PORTFOLIO POINT: Most Australian families won’t have enough superannuation to last them through retirement. It’s time to focus on the public service fat cats with huge defined benefit schemes.
The matter that is hardest to handle in most families is the subtle forces and situations involved in intergenerational wealth.
So this week I am going to discuss this thorny matter with the help of a conversation with veteran stockbroker Warren Gelfand from Shaw Stockbroking.
At the same time, further below I refer to the huge defined benefit schemes being enjoyed by the public service “fat cats” – the same people who are aiming to target your superannuation funds to draw in more government revenue. But first, let’s talk more about the superannuation battlers – the ordinary people in Australia’s heartland who are struggling to build their wealth for retirement.
So back to Gelfand, who sees that a big proportion of his client base is divided into two broad groups of people – the 35 to 55 year olds, and those 55 and older.
The younger generation, back five, 10 or 15 years ago, were very confident. Their jobs were secure, their houses had gone up in price and their biggest problem was that they were paying too much tax. Many also had child maintenance issues, which was sometimes another reason why they wanted a lower taxable income.
So the younger group – particulary those in the 35 to 45 age bracket of that time – went to their accountants and said, “how do I reduce my taxable income to avoid paying so much tax and perhaps also lowering my maintenance requirements?”
The accountants obliged, and a whole series of different schemes came forward. Sometimes it was negatively gearing investment dwellings or shares, other times it was the timber schemes where many billions of dollars was invested.
Other times more dangerous schemes were put forward to the client. The clients initially were delighted because the exercises looked like good investments given the reduction in tax.
Then came the global financial crisis with the big fall in asset values and increased job insecurity. This made the generation anxious because most of the schemes had involved borrowing, so they became over-leveraged. It is this situation that has had a considerable effect on the spending habits of a large group of people. It is not that they haven’t spent, but the loss they suffered has made them much more value conscious than they previously were.
In the sharemarket, a great many of this generation took out margin loans as part of the tax-deductible schemes. The fall in the stockmarket and the efficiency with which those funding margin schemes made calls has caused that area of investment to be substantially reduced. Timber was a disaster in many cases, and large numbers of people are funding timber assets of doubtful value with big loans.
This younger group in good times knew that Mum and Dad were well off, and this had given them extra confidence to take the risks involved in tax reduction.
This also occurred in the older bracket, prior to the global financial crisis, as the baby boomer generation approached their mid 50s and 60s. They had accumulated large profits in their houses and their sharemarket-dominated superannuation was starting to become important. They believed that they would not only be able to fund their retirement but also help their children.
When the stockmarket was rising regularly there was no problem about buying another car because it would be funded with a small rise in the stockmarket. They were happy to hand their children money. But, in recent years the whole situation has changed and the value of their retirement pool has gone down. Moreover, as interest rates fall the investment that had not fallen in value – short-term cash – is now yielding considerably less money.
It’s not that the older group are feeling desperate, but warning signs are appearing which tell them that they now may not have sufficient cash to get themselves through to the 90s if they live that long. They can see the final years of life could be very expensive.
The older generation would love to help their children but they are starting to become nervous. The unspoken understanding that there would be money from Mum and Dad to help the children get through is being questioned. In a minority of situations, their middle-aged children have lost their jobs but have received a big payout. Those payouts are starting to run down. Spouses are returning to work. There is great pressure on grandparents to fund the grandchildren’s education.
But the older generation is now also becoming much more risk averse. They have put substantial sums into bank hybrids and term deposits, and all the talk of difficult times has made them very wary of the sharemarket. They plan to return to the sharemarket, but not in a hurry.
For the most part, apart from people who have lost their jobs, there has not been a huge change in the lifestyle situations. The level of gearing undertaken by the children during the boom is not always discussed with their parents or parents-in-law. Similarly the fact that the parents may not have enough money to comfortably see through their retirement, if they live a long time, is rarely discussed.
Yet simple sums can by alarming. Take a couple aged 65 to 70 with $2 million in savings. Until now, they have always felt very confident that they had more than enough money. It seems almost unconceivable to say that $2 million might not be enough and, of course, the majority of people have a great deal less. But a $2 million asset base yielding say 4% only provides an $80,000 income, and that is not enough. Even 5% return provides only $100,000. So at some point the older generation has to start spending the capital.
I don’t have any magical solution to this problem, except to say that everyone needs to recognise it and we need to send the longest possible message to the current government that a person with $2 million in superannuation is not rich and should not be attacked.
The only big group of people who are really rich in superannuation are the big public service fat cats, who have defined benefit pension schemes that were entered into many years ago worth many millions of dollars today.
The schemes are at least $200 billion under-funded. It’s these very fat cats who are plotting to make it tougher for private savers. This needs to be a really important election issue.
But, meanwhile, children talk to your parents, and parents talk to your children, about these difficult issues so everyone knows where everyone stands.