superannuation - thegoodwills.com

How deep is the financial hardship well?

financial-hardship-savings — How many weeks your savings will last without income – graph provided by The Grattan Institute

It is probably no comfort to anyone to reflect on the year when investors could get 14.95% on a bank term deposit. It was January 1991, the recession Paul Keating said we had to have. People with personal loans and credit card debt watched horrified as repayment rates went to 20% and beyond. The average variable mortgage rate rose to 17.5% at the same time. The gap between the haves and have-nots in that era was painfully obvious.

In the early 1990s, financial hardship forced many younger Australians, unable to service their mortgage repayments, to walk out of their mortgaged houses, leaving the house keys on the bank’s counter. Meanwhile, the lucky worker/investor with a lazy $100k to invest could earn $14, 950 in interest (the price of a new car), over 12 months with no risk whatsoever. Except, of course, if the deposit was with one of the eight financial institutions that went broke in that era.

In 2020, the COVCID-19 pandemic has certainly made it clear how many Australians are suffering financial hardship. At one end of the scale, you have self-funded retirees, on the pig’s back, really, but struggling with the collapse in the value of shares and difficulties finding safe places to store their cash for a return of more than 1.75%.

At the other end of the generational spectrum, while the official unemployment figure is an improbably low 6.2%, it does not reflect the one million casuals who not only lost their jobs, but did not qualify for the Federal Government’s safety net, Jobkeeper.

COVID-19 struck at a time when the Australian household savings rate had dropped to 3.6% (20% is the ideal), and is forecast to drop to 2% or lower in 2021-22. The rate is calculated as a percentage of the amount saved from disposable income.

Meanwhile household debt – most of it linked to mortgages – is at a high of 119.60% of GDP. Economist Gerard Minack told the 7.30 Report in November that household debt at 200% of household income was a “massive macro risk”.

Then came COVID-19 and an economic shutdown the likes of which the country has not seen since the 1930s.

I’m running these confronting numbers past you because there is a lot of nonsense written about Poor Pensioners vs Irresponsible Millenials. Also, some commentators, particularly in the housing sector, are ‘talking it up’ at a time when worst-case scenarios predict a 30% drop in prices.

Conversely, stock market analysts are talking the market down, even as it keeps (slowly) recovering. You have to wonder why.

In mid-April the share market was officially proclaimed a “bull market’’ by the Australian Financial Review (AFR), because share prices had jumped 20% since mid-March.

What’s amazing is that the market has rallied at the same time that Australian superannuation funds paid $9.4 billion in financial hardship paymentsto approximately 1.17 million fund members. Australian super funds have a large exposure to equities, so they have managed the payments so far by selling investments, including shares and holdings in managed funds.

They also asked for help. As the AFR’s exceptionally well-informed Chanticleer observed, The Australian Superannuation Fund Association (ASFA) put a proposal to Treasurer Josh Frydenberg to allow the Australian Taxation Office to cover the hardship withdrawal payments. The plan was super funds would repay the payments over a period of time. The industry also called on the Reserve bank of Australia to provide a liquidity buffer. None of this happened, but Australian funds are expecting a continuation of the rush to withdraw hardship payments.

Under the COVID-19 measures, individuals whose income has been affected can withdraw up to $10,000 of their superannuation balances prior to June 30. They can, if necessary, apply for a further $10,000 after June 30.

There are ordinarily a few hoops to jump through to apply for an early-release hardship payment. As we know, superannuation is meant to be locked away until you retire or reach an age when you can officially tap the fund for money. But in these dire times, super funds worked with the Australian Tax office and other government departments to expedite hardship payments.

By close of business on May 7, ASFA made around 1,175,000 individual payments, totalling around $9.4 billion in temporary financial support. ASFA estimated that 98% of applications were paid within five working days.

Applying for a super hardship payment is a risky business if you are under 35. According to AMP, the average super balance for people aged 25-29 is $23,371 for men and $19,107 for women. In the age group 30-34, the average balance for men is $43,583 and for women $33,748. So it does not take too many trips to the hardship well to run out of cash. I used those age groups deliberately, as most pollsters agree that so-called Millennials are people now aged between 22 and38.

But it is not just the young that have little in the way of savings. According to the Grattan Institute, 50% of working households have less than $7,000 in savings. This probably explains the rush of super fund hardship applications. The Institute admits the data is a few years old, but says the scenario is unlikely to have changed much.

“As you might expect, working households on lower incomes tend to have less in the bank. Among working households in the bottom fifth of household income, the median total bank account balance is just $1,350.

“The meagre savings of many low-income workers are a big worry because they are most likely to be employed as casuals and therefore not have paid sick leave or annual leave.”

The Grattan Institute makes the point that as the lockdown drags on, more people will start to run out of ready cash.

“Our analysis shows that half of working households have five to six weeks’ income or less in the bank. The bottom 40% of working households has about three weeks’ income or less in the bank. A quarter of all working households have less than one week’s income in the bank.”

This last figure may bring your head up, if you remember news stories from New York, which we found shocking, of people with less than $400 in the bank.

Sometimes I think about these matters when doing the weekly grocery shopping, where retail prices are clearly outpacing inflation. (Ed: We did score a large pumpkin from a roadside stall for $3, so you can get lucky).

Those with a job who have not had a pay increase in years can justifiably feel cheated. Admittedly, the Federal Government came to the National Cabinet table with an extraordinary rescue package. But while one of these measures temporarily doubled the unemployment payment overnight, it now seems to be flawed piece of legislation.

People may rightly point out that employers are obliged to pass on the Jobkeeper payment of $1,500 a fortnight, regardless of what the employee was being paid previously. At some stage, these payments will stop and we will revert to the status quo. Will recipients who were technically overpaid have to repay some of this money, or does it just go to the deficit?

Robodebt II, coming soon to a cinema near you.

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Older Australians an economic burden

Treasurer Josh Frydenberg’s much-reported speech, where he referred to my cohort (the over-65s) as ‘an economic time bomb’, should not be seen as random.

The speech to the conservative think tank, the Committee for the Economic Development of Australia (CEDA), was deeply calculated. Frydenberg’s thesis is that older Australians should work longer and take up re-training to help facilitate a return to the work force, thus easing the country’s social security burden.

Frydenberg was immediately attacked by Seniors’ advocates who pointed out (for starters) that 25% of people on the government’s inadequate unemployment payment (NewStart) are aged 55 and over.

It came in a week when the ABC television debuted its much-hyped show, Australia Talks. The latter is based on a huge survey of 54,000 people, who were asked to prioritise their chief concerns.

The list of worries was headed by household debt, the cost of living and drug and alcohol abuse. Ninety percent of respondents answered they were ‘somewhat’ or very much’ concerned about the top three issues, with water (89%) and ageing population (87%) not far behind.

The Treasurer was interviewed the following day by 2GB radio shock jock Steve Price, who didn’t let him off too lightly:

Price: What do you say to our listeners – people like truckies, labourers and builders, all tradies, saying ‘look, we just can’t work past retirement age because physically our bodies are worn out’?

Frydenberg: Well, that is totally understandable and nobody is asking them to do that. What I am saying…

Price: Well, we are pushing up the age of the pension.

Frydenberg: But what I am saying is that when it comes to that age that you referred to (67), that was legislated by the Labor Party back in 2009 and we haven’t said that we would change the retirement age, so we’ve been very clear about that.

Price: But it goes up to 67, right?

Frydenberg: It does. And again, the Labor Party legislated that in 2009.

Price: But you’re going to leave that there?

The Labor Government did introduce measures in 2009 to increase the pension age to 67 through gradual increases during the period July 2017 to July 2023. But the Abbott government’s 2014–15 Budget proposed to increase the pension age by six months every two years from 1 July 2025 until it reached 70.

Despite Prime Minister Scott Morrison shutting down speculation last year that the government was considering lifting the retirement age to 70, it was a Coalition policy and could resurface at any time.

Ian Henschke from National Seniors Australia said it was unfair to stigmatise older Australians.

“We should blame previous treasurers from 1980 who have stood by and watched this happen.

“Let’s deal with the facts, for example, that older Australians want to work more and longer but they are not getting the work they need.”

“When they do retrain, we know they are experiencing discrimination.”

Statistics support the government’s rhetoric that older people are indeed either staying in the workforce longer or making a comeback. The workforce participation for over-65s stands at 14.6%, up from 6% 20 years ago. It’s not hard to find the reason for that: a basket of goods from the supermarket costing $200 in 1999 will set you back $331 today.

There is lots of sage advice around for people nearing retirement age about how much money they will need to fund a comfortable retirement. There is less information around for those in advanced stages of not working anymore and trying to make their money last.

Moreover, factors well out of everyone’s control continue to move the goalposts, forcing retirees to come up with new and inventive game plans. Specifically I’m talking about the unsustainable investment returns available to retirees, who typically are advised to invest in no-risk strategies.

The Association of Superannuation Funds of Australia (ASFA) advises that the ideal superannuation target for a single person on retirement is $545,000 (implying that a couple needs $1.09 million).

So how are we all doing then?

While half-watching the cheerfully superficial Australia Talks, I heard a butcher’s assistant confide that she had $45,000 in her super fund. She didn’t look old enough for this to be a worry yet, but let’s face it; you’d have to sell a shitload of sausages to reach that mythical half a million dollars.

Superannuation was supposed to be the panacea for older Australians not wanting to be a burden on the national pension scheme. But ASFA statistics tell a sobering story. While there are 16.1 million Australians with at least one superannuation account, one in three women and one in four men, across all ages, have no superannuation. So 25% of women and 13% of men are retiring with no superannuation, relying partially or substantially on the Age Pension for their retirement income.

Fair enough, the Age Pension is supposed to be a safety net for Australians who find themselves at 65+ and broke. But why doesn’t Josh Frydenberg shut down the loophole that allows a couple to earn about $75,000 per annum and/or have assets well over $2 million, and still be eligible for some benefits.

In case you had wondered, Australia is a long way down the list of countries which pays its retired citizens something close to a living wage. The Organization for Economic Co-operation and Development (OECD), analysed data from 35 member countries and a number of other nations. Pensioners in the Netherlands, Turkey and Croatia receive more than 100% of a working wage when they retire (the right-hand end of the graph).

At the other end of the scale, pensioners in the United Kingdom receive just 29% of a working wage (compared with the OECD average of 63%

Pensions paid as a percentage of a working wage

Image: OECD countries ranked by pensions as a percentage of a working wage. Australia is 12^th from the left, paying 43%. Source OECD.

The OECD’s 2017 report Pensions in Australia noted that public spending on pensions is low and will remain low (currently 4% of GDP and projected to be 4% in 2050) as opposed to 9% and 10% for the OECD. From this we can deduce the government’s future reliance on superannuation, including the government’s compulsory scheme and privately-funded superannuation accounts.

The old age income poverty rate in Australia is high, at 26%, compared to 13% across the OECD. This is partly related to the high prevalence of people taking superannuation funds as lump sums rather than annuities at retirement. These people, as any current affairs programme worth its spots will tell you, squander their money on travel, then risk falling into poverty if they outlive their assets. No doubt they will then sign on for our Age Pension (which costs the county $50 billion a year).

What, may I ask, is wrong with someone who has paid taxes for 45 years retiring on a combination of savings (super) and a part-pension from the government? Frankly, I’d have thought that paying $1 million+ in income tax through my working life would have been enough.

Nobody considered me a burden then, did they?

Further reading: https://bobwords.com.au/taking-an-interest-in-recessionary-economics/

Don’t touch my dividends, Dude

dividends-franking-credits — Photo: “How will we afford dog food without the franking credits from our dividends?” pixabay.com, CC Mike Flynn

There have been few occasions when dividends made it on to the front pages or lead item TV news. The first time was when Treasurer Paul Keating introduced the dividend imputation scheme in 1987, largely as a way of eliminating the double-taxing of company dividends. From that day, Australian investors were given franking credits on the dividends they received on their shares. This had the welcome effect of boosting the investment return for the investor or super fund. It was just the sort of incentive needed to encourage Australians to prepare for their retirement and aim to become self-funded retirees.

Keating’s scheme did not, however, include the cash refund of the franking credit component of the dividend, which was introduced by John Howard and Peter Costello in 2001.

The second time dividend imputation was ‘trending’ was last week when Opposition Leader Bill Shorten said if Labor gets back into power he would scrap the current system. While emphasising Labor would keep dividend imputation, he said the plan was to scrap excess cash refunds on tax that was never paid in the first place,

The main targets are people with super fund balances of $1 million and more. There are plenty of those distributed among the large super fund managers but also around 30% of the self-managed fund sector are in that category.

In 2017, 1.12 million Australians were members of a self-managed super fund. There were almost 600,000 funds with assets totalling $696.7 billion. About 30% of SMSF assets are held in Australian shares, the ones that pay fully franked (tax-paid) dividends to investors.

What Mr Shorten’s plan appears to lack is a sliding scale which would exempt retirees whose fund balance is below a certain threshold or whose franking credit refunds are below the average ($5,000 a year).

A 2015 study which set out to debunk the myth that one needs a minimum $1 million to retire said that half of Australia’s workers approaching retirement have less than $100,000 in super. Three years hence, the proportionate numbers won’t have changed that much. The study by the Australian Institute of Superannuation Trustees (AIST) sets out to educate people that super is designed to work in tandem with the aged pension and that it’s OK to do that. Even a low super balance of $150,000 can nicely augment your pension.

Yet Bill Shorten says some funds are paying zero tax but picking up a $2.5 million refund cheque. At face value, that would seem to be a loophole worth closing. But at the other end of the scale are individual SMSF members with low fund balances who are undoubtedly already receiving a Centrelink part-pension. The shortfall caused by scrapping cash refunds on dividends will inevitably be recovered via a tweaking of government pension calculations on income and assets. Those who do not qualify for the pension will lose the lot.

Just how important a subject this is for retirees is shown in the Association of Superannuation Funds of Australia (ASFA) superannuation statistics: 1.427 million individuals received regular superannuation income in 2015-2016. Weekly payments averaged from $328 (term annuity), $496 (account-based) and $616 (defined benefit). Franking credit refunds on dividends from the ATO no doubt contributed to these payments.

Some industry super funds have come out in favour of Labor’s plan, but there is plenty of opposition, though so far there is no detail on which to base a counter argument.

ASFA says the proposal could have a significant impact on low-income retirees both inside and outside the superannuation system.

Chief executive Dr Martin Fahy said the system already has a $1.6 million cap in the retirement phase and reforms to superannuation and retirement funding are working but they need time to bed down.

“If there is a concern about individuals with large retirement savings receiving the benefit of refundable imputation credits then this would be better addressed by measures more closely linked to retirement balance,” he said.

Currently, the Australian Taxation Office demands that if SMSF Trustees draw a Simple Pension, it must be a minimum 5% of assets (rising through increments to 14% for those aged 95 and over (!). For example, a fund with two members under the age of 80 and a balance of $450,000 must pay its members a minimum of $25,000 p.a. Providing their other assessable assets and/or income is under the threshold, they can also receive a part pension from Centrelink which could bump their annual income to around $45,000, (somewhere between a modest living and a comfortable retirement). The upside (for the country) in this fiscal strategy is that earnings will (hopefully) keep the members’ balances in the black for as long as possible. This in itself eases the burden on the aged pension system.

And if you need extra cash for a car, a bucket list trip to the Antarctic or to pay a ransom to a hacker, you can take a lump sum. If you’re Homeland’s Carrie Matheson, track down the troll, beat him up and demand he unlock the computer. (He just threw that in for light relief, Ed).

Policy on the run

You will forgive me for liberally quoting other sources on this thorny subject. The ALP has not published a policy paper or issued a media release. The only thing you will find is on Mr Shorten’s website, tucked away under the category: ‘Bill’s Opinion Pieces’.

I initially found Bill’s piece on a website run by the authority on all things super, Trish Power. Power, starting from the same position as all, except for Fairfax Media, which ‘has seen’ a policy draft, suggests it has all the hallmarks of ‘policy on the run’.

Trish Power’s website is a good place to visit if you want to avoid the scaremongering stories in the tabloids and current affairs TV. I bought a copy of her book “DIY Super for Dummies” and found it invaluable when starting our SMSF back in 2006. It may be overstating to say the promise of franking credit refunds was one of the attractions, but nonetheless it was.

Power and other guest writers are following this story while it remains a live issue so if you have a vested interest, here’s the link:

It does seem as if Bill Shorten is hanging his hat on this particular peg and plans to leave it there.

“When this (cash refund) first came in, it cost Australian taxpayers about $500 million a year,” he wrote. “Within the next few years, it’s going to cost $8 billion a year, more than the Commonwealth spends on public schools or childcare. It’s three times what we spend on the Australian Federal Police.”

You can see where he is shining his head torch when he writes that 50% of tax refunds go to SMSFs with balances of more than $2.4 million. Fine, stick it to the top end of town, but look further into this dodgy policy, Bill, and you will see that unless you giveretirees on modest incomes a break, they will be forced to rely more on the public purse. They will resent that and in turn resent you.

FOMM back pages: http://bobwords.com.au/super-end-week/