Various: The Retirement Income Review / Superannuation articles

SMH: Asset testing expensive homes for pension could reduce overspending: Income review

Penalising pensioners with expensive homes could stop overspending on housing, says a wide-ranging review into the retirement system that also casts doubt on already-legislated increases to the superannuation guarantee.

Superannuation is set to rise 0.5 per cent a year above its current 9.5 per cent rate from July 2021, but the Retirement Income Review released on Friday found cancelling the increases would hand the budget billions of dollars more in tax revenue by 2030.

Treasurer Josh Frydenberg said the family home would not be means tested, but the government has yet to respond in detail to the observations about the system raised in the 638-page report.

The family home is currently exempt from the age pension assets test, and renters are allowed to have more assets than homeowners to qualify.

Tenants are allowed $210,500 worth of assets without having their pension cut. The review points out this is much lower than the $560,000 median value of an age pensioner’s exempt home.

“Exempting the principal residence may incentivise people to put too much money into their home,” the report says. This may include spending more than necessary on renovations or choosing not to downsize to avoid reducing age pension payments when the equity is turned into cash.

The review, led by former Treasury deputy secretary Mike Callaghan, says the majority of age pensioners own a home and removing the exemption fully would have a “significant impact” on the adequacy of retirement outcomes. But there could be a cap on the value of pensioners’ expensive homes above the median price to “reduce inequitable outcomes”.

The report also found more efficient use of savings would be better than continuing with the legislated superannuation guarantee increase to 12 per cent by 2025. This could include tapping into equity in the family home, such as through the Pension Loan Scheme or other reverse mortgage-style products, to boost income.

Overturning the super guarantee rise would put $3 billion a year more in government coffers by the end of the decade and have a “positive net fiscal impact”, the report shows. The super rate is currently set to jump 0.5 per cent a year until 2025.

Stopping the hike would increase the proportion of people on the age pension by 1.8 percentage points by 2060, with full-rate pensioners making up half of this increase. The higher revenues collected by the federal government due to lower tax concessions on superannuation savings would outweigh the higher cost of the age pension until about 2055. This would total a cumulative saving worth 2 per cent of GDP by 2060, the review found.

But reversing the existing legislation would mean breaking an election promise, presenting a difficult political challenge for the Morrison government. Speculation over the future of the super guarantee has surged this year following a ginger group of a dozen Coalition MPs arguing against the hike. This attracted criticism from the superannuation funds, unions, Labor and former Prime Ministers Paul Keating, Kevin Rudd and Malcolm Turnbull.

The review’s calculations aligned with the Grattan Institute and Reserve Bank’s view that increasing the super guarantee would come at the expense of income during a worker’s earning years.

A median worker in 2060, contributing 9.5 per cent of their income to superannuation, would receive $32,400 more disposable income over their working life, the review found. However, they would get $70,800 less from their superannuation drawdowns with the age pension replacing $37,900 of this lost income.

With a recommended income replacement rate in retirement worth 65 to 75 per cent of pre-retirement earnings, the report said a 12 per cent rate would be too high.

Mr Frydenberg said the report and “other views” would be considered in light of the circumstances before the scheduled increases kick in. The first 0.5 per cent increase is due in July 2021, with the federal budget expected to be handed down in May, and reversing the rise would mean getting fresh legislation through the Senate.

He said taxpayers were “spending more on tax concessions for superannuation than we will be on the age pension over time” with the cost of the pension dropping from 2.5 per cent in 2020 to 2.3 per cent in 2060 as a proportion of GDP. The cost of superannuation tax concessions are expected to rise from 2.1 per cent to 2.7 per cent over the same period.

Labor Treasury spokesman Jim Chalmers said the argument that freezing super would boost wage growth “does not stand up to scrutiny given wages were historically stagnant after the last time this government froze the super guarantee”.

“After all the sacrifices that Australian workers have made this year, they need a proper plan to grow wages, not a cut to their retirement incomes – one is not a substitute for the other,” Dr Chalmers said.

The Guardian: Bet your house on it: three things to know from Australia’s retirement income review

It’s more than 600 pages and doesn’t make any recommendations. Yet, the retirement income review will inform future government policy decisions, provide cover for the government to ditch the superannuation guarantee increase and sets out what retirement could look like for today’s workforce. So what do you need to know?

Inequality continues into retirement – and no one is sure how to fix it

Got a fairly decent work history and your own house? Come retirement time, chances are you will be just fine. But if you are one of the many Australians who has experienced insecure work, or has been unable to buy their own home, retirement won’t be be all lawn bowls, walks on the beach and gin cocktails.

“While the system may provide adequate retirement incomes for many Australians, there is uncertainty about if and how it can compensate for those who may fall short, such as women, lower-income renters, individuals not covered by the superannuation guarantee, involuntary retirees, Aboriginal and Torres Strait Islander people and those with a disability,” the report says.

We tend to think of retirement as something that happens when we choose to finish work, or at least reach an age where we can make the decision ourselves.

the review found there is a group of people who may be forced into early retirement because of illness or injury who live in limbo until they are eligible for the aged pension.

The review found there is a group of people who may be forced into early retirement because of illness or injury who live in limbo until they are eligible for the aged pension. Photograph: Bloomberg via Getty Images

But the review found there is a group of people who may be forced into early retirement because of illness or injury who live in limbo until they are eligible for the aged pension. That applies to about 28% of early retirees.

“For many who retire involuntarily due to job-related reasons, the adequacy of their living standards before age pension eligibility age depends on the level of jobseeker payment,” the report found.

If you haven’t been able to afford your own home, you are at even further disadvantage, compared with your home-owning peers. You’ll probably even get less age pension, because while the principle family home is not counted in the means test, any savings and other assets are.

The panel found about one-quarter of all retirees who rent, rather than own their homes, are in financial stress – mostly because of high housing costs. Rental assistance from the government sits at around $139.60 a fortnight for a single person with no dependents. In today’s rental market, that is nowhere near enough.

“A significant number of older Australians who are renting in the private market need additional assistance,” the review panel reported. “Increasing the rate of commonwealth rent assistance will only have a small impact. A new approach is required.”

If you had to retire before you were ready and rent, you have the highest financial stress in retirement. The panel did not outline what the “new approach” could be.

The panel found about one-quarter of all retirees who rent, rather than own their homes, are in financial stress.

And if you are are also a woman and rent, or retired involuntarily? Then you can count another level of inequality to what is already being experienced. Men have, on average, 22% more in their superannuation balances than women. That is because women are usually the ones who take time out of their careers to raise children, or care for others, and are more likely to be in part-time work. And you are more likely to live longer as a woman, meaning your already smaller super balance has to go further.

“Research suggests having children is associated with a reduction in earnings of up to 80 per cent on average over the following 15 years, compared to women with no children. The higher life expectancy of women means their superannuation balances at retirement need to stretch further.”

Whether or not you have a partner also impacts your retirement – and women are more likely than men to rent on their own.

Throw in being a casual worker, a troubled work history, or being a member of a marginalised community – particularly Indigenous Australians, who have, on average, lower superannuation balances to start with, as well as the compounded issues of difficulty accessing banking and financial services, and you have another mark against you in retirement.

Employees who earn less than $450 a month from an individual employer are exempt from the superannuation guarantee. That is about 3% of the workforce – mainly young, lower income, part-time workers – of whom 63% are women. That is a hang over from when payroll was done by hand, but is less relevant now it is mostly automated.

Those who experienced inequality during their working life will continue to experience it in retirement, and with less Australians entering the home ownership market, and more Australians experiencing insecure work as a consequence of the casualisation of the workforce, this will only become more of an issue.

Those with retirement savings are dying with their money in the bank

Fake reports of a death tax policy may have plagued Labor at the last federal election (Clive Palmer made an expensive attempt to resuscitate them at the last Queensland election too, to no avail) and no major party has plans to reinstate one.

But the report makes a pretty valid case why a bequest tax might not be such a bad thing. Every second motorhome might carry the boomer joke “spending the kid’s inheritance” but, by and large, Australian retirees leave almost all of their retirement wealth behind when they die. One of the biggest reasons for this? Retirees tend to see the earnings from their retirement investments/savings as their liveable wage, rather than the balance of the investments/savings themselves.

For most Australians aged over 65 years old, their home is their biggest asset. Photograph: Mick Tsikas/EPA

For most Australians aged over 65 years old, their home is their biggest asset. It makes up 60%-72% of their net wealth and, without it, the median retiree net wealth drops to $165,000. But retirees tend not to do anything with this form of wealth, other than live it in. They don’t draw down on the equity, they don’t borrow against it, and they don’t leverage it to increase their standard of living. Once they die, it becomes part of a bequest.

Superannuation actually makes up a fairly “minor source of wealth for most current retirees”. They have their homes, and in a lot of cases savings, which they don’t use, instead living off the earnings of their savings. That includes their super balance.

As younger baby boomers, Gen X and Gen Y approach retirement age, superannuation balances will become more important – particularly for millennials who do not own their own homes. They have also spent most of their working life covered by the superannuation guarantee – in the main – so their savings will be more tied up in their super balances, rather than other financial institutions.

But for now, the bulk of retirees are living on the earnings from their savings and superannuation, combined with the age pension. People are living simply in retirement, and then passing on their wealth to their families.Advertisement

“The majority of people are not using their superannuation balances and other savings effectively to maintain their living standards in retirement,” the review found. “If they did so, they could achieve the same retirement outcome with a lower level of saving and higher standard of living in their working life.

Australian retirees leave almost all of their retirement wealth behind when they die.

“Current retirement outcomes show savings are often not being used as income, with significant amounts left as unintentional bequests.”

How many people are dying with their money in the bank? One large (unnamed) superannuation fund provided data to the review panel, showing members who died left behind 90% of their retirement balance (including their assets, such as the family home).

That not only lowers the standard of living for retirees, as well as take money from the economy (while costing the budget in concessions such as franking credits, which are being used as income while savings remain untouched in the bank), it is cementing generational wealth equality gaps.

“Without a change to retirees’ drawdown behaviour, bequests from superannuation will grow. Rice Warner projections show average death benefits from superannuation for people aged 65 and over are expected to grow in real terms from an average of $190,000 in 2019 to more than $480,000 by 2059.

“Aggregate death benefits are projected to increase from around $1 of every $5 paid from the superannuation system in 2019 to around $1 of every $3 paid out by 2059. Bequests from housing assets will also increase if housing assets continue to grow and retirees avoid drawing on their housing wealth.”

Those retirees holding on to their homes have sat on real estate goldmines, with the review finding the value of housing has nearly doubled relative to household disposable income since the 1990s. New and prospective home owners though, will spend more of their working-life incomes financing their home, meaning they will have less in retirement savings than today’s retirees, and potentially not as much equity in the homes they have purchased.

Legislated increases to the superannuation guarantee look like being scrapped

While all attention was on franking credits at the last election (something which is mentioned twice in the review’s 600 pages) Scott Morrison committed the Coalition to maintaining the scheduled increases to Labor’s superannuation guarantee. Currently at 9.5%, the increases are scheduled to gradually continue over time, until the mandatory contribution hits 12% in 2025. Cue the not-so-silent war. The closer the legislated increase time came, the louder the “we shouldn’t do this” chorus became, until the pandemic provided enough cover to prompt a delay.Advertisement

That didn’t quieten the detractors – only emboldened them. Not only did the Coalition allow for those affected by the coronavirus pandemic to have early access to up to $20,000 of their superannuation savings – a move that will cost young workers up to $100,000 in lost savings by the time they retire – they also allowed the withdrawals without a checks and balance system. Those wanting to take part in the scheme just had to apply through the ATO. Proof would only be needed if the ATO decided to check up on you.

The treasurer, Josh Frydenberg, and the prime minister, Scott Morrison, allowed those affected by the coronavirus pandemic to have early access to up to $20,000 of their superannuation savings. Photograph: Mick Tsikas/AAP

The government has defended the scheme as necessary in the response to the economic impact of the Covid pandemic. It will likely use the same reasoning to delay, or more likely scrap, any further increases to the compulsory superannuation contribution.

The review found that the majority of superannuation guarantees are “paid for through lower growth in wages”. Higher super contributions means lower working life pay.

“In general, employers will respond to an increase in employment costs with a combination of four possible changes: 1. Increase the prices of their products or services 2. Reduce employee wages (or wages growth) 3. Reduce the amount of labour demanded 4. Reduce their profits Even if wages are unaffected, lower labour demand and higher prices are also costs borne by workers,” the review panel reported.

But there is little evidence employers will return foregone super increases in wage growth. The report assumes (based on Myefo data) nominal wages will grow by 4% per year. That hasn’t happened since 2009. Lower wages growth equals lower retirement savings. Keeping the super contribution rate at 9.5% would mean lower income earners would see balances of 16%-18% lower than if it had been increased to 12%, while middle and higher income earners would lose between 14%-15%.

But the review also finds maintaining the super guarantee at 9.5%, without the slated increases over the next five years, could result in lifting working life wages by 2%.

And that’s all the government needs to say it’s off the table. More money in your pocket now, while the nation is in recession, with plans to sell the house, or at least draw down on its equity (if you own one), spend retirement savings (if you have them), access pensioner loan schemes (if you’re eligible) and remember the age pension is there as a safety net (if you aren’t relying on it for housing and living costs) in the future.

We won’t know for sure until closer to next year’s budget, which is due to be handed down in May. But given these findings, and the government’s current disposition towards superannuation, you could probably bet the house on the legislated increases being scrapped.

SMH: Getting people to spend their retirement savings is the main game

One of the first things people getting financial advice are told is to read the fine print.

Those thinking that holding the superannuation guarantee at 9.5 per cent will be a salve for all the problems around wages and retirement income need to look carefully at everything in the 638-page report dropped by the federal government on Friday.

The income review report sets out many of the issues bedevilling the retirement income system.

Most attention, especially within the backbench of the Morrison government, has been on the legislated increase in the superannuation guarantee to 12 per cent by 2025.

The report goes into a large amount of much-needed analysis of this policy, which has been a key part of retirement incomes and the broader economy since its introduction by the Keating government.

Around the superannuation guarantee has grown an entire industry with many eager to clip a little bit of the retirement cash going into the accounts of millions of Australians.

According to the report, sticking at 9.5 per cent, rather than raising to 12 per cent, means a person on a median income would enjoy about a 2 per cent, or $32,400, bump to their income over 40 years of working life. It works out at $15.60 a week.

The trade-off would be $32,900 less in income in retirement. That doesn’t sound too bad, except the review notes that this person would have $70,800 less income from their superannuation. They would need an additional $37,900 in age pension over their retirement years.

This trade-off is open to debate. But the report’s authors don’t think this is the main game.

That lies in what people do when they leave the office for the last time and put out the “gone fishin’ ” sign.

The Federal Government is considering canning already-legislated increases to the superannuation guarantee following an independent review into Australia’s retirement income system.

People are dying with huge nest eggs, afraid to draw down their retirement savings due to concerns about health costs, aged care, out-living their savings or wanting to leave an inheritance to the children.

Analysis for the report shows the average super account at a person’s death is expected to grow from about $190,000 to more than $480,000 by 2059.

In other words, all of the money being put away for retirement is never going to be used.

The review covers a range of options for getting people to use their superannuation for its prime purpose – supporting retirement.

The minimum drawdown of super, currently 4 per cent, is acting as a de facto maximum.

Just 2288 people are using the pension loans scheme, a reverse mortgage-style scheme that allows retirees to take out a loan from the government to cover living expenses, secured against their home. The review finds that encouraging people to borrow about $5000 a year through this scheme would deliver them ready cash while also drawing down a small amount of the equity in their home.

Retirees shy away from using annuities to deliver an ongoing income, partly because of fears they will outlive their retirement savings.

The assets test around the age pension actively encourages people to stay in their home rather then use the equity built up in it.

So tied are we to the home as an asset, the review finds between 35 and 45 per cent of all people of retirement age say there is no circumstance under which they would draw down equity in their home.

Most retirees want a stable income. But according to the review, the age pension means test, combined with minimum drawdown requirements for super, “does not lead to stable income for those affected by the assets test”.

Politically, the headline is all about the super guarantee. But the real issues, what will affect millions of retirees, is getting people to spend their retirement savings.

And not one of the solutions is easy.

SMH: Opinion/ Andrew Bragg – Too much self-interest: why the super system is broken

The super system has been let down by both sides of politics for too long. I know because before I entered Parliament I was at the coalface of the business sector at the Business Council of Australia.

I could see the major finance players had too much influence over Liberal Party. They argued that more super was always a good thing. Too many vested interests were putting their own interests ahead of workers and the nation. And getting the policy settings they wanted.

The Federal Government is considering canning already-legislated increases to the superannuation guarantee following an independent review into Australia’s retirement income system.

Today, I see the union/super fund influence over the Labor Party which demands more super so the funds can funnel more money to a dwindling union base. Finally, we have an independent report which has my side of politics looking more critically at super for the first time in 30 years.

The response from Labor leaves a lot to be desired. Even before the 600-page report was released, Labor and the super lobby said it was “wrong”. Labor defends the status quo even though the system costs more than it saves, doesn’t get many people off the pension and has among the highest fees in the world.Advertisement

When I was elected to Parliament in 2019, I was determined to take a fresh look at super, an idea Australia is heavily invested in. We must make super work and I said as much in my first speech and my 2020 book, Bad Egg: How to Fix Super.

I have never said super was a bad idea, just that the system was broken and needed to be fixed. My policy ideas have now been vindicated by the Retirement Income Review. There are two consequences which should flow from the review. First, superannuation has damaged home ownership and this trend must be reversed. Home ownership is more important than super. The report states that private property ownership should be the focus of the retirement system with home owners having better retirement outcomes than renters and more equity to draw down on in their later years.

As I report in my book, more Australians are struggling to buy a house and pay off their mortgage than ever. The average deposit for a first house doubled between 2000 and 2015. The review demonstrates the reality that more super means less wages or a smaller deposit for a first home. “About one-quarter of retirees who rent privately are in financial stress, primarily because of high housing costs,” it reports. The facts and figures speak for themselves:“Twenty-eight per cent of early retirees are in financial stress. Renters who retire before Age Pension eligibility age have the highest level of financial stress in retirement.”

Second, superannuation is too expensive for Australian taxpayers. The report says: “The cost of superannuation tax concessions is projected to grow as a proportion of GDP and exceed that of age pension expenditure by around 2050. This is due to earnings tax concessions. The increase in the super guarantee (SG) rate to 12 per cent will increase the fiscal cost of the system over the long term.” Super concessions will balloon and the system will never pay for itself. We should adopt a clear objective and framework to ensure it becomes a net positive to budget scheme.

How could we have a system without an objective or a framework after 30 years of operation? Is it any wonder the system costs more than it saves with no real prospect for a positive budget contribution. The high budget cost is in addition to another major flaw which has been allowed to fester for too long. The fees are too high.

Yes, we addressed this in the budget with reforms to cut fees but I have long advocated we should go further and establish a cheap and cheerful government default fund. This could cut the average fee from around 1 per cent down to 0.3 of a per cent and negate the need for a higher mandatory contribution rate.

On the mandatory super rate, the report is critical: “Maintaining the SG rate at 9.5 per cent would allow for higher living standards in working life. Working-life income for most people would be around 2 per cent higher in the longer run.”

It’s ludicrous that Australians pay more in super fees than they do on their power and water bills. We pay $30 billion a year in super fees. This Retirement Income Report adds facts to the debate which has been polluted for too long by foul self-interest. There is too much self-interest, far too much waste and not enough delivery on key objectives.

Australia is so heavily invested in super – we should make it work. And when you hear someone defend the status quo, don’t forget Jack Lang’s quip: “Always back self-interest. At least you know it’s trying.”

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