Tuesday, May 12, 2015

Age Pension and Super

From the newsletter of international best selling author, finance and investment expert, radio broadcaster, newspaper columnist and public speaker – Noel Whittaker.
Australia has one of the most generous superannuation systems on the planet; there is just one problem – it’s unsustainable. Under the current rules, a couple can have up to $1,151,500 of assets, plus a family home of unlimited value, before losing access to at least a part pension. The cut-off point for the income test is $74,818 a year. 
The Coalition tried to reduce age pension expenditure by tying increases to the cost of living instead of average weekly earnings. For some reason, which I still can’t understand, this was attacked on all sides and the proposal has been abandoned, at least for the time being. They have now announced they are changing the taper rate – that is the rate at which pension decreases as assets or income rise. But changing the taper rate is fraught with difficulties. If you make the taper too steep, pensioners are placed in the invidious position that it’s not worth earning extra income because of the effect on the pension. If you make it too shallow, as it is now, you push out eligibility so far that even a person earning $74,000 a year is eligible for a part pension. 
Currently, under the income test, every additional dollar earned above the threshold causes a reduction of $0.50 in pension. Under the assets test, the full pension is reduced by $1.50 per fortnight for each $1000 above the threshold. Pension eligibility is then assessed using the test which produces the lowest pension. 
Because of the way the numbers work, almost everybody with financial assets in excess of $350,000 is assessed under the assets test. The government has now announced that the asset test taper rate is going to be changed, but by increasing the threshold at which it starts, a significant number of part pensioners will become full pensioners. For a single homeowner, the base will rise from $202,000 to $250,000 and for a homeowner couple it will rise from $286,500 to $375,000. The cut-off points will be approximately $535,000 for single homeowners, and $810,000 for homeowner couples. These are approximate numbers as the changes will not take effect until 2017, and the numbers will be increased on 1 July each year by the CPI. This will hit hardest on retirees with substantial assets. 
An age pensioner couple with $750,000 of assessable assets should currently be receiving $602 a fortnight pension. Under the new rules, this would drop by $430 a fortnight, or $11,180 a year. That’s going to be a big impact on their budget. I was discussing this on Radio 2UE last Saturday with George and Paul, and a listener pointed out that under the proposed rules, a person with $900,000 in assets would get no pension whatsoever, and if their money was in the bank earning 3%, the income generated would be just $27,000 a year. They contrasted this with the situation of a full pensioner with minimal assets, who would be getting $34,000 a year indexed. It’s a valid point, but as I said to the listener, the person with $900,000 would be taking a very high risk if they kept their money in cash. They should have a diversified portfolio which hopefully should be giving them at least 6%.
Yes, I am well aware that many retirees are risk averse – this is why I have been urging my readers for years to get acquainted with growth assets like shares at an early an age as possible. 
The big news in super right now is the proposal by Opposition Leader Bill Shorten to hit thousands of self funded retirees with a new tax on super – the implications of which have obviously never occurred to anybody in the Labor Party. Unfortunately, dreaming up impractical ideas to hit superannuants is not just the prerogative of Labor. 
Who could forget August 1996, when incoming Prime Minister Howard introduced a surcharge of 15% on superannuation contributions? There was no consultation with industry, and the cost of administering it was almost as much as it raised. It was called a ‘surcharge’ because the Coalition had promised “no new taxes”, but voters weren’t fooled by the terminology. It was one of the most unpopular imposts ever put upon the Australian people, was watered down in 2001, and abolished altogether in June 2005. The irony is that it is still causing work at the tax office due to defined benefit liabilities, and the amendment of old returns. When introducing legislation to abolish the surcharge, Finance Minister Nick Minchin said, “We made clear in 1996 that the surcharge was not good policy per se, but was a necessary measure to help get the budget back in good shape … we can now remove what was only ever seen as temporary medicine for Labor's fiscal follies”. 
The Gillard Labor government announced a reintroduction of the surcharge at its original rate of 15% in the May 2012 Budget. It was not passed by parliament until June 2013, but was then backdated to take effect from July 2012. But an extra tax on contributions is not enough for Labor. They now wish to tax members in pension phase as well. Shorten has announced that, if elected, Labor would “re-introduce” a tax on the earnings of super funds, and reverse the abolition of such a tax by the Howard government in the May 2006 Budget. He can’t even get his facts right. There has never been a tax on the earnings of a super fund in pension phase – what the Howard government actually did was make withdrawals from super tax free once a member reached the age of 60. 
Labor proposes a tax of 15% to apply to the earnings of superannuation funds in excess of $75,000 a year per member. On the face of it, that’s simple, but as ex-Tax Office Deputy Commissioner Stuart Forsyth points out, it would be a nightmare to administer in practice. He believes Labor is suggesting “a new calculation of a notional share of the taxable income of the fund that could apply to a member’s account as if it were not in pension phase. This would then be adjusted for capital gains, and then aggregated by the ATO. Any liability would somehow be advised to multiple funds, with the potential to be amended on multiple occasions.” 
As Forsyth points out, this would create a new and strange compliance burden, while the cost to implement it would be prohibitive both at the government level and the industry level. Whenever I make a speech, I ask the audience what they think about super. There are those who love it, and those who hate it – but on one aspect there is a common belief. Everybody is sick of the continual changes. 
When the Rudd–Gillard government was in office, they made history by being the only government in Australia’s history to alter the superannuation settings in every Budget from the time they gained office in 2007 until their resounding defeat at the polls in 2013. There is an overwhelming demand for superannuation to be left alone. It’s time all political parties listened.
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