pension) and that it has to last much longer than the average life expectancy at retirement. This is because the average life expectancy at retirement is calculated on current mortality rates not future mortality rates. Currently mortality rates between 65 and 85 are decreasing around 3% a year (even 4% in some ages for males). So this must be taken into account. Also because the longevity risk is borne by the retiree one needs to plan on having enough money to last many years past the average age at death. I currently advise healthy people to determine their retirement pension on the basis that they will live to 100. Currently someone aged 65 who is fit and well has about a 20 to 30 per cent chance of making 100. When you include these factors $2 million does not buy nearly as much pension as you would think.