Living today, paying tomorrow: A super dilemma

Many Australians are using their superannuation to repay their debts ... compulsory annuities may be warranted.

PORTFOLIO POINT: Have Australians “outsmarted” superannuation? Here’s a compelling argument for compulsory annuities.

What happens when the best of intentions from our elected representatives is beaten by the people’s own mathematical ingenuity?

What if someone forces you to save money against your will, but given the knowledge that those savings will eventually become yours, you create a counter-balance of spending on the other side (the “now” side) of the ledger?

For example, if you know you are going to receive $200,000 at a future date, might you lift your spending, or increase your debt, by $200,000, in the secure knowledge that the increased spending, or debt, will be covered?

Surely not. Well, I don’t think Eureka readers would.

But it would appear that a good portion of Australian workers are doing exactly that. And it might just have made a 20-year joke of Australia’s compulsory superannuation system.

A new report by CPA Australia suggests exactly that – Australians are spending their superannuation before they receive it. All superannuation has done, the CPA’s report claims, is pull forward spending to now and even yesterday, as the member receives twice yearly statements letting them know how much they’ll be receiving from their super fund when they hit preservation age. And that’s when things bought on the never-never can be paid for.

The “now” spending is, generally, funded by debt.

“I know my super will be worth $250,000 when I retire in 10 years, so that’s $250,000 worth of debt that I can run up between now and then. When I retire, I grab my super and repay the debt.”

If Australians are, consciously or sub-consciously, doing this, then CPA Australia is right. And the only real solution is harsh, but something that is probably inevitable in the future in any case.

And that is compulsory income streams or annuities.

This is a topic that I’ve covered in this column (Annuities big comeback?) that has got to be appealing to governments. I’d put money on a government in the future enshrining it in law.

While I’m always wary of “lies, damned lies and statistics”, let me take you through some of what CPA Australia has unearthed.

The report’s author, Professor Simon Kelly, says that Australia’s superannuation guarantee (SG) system has failed to deliver on its major objectives. The SG was introduced in 1992 as a way of forcing national savings. But, in the eight years between 2002 and 2010, any increases in the average superannuation balance have been devoured by the increase in average debt levels of those approaching retirement.

The biggest proof of this, according to Kelly, comes from these simple statistics he compiled from the HILDA (Household Income and Labour Dynamics in Australia) surveys.

“In 2010, household debt of those aged 60-69 and not retired was $119,000, while in retired households, it was $50,000. Non-superannuation financial asset levels were approximately the same, but superannuation was considerably lower for retirement households ($238,000 for retired and $304,000 for non-retired).”

It’s the same age group – just that some are retired and some aren’t. In one, debt is $69,000 higher and in the other, superannuation is $66,000 higher. It seems pretty much a straight super-for-equity swap.

That is, reach preservation age, grab your super, pay down your debt.

That’s where the problem lies and where Kelly makes his strongest point. Why pay interest on debt, when you’ve got assets that could pay it down and make a guaranteed after-tax return?

It wouldn’t be much of a stretch from that for someone in their 50s to look at their growing super fund balance – though the financial years of FY2008 and FY2009 won’t have been great examples – and realise that money is on its way to fruition.

Even subconsciously, a portion of people must be saying to themselves when they see that $200,000 balance, “well, we can afford to update the car, or let the credit card balance run in the red for a little longer”. Kelly also believes they’re helping their kids into their first homes.

If that is what’s happening, then it’s a danger sign to Treasury. And, by extension, not just this government, given what is being considered now (see columns The big super raid is on the way and SMSFs in the firing line), but future governments.

During the period from 2002-2010, the average superannuation balance for 50-64 year olds grew by 48%. Non-super assets grew by 3% and property assets grew by 58%.

However, property debt grew by 123% and other debt by 43%.

In the eight years to 2010, other property loans had more than doubled and credit card debt had increased by 70%.

Superannuation is not designed to fund consumption now. In fact, it can’t. It’s the opposite of that. It’s designed to fund consumption – more importantly, to raise income above the meagre government age pension – in the future.

But there is nothing stopping people from spending in their final years in the workforce, then receiving the super payout and repaying the debt run up in the last five to 15 years of their working lives.

And while banks aren’t allowed to use superannuation as security, you show me a bank loan application that doesn’t ask for the applicant’s super balance as a list of assets.

If you are over 65, you can withdraw your superannuation, in full, when you want. And it will be tax free.

In fact, given that there are no restrictions on getting access to your super post-65, it’s almost encouraged.

As Alex O’Malley, the chief executive of CPA Australia, says in the foreword to the report: “Serious consideration must be given to limiting the amount of superannuation that can be taken as a lump sum and encouraging income streams in retirement. Given the compulsory nature of the system, it is not unreasonable to consider the use of compulsory income streams in retirement.”

There is ongoing talk about making super-backed annuities a compulsory part of superannuation.

For example, stopping someone with a $250,000 super sum from taking more than, say, half of that as a lump sum, with the remainder being turned into an income stream. Or any percentage the government of the day feels is appropriate.

If that was done, would more people look at their likely super balance at retirement and decide to spend less of it now?

(I would even go one step further and ask if the following is possible. If the findings of this report are reliable, could the “spend now” mentality of the soon-to-be retired potentially be a contributory figure in Australia’s ability to avoid the recent global economic slowdown?)

Annuities have waned in popularity in recent years. There simply aren’t enough providers around. As a result, the cost of annuities tends to be very high, from the point of view of a percentage-based fee (which they inevitably are).

Compulsory annuities would change that, as more providers entered the market.

But take yourself back to the euphoria of the then Labor government of the late 80s and early 90s, who dreamed up compulsory super, and ask yourself ... did their grand plans for helping Australians self-fund their retirement consider this?

Most likely not.

The information contained in this column should be treated as general advice only. It has not taken anyone’s specific circumstances into account. If you are considering a strategy such as those mentioned here, you are strongly advised to consult your adviser/s, as some of the strategies used in these columns are extremely complex and require high-level technical compliance.

Bruce Brammall is director of Castellan Financial Consulting and the author of Debt Man Walking.

Graph for Living today, paying tomorrow: A super dilemma

  • A recent decision by the Australian Taxation Office could see some self-managed super fund members hit with excess contributions because of a commuted “complying lifetime pension”. The interpretive decision ATO ID 2012/84 found that an SMSF member will have concessional contributions under certain circumstances where a pension reserve account is maintained. The full decision can be read here, as it is quite long and detailed. SMSF Academy head Aaron Dunn explains: “In particular, the Commissioner distinguishes between the amount counting as a concessional contribution where the pension reserves are used to commence an account based pension, as opposed to the amounts not counting where the pension reserve is used to commence a market linked pension.”
  • Self-managed super is “under attack”, according to the Australian SMSF Members Association. In an email to members, Chairman Grant Abbott wrote: “Everywhere you look SMSFs are under attack.  From the ACTU calling for SMSFs and no other super fund to pay tax on unrealised gains each year to the government introducing laws to let our NZ friends to transfer their super into any Australian super fund except a SMSF … The push is on.” ASMA is conducting a survey on super issues, planning an “SMSF Members Roadshow” in December, and launching a drive for new members (membership is free) in the “next few turbulent months leading up to the 2013 budget”.
  • Investors should seek expert advice on whether deceased estates can distribute or gift assets to SMSFs, or else risk legal problems, according to DBA Lawyers. The self-managed super specialists considered the question of gifts, by way of estate, provided the executor was not a relative. DBA Lawyers suggest “the ATO would treat a gift from a deceased person’s estate to an SMSF subject to the usual contribution caps and any excess would be subject to excess contributions tax” and also that “the gift may well result in statutory income being received by the SMSF trustee for tax purposes”. DBA said it did not see a reason why contributions and non-arms length income provisions would not both apply, and considered the anti-avoidance provision in the SIS Act, and says: “The above is a good reason why it is worthwhile seeking expert and considered advice before implementing any strategies.”
  • Shadow Minister for Superannuation Mathias Cormann has called for Superannuation Minister Bill Shorten to “come clean” on a “$30 billion secret super tax plan”. In a statement, Cormann said Shorten should “tell Australian super savers who will have to pay the $30 billion in increased super taxes” to put the budget back into surplus. The Senator said Wayne Swan had “unrealistic budget expectations” and highlighted cuts by the government to concessional contributions caps, co-contributions and increases to the contributions tax for high income earners. Media reports this morning suggested the Labor government would not make major tax changes to superannuation in the mid-year budget review.

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