Super: Something's got to give

As our correspondence shows, a superannuation showdown looms. This week the Labor Party has fired the first shot.

Summary: Many Eureka Report readers are prepared to accept a tax free superannuation fund income up to a certain level, with the rest taxed at 15 per cent. I am inclined to support the federal opposition proposal to tax super incomes above $75,000, given the danger of a miscalculation from Treasury. But I ask politicians not to tax pensions, as this is unfair to many people.

Key take-out: Thank you all for your letters about possible super changes. I will send my summaries of the correspondence and my remarks to the offices of both Josh Frydenberg and Bill Shorten.

Key beneficiaries: General investors, SMSF trustees and superannuation accountholders. Category: Superannuation

The good news this week came from two sources. Assistant Treasurer Josh Frydenberg announced that there would be no major changes to superannuation in the May budget.

At the same time opposition leader Bill Shorten said that if the parliament adopted his package there would be no further changes from an ALP government. (We know you can’t believe politicians but Shorten has been consistent on this.)

There are many themes in the Eureka Report superannuation letters I asked subscribers to send in, but a clear one is instability (see We hear you!, April 15). But a great many readers are prepared to accept a minimum tax free superannuation fund income and the rest taxed at 15 per cent. As you saw this week’s 2015 Shorten package is similar to his 2013 proposal but the tax free income allowed in a fund is $75,000 per person instead of the 2013 $100,000 proposal and capital gains tax changes start at July 2017, when the tax starts. The key will be how it will be indexed.

In his election campaign Tony Abbott promised no big changes to superannuation in his first term of office but at that stage the 2013 Shorten proposal was on the table. Frydenberg and Social Services Minister Scott Morrison are discussing a new approach to social service expenditure including retirement incomes and superannuation. And no doubt Treasurer Joe Hockey will also be involved. Frydenberg and Morrison are two of the best talents in the Abbott ministry but as we well know Treasury has very little idea of how superannuation works and what it costs.

So there is always danger of a major miscalculation, even with talented ministers. That’s one reason why I am inclined to support the Shorten proposal because with Treasury in a mess in superannuation and younger people, particularly those in the media, knocking superannuation at every turn there is danger (see The superannuation squeeze, April 8).

Below I quote a young person’s view of the older generation – you will find it both fascinating and disturbing. That is why our fantastic reader discussion on superannuation is so valuable and so well timed. (I encourage you to click here and look at this week’s discussion.)

Last week I summarised around 30 letters (see them here) and this week it is probably closer to 40 because additional correspondence arrived. I will be forwarding my summaries of the correspondence and my remarks to the offices of both Josh Frydenberg and Bill Shorten.

I can’t guarantee how much time they will spend on it but there are very few other places where such a wide variety of views from superannuation stake holders can be obtained. Once again I thank you for your contributions and I have greatly shortened many letters and I hope I have done you all justice. This week’s correspondence included some passionate pleas from a number of superannuation savers who raised the alarm because some contributors last week had suggested that superannuation pensions be taxed rather than superannuation fund income. 

One of those alarmed correspondents was Gordon who describes how he would be devastated by a tax on pensions:

I built up my superannuation in an SMSF over the last 19 years and during that time contributed a considerable amount as undeducted contributions – on which full tax had already been paid,” Gordon says.

“I really don't see the value of a super system where you pay full tax before you contribute and then pay more tax when you draw down in pension mode.

“The equivalent tax on the income could amount to something like 60 per cent or more if the tax on earnings were to be 15 per cent.

“In addition, I remember paying significant ‘Superannuation Surcharge’ tax in addition to the 15 per cent contributions tax, during the early years of the Howard/Costello government,” Gordon concludes. 

So please politicians DO NOT TAX PENSIONS – IT’S TOTALLY UNFAIR TO MANY PEOPLE.

I fear our government is making superannuation irrelevant to young people and almost certainly longer term this will be a big cost because the young people dominate the media and changing opinions towards retirement and superannuation. They need to be brought into the superannuation fold. I have advocated using superannuation to assist first home buyers as part of the program to get young people interested in superannuation but more of that later. Here is part of Stephen’s email and I do suggest you read it because it has ideas that older people don’t normally encounter. 

Stephen: “I feel compelled to respond to all of the people who have written in crying blue murder about the proposed government changes to superannuation. 

“I am a member of Gen Y and see things very differently from most of your subscribers (the vast majority of which are likely baby boomers or early Gen X).

“Baby boomers who went to university did so without incurring large debts. Baby boomers who bought a house bought one at somewhere between 1.5 and 3 times their average annual salary. Baby boomers have seen a continuous fall in interest rates for 24 years. My generation has seen house prices rise to between 5 and 6 times our average annual salary. We have seen interest rates fall so far below the long term average that we cannot hope to see interest rates drop by 15 per cent (again) in our lives. We've seen bracket creep kill our earnings for the last seven years (spending power is 15 per cent less than in 2008 for the same salary). Meanwhile, baby boomers have begun retiring and we're shouldering the tax burden for paying the pensions.

“The baby boomers really are the lucky generation, which is why it makes people see red when boomers are complaining about having to pay a bit more tax.

“Given the median and mean wages are sitting around the $55,000-$70,000 mark, someone living with a super pension of $100,000 is living well above the mean and median standard of living. I thoroughly reject the assumption that these people are not rich. By Australian standards they are rich, by world standards they are extremely rich.

“There is nothing wrong with wealth. After all, the reason we all subscribe to Eureka Report is to help us increase our wealth. Yet I don't feel that it is too much to ask that this income be taxed. After all the ‘seed corn’ that went into producing the harvest was not taxed heavily at all. The compounding effect of this tax reduction on money going into super has been of great benefit. In fact, given an average growth of 7 per cent per annum, after 20 years, someone contributing to super with a 15 per cent tax rate yields 55 per cent more capital after 20 years than someone who made the same investments outside super with a marginal tax rate of 45 per cent (and 30 per cent more than someone on a 30 per cent marginal tax rate).

“I do not think that it is unreasonable that the income generated from this extra wealth is taxed. Finally, the point about allowing young people to dip into their super and pull out $100,000 for a house deposit is to be commended, but is frankly unrealistic for most young people. I am a highly paid professional in my early 30s and along with many of my friends have nowhere near $100,000 in super. I worked right throughout university, have never been long-term unemployed. To have $100,000 in super I'd have needed to average roughly $65,000 pa since I was 17! I was not on this kind of money until I was 27 (and like I said, I am university qualified and work in a lucrative field, with an impressive resume).

“I understand that many older people are upset by these changes, but the reality is that the reason they're upset is that they've entirely forgotten what life is like as a younger person with no capital base to work with.”

You will see that Stephen says that my idea of $100,000 as a housing contribution doesn’t work because young people can’t accumulate that sort of money in the time frame where they are looking to buy a dwelling. Another emailer suggests the figure should be $50,000. Remember I would not consider giving that sort of assistance without some change to the current enormous stimulation given to dwelling investment via negative gearing and other tax benefits. Unless you change the investor rules, a superannuation concession for younger people will simply balloon prices and have no effect at all. I realise that allowing first home buyers to use their superannuation is vigorously opposed by most people. But because I follow what is happening in the media I think I am better equipped to detect an anti-superannuation sentiment in young people which can only be curbed if superannuation is made relevant to the new generation. 

Among this week’s letters I have summarised a number of interesting suggestions on how you might organise pensions and superannuation in a much more constructive way. There is clearly a significant number of retirees that think lump sums should be stopped or curbed so that superannuation becomes a retirement income that reduces reliance on the aged pension. The trouble is that a great many people are relying on these lump sums to pay off mortgages. There has been a great deal of advocacy for people to work well beyond 65 years of age to assist in saving for retirement and lessening the pension bill. As somebody who is still working at 74 you often find me expressing sentiments along those lines. But I was brought back to reality by an email from one of our Eureka Report readers who wrote how difficult it is to gain employment when you are aged in your 60s.

There is an underlying deep resentment for any government that substantially changes the retirement rules retrospectively. A great many people have established savings plans on the current rules and have a deep hostility to people who change those rules. At the same time there is an understanding that at the high levels of super investment and income it is fair to levy a tax. It is a question of what those levels should be and how it should be done.