nearly all<\/a> the income tax paid over their working life. Two factors, the small proportion of older people in the population and few people of work-force age receiving other income support payments, allowed this generosity. Continuing increases in longevity have added to the actuarial costs of the age pension since then partially offset by an increase in the entitlement age to 67.<\/p>\n\n\n\nThere has been no further actuarial valuation of the cost of the current benefits on offer. Successive governments continue to spend substantial amounts on pension benefits without any scrutiny of whether they are getting value for money and helping the right people. The system is heavily biassed in favour of homeowners and helps maximize the inheritances of their fortunate children. The rules and rate structures do not recognise the major cost pressures that the home-owners subsidy places on retired and other renters in the private market.<\/p>\n\n\n\n
Two costly inequities are not widely publicised or known about. First the age pension income test assesses recipients of indexed government and other pensions more generously than those relying on past savings to generate income. (Guess who formulated the policies. Indexed pensions have much greater value than lump sums even when inflation rates are low). Unbelievably, the automatic pension boosts for inflation provides the same dollar increase for those receiving $1 a fortnightly pension as a full rate usually much worse off pensioner receives.<\/p>\n\n\n\n
Compulsory super started off as a modest boost to the pay of powerful Melbourne unionists and certainly not as a way of reducing future age pension outlays. Greg Sword and Gary Weaven of the Storeman and Packers Union lobbied the Fraser Government to endorse this means of getting around restraints on wage increases. The change of government set the ball rolling to the current 12% compulsory super arrangements.<\/p>\n\n\n\n
No government has ever commissioned a detailed cost-benefit analysis of the Compulsory Employer Superannuation contribution legislation. The decision makers did not even consider whether the benefits included reducing age pension and helping fund aged care outlays. If they had been why would the legislation not cover the self-employed and others living on investment income. Allowing access to the money as a lump sum also suggests that the motive was solely to boost employee payments in a tax effective way.<\/p>\n\n\n\n
This legislation has increased tax expenditures. Currently the annual loss in collections (Treasury estimate for 2024-25) are around $60 billion. This converts into $3,500 annually averaged over 17 million working-age residents many of whom do not have significant superannuation assets. Furthermore, these costs will continue to increase rapidly going forward because of the increase in the contribution rate to 12% of wages paid and the continuing rapid growth in total account balances.<\/p>\n\n\n\n
Focusing on achieving large reductions in government pension and aged care outlays could help offset the growing pressure on the budget. Alternatively given the problems increasing numbers of workers are facing in achieving home ownership and meeting increasing rent costs, there may be merit in considering alternative policies to compulsory super giving workers greater flexibility.<\/p>\n\n\n\n
Especially with the difficulty young, middle, and older age groups are now facing in obtaining and keeping jobs, major policy shifts may be the only way ahead. Tightening up the eligibility criteria for government welfare aid is one possibility. Focussing on the generosity of the superannuation tax concessions is another. A more sensible approach would be a combination of the two.<\/p>\n\n\n\n
Working for Dr Sax in SWPS, we developed one benchmark for subsidising occupational super. The starting point, quite reasonable and fair in an overall context, was ensuring that recipients of superannuation tax concessions only received a maximum subsidy equal to the actuarial value of the age pension. Unfortunately, current arrangements allow double dipping, i.e. allowing retirees to receive help from both government benefits even when the super concessions have provided benefits well more than the cost of the age pension.<\/p>\n\n\n\n
Starting from fresh avoiding double dipping would involve easy policy changes. By providing all taxpayers with an indexed tax credit equal to the single person actuarial value of the age pension, taxing superannuation as personal income or under company tax rules (to simplify accounting and compliance) would be easy. When the available tax credit is exhausted, there would be no further tax concessions. Those reaching retirement with any unused credit could convert this into an equivalent value annual indexed pension. Simple but fair use of government money.<\/p>\n\n\n\n
Treasury and Social Security did not support such a logical approach to aiding retirees. Social Security found merits in simplifying the system by providing the age pension to all and clawing back some from the better off via personal income tax. Treasury amongst other reasons such as outsiders making policy suggestions to governments objected because it threw light (a later chapter) on the (my words extreme) generosity of their unfunded superannuation scheme.<\/p>\n\n\n\n
This is of course all background. We cannot start from fresh and must make do with what we have got. That is crappy and unfair arrangements. Take the current superannuation arrangements even after the very weak recent S296 changes which increase tax slightly on those with balances above a indexed $3m and even more above $10 million. <\/p>\n\n\n\n
The current concessions favour the well-off and well-advised. Those with large assets understand super is the tax shelter par excellence even if invested in low or risk-free assets. Having my assets in super rather than all in personal names reduced my tax bill by (conservative estimate) at least $190,000 last year. Even if the returns were 50% of those achieved the tax saving was $95,000. (The S296 changes will increase my tax bill by no more than $20,000 or less if I change investment strategies).<\/p>\n\n\n\n
These are figures for one individual. Many super accounts are much larger than mine. The current maximum annual age pension is $31,226 (single) and $47,070 (combined couple) plus valuable health and aged care concessions. Even if last year was an exceptionally good year for super funds, how can any government provide such a lavish tax shelter when other parts of the system are ripping money out of wage earners and penalising non-homeowners and reducing their cash flow to enter the market.<\/p>\n\n\n\n
More about this later when I detail just why and how our super policies have become so unfair. Self-interest and political decisions to maximise the benefits of being in parliament could have contributed to the current massive bureaucrat and politician unfunded super benefit liability. Alternatively, they may have run up these huge liabilities because they considered they needed more government support in retirement than ordinary workers in more mundane workplaces, earning much less. <\/p>\n\n\n\n
Besides reducing tax collections, our compulsory super arrangements present a major and insurmountable obstacle to reducing the reliance on personal income tax to raise revenue. All other developed countries levy social security taxes on employers and even on individuals themselves as a major source of funding. The 12% compulsory super levy on employers plus 5% payroll tax to the States leaves extraordinarily little scope to introduce a new social security tax to help meet pension and aged care outlays.<\/p>\n\n\n\n
The government could levy a new social security tax on those not covered by compulsory super legislation. But the prospects of this ever happening are not even worth discussing. <\/p>\n\n\n\n
Reducing the budgetary costs of compulsory super is not on the agenda of any political party. Ensuring that the money accumulated provides a retirement income is also not an issue under consideration. Worse still our policy makers are ignoring the increasing percentage of the population retiring or losing their jobs while they still have mortgages or renting accommodation.<\/p>\n\n\n\n
Denying them the opportunity to withdraw their super tax-free after 60 and pay off their mortgage or buy a home would be cruel especially given how heavily our age pension and tax system favours homeowners. Reviewing whether the large and growing subsidy to compulsory super is a cost-effective way to help these taxpayers needs urgent consideration.<\/p>\n\n\n\n
A later chapter into the costs and benefits of abolishing compulsory super helps you the reader to assess the pros and cons of doing so. Amongst the costs is that on average 40% of the money received by larger funds (not SMSFs) is at once shipped offshore and not invested in Australia. On the positive side the reliance of super funds on franking credits to boost income reduces the risks (which worry me given how much of the valuation of imputation has increased share prices) of a future stressed government hacking into franking credit rebates. <\/p>\n\n\n\n
Labor recently tried unsuccessfully to implement a partial measure to reduce the cost of the imputation system. But the easiest quickest budgetary fix for a desperate government would be to revert to double taxing dividends.<\/p>\n\n\n\n
\nOur costly and not well-designed age pension system<\/li>\n<\/ul>\n\n\n\nAllowing individuals starting at age 60 to withdraw all or part of their funded super balances tax-free as a lump sum increases retiree\u2019s ability to maximise the benefits offered under our age pension rules. Provided (an extremely big ask) they can trust them, older Australians can gift to relatives all or a large part of their assets and after five years while they may still control or benefit from these family assets Centrelink totally ignores them under its asset test. Even better, like under the personal income tax legislation social security ignores owner-occupied homes of unlimited value in assessing age or any other pension entitlements.<\/p>\n\n\n\n
Owning a house incurs running costs, but especially over the past decade and going forward these are largely or more than covered by value increases. And if budgets are tight, especially at older ages reverse mortgages offer a simple helping hand to keep the social security advantages of owning a family home. Compare this with the help available to retirees renting in the private market or elsewhere. Despite burgeoning house price and rental costs, the maximum age pension rental subsidy available (up to 75% of the rent paid up to a maximum $110 a week) lags market changes-especially in the major cities <\/p>\n\n\n\n
Politicians and policy makers conveniently ignore these key equity issues. Their implications for ensuring an adequate supply of affordable housing are major especially with elevated levels of migration increasing demand. Penalising and thereby delaying sale of the family home reduces the available supply and the ability to increase housing density. Current Homeowners and their heirs gain from increasing house prices, which increases the pressure on those renting or buying their first home.<\/p>\n\n\n\n
Way back I co-authored a book on how to get the pension. Even then, the unlimited value exemption of the family home and the flexibility to make gifts of assets ignored after 5 years featured as key strategies. Using reverse mortgages has gained popularity more recently understandably given the appreciation in house values now occurring. <\/p>\n\n\n\n
When advising, being aware of housing market options (my brother Malcolm set up Dixon Homes one of Queensland\u2019s biggest affordable home builders for many years) helped greatly. For example, in Canberra despite lower house prices than in other capital cities, helping parents stay in their home for as long as possible was a winning choice in many cases (e.g. those on large blocks in inner suburbs, fashionable areas etc). With their own retirements protected by their own home ownership and generous super chipping in to help mum and dad keep their home was a successful inheritance maximising strategy.<\/p>\n\n\n\n
Now with many families not so fortunately placed, the rapidly growing reverse mortgage industry will continue to prosper. The major asset of many current retirees today is still the family home owned outright but this is changing quickly. So far, no political party expresses concern about the fairness of the current legislation even though as Bob Dylan rightly points out the times they are changing. Reconsidering both the costs and rationale for continuing current policies is long overdue. <\/p>\n\n\n\n
How can we ever achieve fairness if we continue to have one rule for the haves and tougher arrangements for the have-nots. One key area of concern is the generosity of the super tax concessions when retirees also have easily achievable ways to maximise their age pension and related help.<\/p>\n\n\n\n
With median house prices in many areas around or above the million dollar mark and all capital gains available tax-free, now could be the time to reconsider both slow but effective changes to taxation and social security arrangements to help relieve the pressure on less fortunate younger and middle aged taxpayers. Not doing anything is a recipe for continuing with growing burdens on the segment of the population who can least afford it.<\/p>\n\n\n\n
Summing up allowing tax-free capital gains even in the many millions of dollars and ignoring the value of the family home in assessing the eligibility for generous (but still inadequate for many) age pension benefits have created serious inequities in many ways unique to Australia. For example, try accessing aged care or other similar government help in the U.K. and keeping any equity in the family home or receiving large tax-free capital gains on the family home in the USA.<\/p>\n\n\n\n
Consider a glaring market distortion created by the current rules. Many future retirees will still be renting or have large mortgages when they retire or loss their job at age 60 or later. The tax and social security benefits of paying off their mortgage or buying a property using their superannuation far exceed the benefits of using the accumulated super assets to boost their retirement income. Might it not be more sensible to divert some or a large part of the cost of subsidizing super contributions into helping more people achieve homeownership. Forcing employers to divert 12% of every employee\u2019s income into may not be the most sensible way ahead.<\/p>\n\n\n\n
To sum up, given how favourably the current rules aid owner-occupied homeowners, no future government has any chance of changing the current super rules granting access to super benefits as a lump sum after age 60 (or 65 depending on their circumstances). Read on to see why I consider compulsory super as a major if not the most important reason Australia is suffering from budgetary problems.<\/p>\n\n\n\n
Australia may not want Singapore\u2019s remarkably elevated level of compulsory super contribution. But when Georgina Carnegie and I reviewed the Singapore system for the Commission on the Future, Singapore\u2019s system had helped achieve both a strong economy and 92% home ownership. I cannot say anything so reassuring about our current arrangements.<\/p>\n\n\n\n
Back to the age pension itself. By any standards, it may just be adequate in size for retirees comfortably housed. But for those with little assets and private income renting in the housing market the aid is at best meagre. Iindexation for inflation three times a year helps cope with cost increases but full or near-full rate pensioners still need more income or family back-up for unexpected outlays. Ironically, part pensioners are more fortunate. Gaining entitlement for even $1 a fortnight of pension allows the recipient access to the same dollar automatic inflation increase as a full-rate recipient receives. Valuable fringe benefits worth up to $40 a fortnight and much more when there is health issues add to this benefit. <\/p>\n\n\n\n
You can assess yourself the goodies offered. Not being an actuary but owning a computer has helped prepare the following approximate costings of the current value of the age pension. Obtaining an income stream equal to the indexed age pension for the average expected life span at age 67 -18 years (single), 19 years (married couple combined) requires accumulating by age 67 the following amounts:<\/p>\n\n\n\n
<\/div>\n\n\n\n
<\/th> 0% Real Return<\/strong><\/th>3% Real Return<\/strong><\/th>5% Real Return<\/strong><\/th><\/tr><\/thead>Single<\/strong><\/td>$593,000<\/td> $430,000<\/td> $370,000<\/td><\/tr> Combined Married Couple<\/strong><\/td>$895,000<\/td> $670,000<\/td> $570,000<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n<\/div>\n\n\n\n
Even Bill Hayden\u2019s Blind Freddy can see that funding payments of these amounts for all eligible people over age 67 is a big ask especially when the government has no earmarked taxes devoted solely to doing so. Restricting the number of eligible recipients to those in need is the only way of limiting outlays.<\/p>\n\n\n\n
Assume as responsible people we want to fund the future liability as it increases over the working life of the average taxpayer. Assume this is 45 years. With migration at later ages and a growing percentage of the working age population already receiving welfare this may be too optimistic but let us continue. To accumulate the actuarial value of the age pension would require setting aside annually the following amounts:<\/p>\n\n\n\n
<\/div>\n\n\n\n
<\/th> 0% Real Return<\/strong><\/th>3% Real Return<\/strong><\/th>5% Real Return<\/strong><\/th><\/tr><\/thead>Single <\/strong><\/td>$13,000<\/td> $9,555 <\/td> $8,222<\/td><\/tr> Combined Married Couple<\/strong><\/td>$19,888<\/td> $14,888 <\/td> $12,666<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n<\/div>\n\n\n\n
Achieving home ownership without receiving gifts and bequests to help requires much larger savings out of after-tax income. Obtaining an inflation adjusted annual gift of up to around around $10,000 or $15,000 (couple) is nevertheless worth thoughtful consideration.<\/p>\n\n\n\n
Personal income tax collection in 2024-5 totalled $347 billion. ABS figures show around 17 million people in the working age population. Simplifying the calculations by ignoring the income tax paid by older Australians above age pension age puts average annual personal income tax collection at around $20,000 annually. With the population continuing to age further, this is not good news for taxpayers. Not having any earmarked taxes to fund age pensions will continue to put pressure on personal income tax collections.<\/p>\n\n\n\n
As mentioned previously, we have no or very few options other than to reconsider pension eligibility criteria and getting value for money from our large superannuation tax concessions. provide positive returns. <\/p>\n\n\n\n
By handing over payroll tax to the States, the Gorton government made it more difficult to introduce social security taxes. The compulsory super payment now at 12% up to a high-income income level has gone further and completely closed off this way of reducing personal income tax burdens. Despite these past policy decisions, there is a major flaw in the strategy to increase retirement assets and income. Compulsory super rules apply only to employees or contractors considered to be employees under the legislation.<\/p>\n\n\n\n
Self-employed and investors are free to choose how they invest their income. If the reason for compulsory super is to force people to save for retirement, the current policy unfairly discriminates against everyone who has no workable alternative to paid employment. The government is depriving around two thirds of the population flexibility to invest in their preferred way. The other third is more fortunate in being able to choose whether they invest in super or give priority to achieving homeownership and other objectives. <\/p>\n\n\n\n
Just as concerning is the prospect that our high superannuation and payroll tax employer on costs are increasing the incentive for employers to use AI to shed labor and reduce salary levels. Personal experience suggests the threat is serious. My interest in do good investments led to my backing Australia\u2019s first AI company Softlaw (sold to Oracle in 2008). Shunned by the Australian bureaucracy because of the threat to the jobs of many, Gordon Brown\u2019s government seized the opportunity in two departments to address budgetary pressures through major job shedding. The UK success generated Larry\u2019s highly profitable takeover. The rapid improvement in technology since then has markedly increased the attractions of AI.<\/p>\n\n\n\n
When if ever our decision makers undertake a clinical cost-benefit analysis of compulsory super for future budgets, its impact on reducing future employment opportunities, and the resulting increase calls on income support from people aged less than 67 should receive a high priority.<\/p>\n\n\n\n
Watch closely whether Treasury and a future inter-generational equity report even raise this issue. Their commissioned Callaghan report and latest inter generational review of actual and projected future outlays saw them as largely being under control by assuming continuing reasonable future GDP growth. My perspective is different. To sum up, there is no certainty that funding our continuing ageing population and social security system is under control. <\/p>\n\n\n\n
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