Warning: Super is coming under pressure
25 November 2013
The Grattan Institute at Melbourne University is making comments that indicate where the direction of government policy may head in the future . This is of great import to SMSF investors. There are growing indications that as Australia ages, governments will struggle to pay for pensions. Saving for your own retirement is becoming more and more important.
The noises are getting louder. The Productivity Commission last week called for the retirment age to be lifted to 70. While this would be political suicide, and was duly dismissed by the government, it is an indication of where the pressures will come from. The Grattan Institute is arguing that owner occupied housing should be included in eligibility for pension payments. This is politically unsalable, but it is again an indicator of the rising pressure on governments to look after the aged
The Grattan Institute report aggressively targets the aged sector. It calls for raising the pension super age, the including of the primary residence in the Age Pension Asset test, and the limiting of superannuation tax concessions.
"Limiting superannuation tax concessions would mainly affect high-income earners, who reap most of the benefits of tax concessions for contributing more than $10,000 a year to superannuation. The package would probably slightly reduce inequality overall, consistent with some – but by no means all – efforts to improve budget balances around the world."
The report then states the obvious, that the aged will be affected. It is an alarm bell for those looking to save for their futures:
"The major sensitivity with this package is that all of the reforms appear to affect older Australians more. This may be more perception than reality, but it would be an important issue to manage Increasing the pension and superannuation preservation age mainly affects those aged about 50 to 55 in the short term. Assuming that the eligibility ages are lifted gradually, those already retired would be unaffected. All Australians who are under 50 today will share the burden in the future as they age. Many under the age of 45 may believe that increase is inevitable – and in any case the effect is at least 20 years away. Including owner-occupied dwellings in the assets test primarily affects those over 65 – although obviously these rules will apply to everyone when they are older."
Like the proposals to raise the retirement age to 70, much of this is politically unpalatable. The suggestion in the Grattan report to broaden the GST is more likely to get traction. But there is a clear indication that the benefit of super tax treatment is being seen as a problem. It is seen as "middle class welfare". Middle class welfare is not actually a problem in Australia, contrary to widespread belief. Welfare is far more targeted at the needy than in almost all OECD countries. There is in fact a transfer of wealth from the middle class to the lower classes.
The exception is super, and that is likely to be targeted as governments come under pressure. The Grattan report states this:
"The skew of Australia’s current tax and welfare systems explains why the proposed package would have a greater impact on older Australians in the short term. Our tax and welfare system is generally tightly targeted to those most in need. The biggest exception is pension and superannuation systems, which are substantially ‘age-based’ rather than ‘needs based’. Inevitably, reforming these arrangements emerges as a high priority that would substantially improve budget balances with relatively limited side effects.
Other packages might be designed around a different combination of proposals. The key task is to group together major reforms in ways that demonstrate that everyone in the community is sharing the burden of budget repair."
There may be a case that there are "limited" economic side effects from making these changes but there will be potent political side effects. The same ageing demographics that are putting government finances under pressure are also making older voters a powerful voting bloc. It is better to read reports such as these as signs of the future than a blueprint which governments will follow.
The AFR outlines how government choices are becoming restricted:
"Raising the pension age on its own won’t be sufficient. The age at which savers can access their super also needs to be raised to reduce the scope for retirees to spend their private savings and then move onto a government pension when the piggy bank is empty. At the very least, the gap between the pension age and the super access age needs to be reduced from seven years, which is where it will be in 10 years as the pension age rises to 67, to five years, which is where it sits. Eventually, the gap will probably need to close completely.
Any inquiry into how Australia funds its future must surely look at labour market productivity, as well as the link between workforce participation and savings. Research by actuarial firm Rice Warner for the FSC shows increasing the time spent in the workforce for every Australian by just one year reduces the super savings gap by $200 billion.
As the financial system inquiry cranks up, it would be timely for a new inter-generational report to be published so Mr Murray and his team have the latest information on population trends. The last such report was published in 2010 and the previous Labor government postponed the next instalment until 2014. It would be helpful if the Coalition kept to this timetable."
Saving for your retirement as much as you can is becoming ever more important. The government's ability to fund retirement will come under inexorable pressure.