Push for solution to when super runs out Living longer doesn't always pay

TREASURER Wayne Swan has committed himself to work to remove one of the worst drawbacks of Australia's superannuation system - what happens when super runs out.

By InvestSMART · 6 Oct 2011

By InvestSMART ·
6 Oct 2011

Comments

TREASURER Wayne Swan has committed himself to work to remove one of the worst drawbacks of Australia's superannuation system what happens when super runs out.

David Cox of Challenger Financial Services told the Canberra tax summit that an increasing number of Australians were living longer than their superannuation annuities. "If they have a superannuation balance of $100,000 or so and are prepared to live modestly, it will last a long time. But if they want to live comfortably it is going to run out," he said.

"The statistics are chilling. Even someone attempting to live comfortably on $500,000 will find it runs out before their life expectancy. The old age pension is not a very comfortable way to spend the latter part of your life.

"Most people don't appreciate how long they are going to live. We would like to offer deferred annuities that would kick in after life expectancy, but the rules make it too difficult.

"For $10,000 a 65-year-old could buy an annuity that would pay half the pension on top of the pension after life expectancy. Our modelling shows it would save 3 per cent of age pension and age care costs."

Mr Swan said he had heard the discussion and with Assistant Treasurer Bill Shorten would work with the industry "to do more in this area".

Economic consultant Nicholas Gruen said the planned increase in super contributions from 9 to 12 per cent of salary would make it harder for young people to save the deposit for a house.

"It makes sense for people in their 20s and 30s to accumulate savings in the form of a housing deposit. I suggest that at some stage as we increase super we allow withdrawals from funds for housing deposits rather than the kind of Mickey Mouse system we have at the moment, where super makes it hard for people to save," he said.

Earlier, Grattan Institute economist Saul Eslake turned Mr Swan and Prime Minister Julia Gillard stony-faced when he said the practice of negative gearing transferred $4.5 billion per year from ordinary taxpayers to affluent ones.

"But there are now 1.7 million of them, and they vote," he added. "Which is why the subject is off the agenda for both major political parties."

It was not true that the brief suspension of the practice under which investors are allowed to write off losses made on rental properties against other income by treasurer Paul Keating in the mid-1980s led to a surge in rents.

Nine out of 10 negatively geared properties were existing units or houses rather than new ones. Rather than boost the supply of properties, negative gearing pushed up the price of existing ones. "The US has never had negative gearing yet they have never had a rental vacancy rate of less than 5 per cent. We have negative gearing and we have never had a vacancy rate in rental properties of over 5 per cent," Mr Eslake said.

Finance journalist David Koch, who was at the summit as a community representative, said there should be a time limit on negative gearing.

Go to Google News, then click "Follow" button to add us.

Share this article and show your support

Frequently Asked Questions about this Article…

What does it mean if my superannuation runs out and why is this a problem for retirees?

The article explains that many Australians are living longer than their superannuation annuities will support. Industry experts warn that while a balance of about $100,000 can last if you live very modestly, even $500,000 may run out before your life expectancy if you want to live comfortably. When super runs out, retirees may have to rely on the age pension, which is described as unlikely to provide a very comfortable lifestyle for the latter part of life.

What are deferred annuities and how could they help when superannuation runs out?

Deferred annuities are products that start paying an income later in life, potentially after a person's actuarial life expectancy. The article reports that Challenger Financial Services supports offering deferred annuities, but current rules make them difficult to provide. For example, their modelling suggests a 65‑year‑old could buy a deferred annuity for about $10,000 that would pay half the pension on top of the age pension after life expectancy, and this could reduce age pension and aged‑care costs by roughly 3%.

How are policymakers responding to concerns that people may outlive their superannuation?

Treasurer Wayne Swan said he has heard the discussion and, together with Assistant Treasurer Bill Shorten, would work with the industry to 'do more in this area.' That indicates the government is open to exploring solutions, such as changes that might allow deferred annuity products or other measures to address longevity risk.

Will increasing compulsory super contributions from 9% to 12% affect my ability to save a home deposit?

Economic consultant Nicholas Gruen warned that raising compulsory super contributions from 9% to 12% could make it harder for people in their 20s and 30s to save a deposit for a house. He suggested that as super increases, policymakers should consider allowing targeted withdrawals from super for housing deposits to avoid making it difficult for young people to accumulate home‑deposit savings.

What did the article say about negative gearing and who benefits from it?

Grattan Institute economist Saul Eslake argued that negative gearing transfers about $4.5 billion per year from ordinary taxpayers to more affluent individuals. He also noted there are about 1.7 million negatively geared properties, and that the policy tends to benefit wealthier investors, which makes reform politically difficult.

Does negative gearing increase the supply of rental properties or just push up prices of existing homes?

According to the article, Eslake said nine out of 10 negatively geared properties were existing units or houses rather than new builds. He argued negative gearing pushed up the price of existing properties rather than boosting supply, so it did not increase the stock of rental housing as some proponents claim.

Is there evidence that suspending negative gearing raises rents?

The article states it was not true that a brief suspension of negative gearing in the mid‑1980s under Treasurer Paul Keating led to a surge in rents. Eslake used this point to challenge the claim that limiting negative gearing necessarily drives rents higher.

Are any limits or changes to negative gearing being proposed?

The article reports that finance journalist David Koch, attending the summit as a community representative, suggested there should be a time limit on negative gearing. Beyond that comment and Eslake's critique of the policy's distributional effects, the article notes the subject is politically sensitive and off the agenda for major parties because many voters are invested in negatively geared properties.