The superannuation squeeze

Here's what might happen and what you can do about it.

Summary: People with $2 million in superannuation are suddenly declared rich, but if their return is only three per cent, their annual income is just $60,000. I fear the introduction of a 15 per cent tax rate on all income earned by super funds in pension mode. Other ideas are being canvassed publicly, many of which I regard as horrific, such as a flat tax on all earnings by people aged over 65.

Key take-out: The pressure from younger people to make changes to the super system is considerable. It’s very foolish for the superannuation movement to make super irrelevant to them.

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

The superannuation debate is starting to get serious. Today’s revelations in The Australian that Social Services Minister Scott Morrison is preparing to cut back pension entitlements is the strongest indication yet that things are about to change. At the same time it looks like interest rates are going to fall further and stay down for an extended period, which is good news for the share market.

But, as we all know, the country has deep underlying problems.

Over the Easter break I saw a different side to all this – down at the beach, prosperity among young families bubbled up everywhere. The restaurants were full, my friend who hires the paddle boats and other small craft on the river has never had such a good period. It was much better than Christmas. 

And you could see what was happening. They were young families who have mortgages who have seen their interest rates fall and expect them to fall further and the price of their dwelling has risen. Some have negatively geared residences which have also risen in value.

In addition, those splashing the money around feel their jobs are secure, at least for the medium term. So don’t be surprised at better figures than you expect coming from parts of the retail economy. But two other groups are not finding it as easy. Our young people struggle to get good paying jobs and buying a house looks beyond them. That causes them to spend rather than save but it also undermines the stability of the country. And finally the older people – those approaching retirement and in retirement – were not flocking to the restaurants. To the extent they have houses they are clearly enjoying better prices although the benefit of higher house of residence prices is a myth because until you die you need a dwelling.

To the extent they have invested in shares particularly bank shares and Telstra they are doing well but miners have held them back. 

If they have money in term deposits older people are getting a beating. Many agree with me that low rates are going to be with us well into the future, maybe for three or four years. 

Australia’s cost structure is not competitive therefore we need a lower dollar which is not easy to achieve given our interest rates are higher than the US and Europe. US rates will rise but moderately which should enable Australia to use interest rates to lower the currency.

We have a society that is constantly demanding and expecting enormous expenditures from government which simply no longer can be covered by existing taxes given the slump in iron ore, coal and gas which have been a driver for our tax revenue base. 

At some point Australia will have to face reality. But neither of our major political parties wants to be the group to convert that reality into action because it means they go out of office. Each party wants the other to do it. But out of this situation comes a very disturbing trend. 

The middle class and the younger people have suddenly hit on a group that they think needs to be punished – those approaching or in retirement. And so people with a $2 million retirement superannuation fund are declared rich. (I must confess I am in that category.)

But if their return on this $2 million superannuation money is, say, four per cent then they will get $80,000 in income and while that might be currently tax free, it is certainly no bonanza. If the return is only three per cent (the Commonwealth Bank is offering only 2.7 per cent for one year) then we are talking about an annual income of just $60,000. 

If it is decided that people with $2 million in superannuation should have a 15 per cent tax imposed on their superannuation income then their ability to pay pensions from superannuation falls even further. 

When he was assistant treasurer, Bill Shorten actually tried hard to solve the problem and suggested that tax rates on superannuation in pension mode should only cut in when a person’s superannuation net income reached $100,000. This was simple to administer for self-managed funds but complex for major funds. The proposal had other problems. When the Coalition came to power the Shorten plan was thrown out as a result of pressure from the major funds. My fear is in the current environment pressure from young journalists and those with axes to grind will lead to a 15 per cent tax rate on all superannuation income including that earned by superannuation funds that are in pension mode. 

This is very unfair for those with small amounts in superannuation. 

As I described last week (Potential tax system changes: A user’s guide, April 1) Treasury is starting to understand the potential benefits of superannuation. The great problem of the superannuation movement has been that there are very few people with a clear plan to set rules for superannuation to cover the next ten or twenty years. 

But here are some of the ideas – many of them I regard as horrific – that are being canvassed among the public. I would be very interested to hear from Eureka Report readers about their views. (Contact us via our online form, or send an email to subscriptions@eurekareport.com.au.)

  • The Scott Morrison plan where the taper rate would be cut as well as the threshold where the taper rate cuts in. This would mean allowances introduced by John Howard back in 2006 would be unwound. Specifically,  The Australian reports the minister is looking at cutting back the taper rate from $1.50 per $1000…possible back to where it was in 2006 at $3.00 per $1000. Such a change will immediately cut back the pension entitlements of thousands – it is estimated it will save $1 billion. A year . There is also plans to review the threshold for access to pensions – currently a couple only lose access to part pension when their assets – excluding the family home – are more than a million. The Morrison plan is among the most potent suggestions we have seen so far because it is understood to be politically feasible, ie it would be supported in the Senate.
  • A flat 15 per cent tax on all earnings by people aged over 65. This is designed to encourage people to stay in the work force.
  • The Shorten plan where a 15 per cent tax is imposed on superannuation fund earnings over $100,000.
  • A continuation of the current situation where it is all tax free for superannuation funds in in pension mode.
  • Superannuation should be organised so that a person’s is paid out when they reach 85 and the government pension and/or personal savings cut in at that point. That way it is possible to plan superannuation and overcome the problem that people do not know how long they will live.
  • A much greater correlation between government pensions and superannuation pensions.
  • An end to lump sums so all superannuation is used for pension income so reducing reliance on government pension.
  • The government pension assets test should include the family home particularly if the house is large and where pension payments are made it becomes a mortgage on the house.
  • Ideas that you believe that are better than the above.

Many of the above will be very unpleasant experiences for retirees but all of them are under review and the pressure from younger people is considerable.

That is why I suggested last week that we reign in many of the tax schemes related to investors in housing and allow young people to use $100,000 of their superannuation as a part deposit for a dwelling. It is not a concept that is gaining traction. But what that would do is make younger people interested in superannuation. 

Currently they see it as a rort for the elderly while younger people are discriminated against in housing. As is always the case it’s the younger people who play a big role in the media and it’s very foolish for the superannuation movement to make superannuation irrelevant to them.

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