The big wealth squeeze

Older Australians are being squeezed harder by policy initiatives … and then there’s the family squeeze.

Summary: The intergenerational wealth transfer is on, whether you like it or not. On the one hand, older Australians – particularly retirees – are being hit from both sides of politics. As well as measures that sting retirees, including higher taxes, banking fees, and lower franking credits, low interest rates are biting hard on savings. And then there’s the other big wealth dilemma. Should you use your funds to help out your children and grandchildren?
Key take-out: In the current environment of low interest rates, the reluctance of many to invest in the sharemarket is switching more and more capital into the housing market. This is helping to push up prices, and making housing less affordable for the younger generation.
Key beneficiaries: Retirees. Category: Strategy.

The politicians on both sides now understand that in the next decade there will be a lot less money to splash around.

And so both sides are being tough on the older generation in Australia, and that money squeeze underlines the generational quandary that older people have in deciding whether to help finance their children and, if so, how it should be done.

What we are seeing on the national stage is being duplicated family by family. Let’s first talk about the national stage. We have seen a series of attacks by politicians on the savings of older Australians.

Higher taxes

The first was, of course, the superannuation tax. You will remember that Treasury produced totally fictitious sums, so the Cabinet used sums that I prepared to justify the 15% tax after a $100,000 tax-free threshold.

I feared that what Treasury wanted was far worse. The Opposition plans to embrace the government proposal, but it might be possible to quarantine superannuation tax rises for say five years. By then, the electoral power of older people will be much stronger, simply because of the ageing process. Then the government put a levy on bank deposits, once again aimed fair and square at the older generation, who are the main users of bank deposits. The Opposition is not going to change that.

Lower rates

And, of course, the daddy of all income transfers is being undertaken by the Reserve Bank. When it first began to cut interest rates it was all about stimulating the economy. Interest rates are now so low that further interest rate reductions won’t stimulate the economy. They are simply wealth transfers from the older generation to the younger generation with mortgages.

Reduced franking credits

And finally, and most spectacularly, the Coalition decided to reduce company tax by 1.5% but put a levy of 1.5% on the profits of the top 3,200 companies. In other words, it swapped the tax for a levy. What that means is that the levy will reduce profits in the same way as a tax, but it is not part of franking credits. So once the proposal is enacted, retirees and those saving for retirement will only get a franking credit of 28.5%, which will raise some about $1 billion for the Parental Leave Scheme once past franking credits are exhausted (around 2015-16).

Given that $2 billion-$2.5 billion comes from simply rationalising existing schemes, it is clear that retirees and those saving for retirement are providing a big chunk of the new funding for this proposal. It is an intergenerational transfer. I was recently speaking on Sydney ABC Radio with presenter Linda Mottram pointing out that it is getting more and more tempting for retirees to go on 10 cruises, spend their money and then go on the aged pension. Of course, I wasn’t serious, but Linda invited me to make some bookings immediately.

But behind that jovial exchange is a very serious matter, because I don’t think the politicians and certainly Treasury understand that retirees are really being hit by the lower interest rates. They just keep thinking that the well will never dry up. Retirees are going to have to become much more active.

A generational dilemma

When it comes to families, the older generation has a dilemma. First, they are being battered by politicians and the Reserve Bank and therefore are wondering whether they have enough money for their retirement. Yet it is clear that the lower interest rates are kindling demand from investors for residential property and, increasingly, particularly in Sydney. Despite the low interest rates, ownership of an inner-city house is moving further out of the range of young Australian families because wages are simply not increasing in line with the movement of inner-city house prices. Young families going to outer suburbs often means much more travel for all the family, including the grandparents.

So should the parents keep their dwelling unencumbered until their death, or should they put a mortgage on their dwelling to help their children gain their own house? The difficulty with this process is that people like myself, who are in their seventies, are aware of their mortality because they go to funerals of their friends. At the same time, they see others living on to their nineties and even to 100, and as you get older the cost of living rises because of the “cost of maintenance”.

More seriously, health costs rise and, in some cases, can be very high if nursing/medical care is required on a 24-hour basis. So older families are frightened to leverage their assets to help the family, just in case they might need them. However, the next generation is struggling. There is no doubt that 10 or 20 years ago no-one believed they would have dwellings that are now so expensive. We couldn’t have imagined that the tax-free nature of the base home has delivered a large increase in the amount of investment in those dwellings. And moreover, investors and groups like the Chinese have become major buyers, often on a negatively geared basis, and this has pushed the dwelling prices higher and higher, although it has also provided rental accommodation.

In the current environment of low interest rates, the reluctance of many to invest in the sharemarket is switching more and more capital into the housing market. Unless there is a sharp rise in the supply, which is not easy to achieve, we could see some strong gains in the next six months, particularly in the inner-city housing in Melbourne and Sydney. Apartments in Melbourne may not benefit to the full extent because there is a large amount of supply coming through, and in Sydney the largest apartment owner Harry Triguboff has declared that he is going to sell some of his apartments to keep the market stable. Harry has some 5,200 apartments, which is an enormous number. So what is the answer?

Taking action

On the political stage it means retirees are going to have to become more active, so politicians understand the consequences of their actions. On the family stage there is no easy answers, but if you have a situation where on a reasonable basis you have sufficient funds to support a satisfactory lifestyle, then it does make sense to help your children in housing or in the education of your grandchildren.

You may find that the second course gains even more pleasure than the first. The first is static, but the second gives you the joy of seeing your grandchildren benefit from the best available education. Certainly that is what I have found.

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