raveswei

20 Jul 2011, 03:57 PM

Not just that, but 401k contributions and fund income are not taxed. In addition, other fund costs (Cost of Administration) are significantly lower for 401k accounts.

All this has “compound” effect on retirement savings

peter fraser

20 Jul 2011, 10:58 AM

When I read this article I didn't look at the author as it wasn't property related. Of course I haven't got a clue if our dollar will rise as much as the headline states, but the article does raise quite a few interesting points. Even a move to $1.20 USD will have a massive effect.



It is written by Chris Joye, who the bears love to hate, however it is one of his best articles IMHO and shows what a deep thinker he really is. Read it without any pre-conceptions or prejudice, and it will help you understand what MAY occur in the future. There are a number of posters here from other countries who are yet to transfer money across to $AUD so they may be interested in this.

If true it will have huge ramifications for our industry, and also property especially in tourist areas like the Gold Coast.

Imported goods will look very cheap, but what other effects will this have on us?

LINK HERE

davel

20 Jul 2011, 04:30 PM

Good info.

I think its also important to remember that although all UK citizens are entitled as you say they are, a good % will not access their state pension because they dont need it. I dont know what that % is, but I imagine its got to be in double figures. Dont know how much that affects planning at the macro level, but at least its got to leave some surplus money each year.

Another point is that overseas residents dont get the annual inflation-based rise, right?

Sprog

20 Jul 2011, 03:26 PM

peter fraser

20 Jul 2011, 02:01 PM

In stark contrast, many western economies have little in reserve for this imminent problem.

Which ones?

I'm not familiar with all of them, but the ones I have looked at have massive social security trust funds (to use the US terminology) sequestered from general government revenues. These are financed by dedicated payroll taxes, generally of similar magnitude to Australia's 9% mandatory super levy. The actuarial soundness of the individual funding models (vs the current benefit levels) in each country vary, and have been subjected to revision from time to time--but the super scheme in Australia hasn't exactly been a beacon of stability either.

There are some key differences between the Australian scheme and that ofother western countries. The first is that mandatory super contributions in Oz go into individual accounts which offer considerable individual choice (and risk) around how the funds are invested. In other countries, the mandatory social security taxes go into a collective pool of assets that is centrally administered for the benefit of all future claimants, and it is generally very conservatively invested.

The second key difference is the payout. Australia allows myriad options for drawing down super balances after the preservation age. Depending on one's financial position (e.g. if the income from super is relatively low), there may also be an income top up from the "age pension". In other countries, the state pension is the payout from the mandatory contributions scheme, and eligibility for it is not means-tested.

(I'm deliberately ignoring employer-provided pensions, and the provision for voluntary additional contributions to retirement funds on a tax-advantaged basis. In Australia, since the super scheme is already based around individual accounts, additional contributions are lumped together with the mandatory ones--no separate system is required. Elsewhere, there is a need for a distinct scheme of "individual retirement accounts" (again using the US terminology). Indeed, the US has two different types of IRAs, 401(k) and Roth.)

So it isn't really accurate to say that "many western economies have little in reserve for the imminent problem". There are funds sequestered for the purpose. The question outside Australia is whether the reserves are sufficient to fund benefits at present levels (adjusted for inflation) as the boomer cohort retires. In places like Greece, the answer is clearly no. Elsewhere the situation is more manageable, through relatively restrained tinkering with the inputs (payroll tax rates), outputs (the pension levels), and eligibility criteria (primarily the retirement age). Essentially demographic pressures are forcing these state schemes to convert from defined-benefit to defined-contribution models, with the adjustments being felt by all retirees.

Note that the question of actuarial soundness also applies to the boomer generation within Australia. I think you're well-acquainted with both the statistics and the anecdotal evidence of underfunded super within the 46 - 65 age group. Mandatory super has been active for only part of the working lives of members of that cohort, and the 9% mandatory levy is barely adequate to sustain lifestyle over a full career's-worth of contributions.

peter fraser

20 Jul 2011, 06:07 PM

But what is your take on the unfunded public sector promised benefits. Perhaps I'm wrong, but I understand that most states, and many municipalities have massively underfunded and over promised. I don't have any info on the federal government pension fund status, but it would surprise me if it was fully funded.

The EU member states are a real mixed bag, with some countries very well funded (about 50%) whilst the others are almost completely unfunded.

This is getting a little old but Read This page 7 and note from the table 7 of the 15 countries had provisions of less than 20% of GDP - I don't know if it has improved since then. Difficult to tell the effect of this as each country may have different populations age pyramids etc. but I would assume there are significant similarities.

Given that our super scheme is now carrying about 100% of GDP I think we are better equiped than many countries that we would naturally compare ourselves to.

peter fraser

20 Jul 2011, 02:01 PM

Most other western economies to my knowledge, don't have the compulsory superannuation that we have had in place for 20 years. It won't completely save us, but it will dampen the effect.

Previous generations have happily retired with almost nil savings, at least retirees from now onward will have some nest egg, relieving the burden on the state.

Graph Super growth

It's now in the $1.2T to $1.3T range.

The Federal government also has the Futures Fund to help cover future commonwealth employees superannuation funding needs, and it holds about $75 Billion.

Futures Fund

In stark contrast, many western economies have little in reserve for this imminent problem.

BubbleBoy

20 Jul 2011, 08:55 PM

As pointed out earlier, superannuation costs the government more money than it will ever save


http://taxreview.treasury.gov.au/content/submissions/retirement/Institute_of_Actuaries_of_Australia_20090312.pdf page 13

"While we have not performed long term modelling of these relative costs and benefits, it is likely that the tax expenditures will significantly outweigh the savings in the Age Pension outlays relating to superannuation."

Henry Review (one of the preliminary papers) regarding proposal to increase super to 12%:
http://taxreview.treasury.gov.au/content/StrategicPaper.aspx?doc=html/Publications/Papers/Retirement_Income_Strategic_Issues_Paper/Chapter_2.htm Page 11:
"An increase in the superannuation guarantee would also have a net cost to government revenue even over the long term (that
is, the loss of income tax revenue would not be replaced fully by an increase in superannuation tax collections or a reduction in Age Pension costs)."

BubbleBoy

20 Jul 2011, 08:55 PM

"An increase in the superannuation guarantee would also have a net cost to government revenue even over the long term (that
is, the loss of income tax revenue would not be replaced fully by an increase in superannuation tax collections or a reduction in Age Pension costs)."

Strindberg

20 Jul 2011, 09:16 PM

The implication in that Henry Review conclusion is that if the 9% super rate is replaced by 12% then all employers will immediately cut wages by 3%. Did everybody's pay get cut by 9% when super was introduced?

And anyway, it doesn't contradict the main points I was making about government entitlement obligations. The UK's pension is not means tested whereas the Oz pension IS means tested. Britain also has tax advantages (more than Oz) for private pensions. UK people with those tax advantaged private pensions will still get the full basic state pension. There remains a difference between the UK and Oz in terms of future government liability. And the residency qualification difference still applies.

Sprog

20 Jul 2011, 09:21 PM

Well sure, but so what?

The cost to government revenue would be a cause for worry if the benefit to super recipients remained static--that would imply that funneling retirement savings through the super system provides inherently poorer returns than distributing them through the age pension alone.

But an increase in the mandatory levy from 9 to 12% should result in dramatically larger superannuation balance for most recipients. It's not just the cost to the government that needs to be assessed, but the increase in living standards among superannuation recipients.

BubbleBoy

20 Jul 2011, 09:37 PM

This doesn't acknowledge that if you want to improve retiree incomes, and the current system has a net cost to the government - there are other systems that have a similar net cost to the government but might give better outcomes - such as using the money to put in a sovereign fund to provide benefits in the future??

OR maybe *gasp* - people should be allowed to make their own current v future consumption choices??? Once we take away the major justification of super - that it saves the government money - what it ultimately is is a tool for controlling people's lifetime consumption patterns. Is there solid research that shows that people are unhappy with their voluntary lifetime consumption patterns?

Sprog

20 Jul 2011, 09:56 PM

I'd want to see some evidence that sovereign funds do indeed provide better outcomes than an equivalent tax expenditure on super. I know I'll get some personal benefit from my super balance, funding things I actually want or need.

With a sovereign fund, at best one gets a nebulous charter, an inherent predisposition to fund Big Projects with diffuse benefits, and a highly uncertain schedule for benefit realisation.

I have more sympathy for the current vs future consumption choice argument. But having a large tax-advantaged scheme for retirement savings, which is a head of government expenditure that I actually find useful, constrains government expenditures in other areas which I find not so useful. A self-interested attitude, I will admit...

BubbleBoy

20 Jul 2011, 08:55 PM

peter fraser

20 Jul 2011, 02:01 PM

Most other western economies to my knowledge, don't have the compulsory superannuation that we have had in place for 20 years. It won't completely save us, but it will dampen the effect.

Previous generations have happily retired with almost nil savings, at least retirees from now onward will have some nest egg, relieving the burden on the state.

Graph Super growth

It's now in the $1.2T to $1.3T range.

The Federal government also has the Futures Fund to help cover future commonwealth employees superannuation funding needs, and it holds about $75 Billion.

Futures Fund

In stark contrast, many western economies have little in reserve for this imminent problem.

As pointed out earlier, superannuation costs the government more money than it will ever save


http://taxreview.treasury.gov.au/content/submissions/retirement/Institute_of_Actuaries_of_Australia_20090312.pdf page 13

"While we have not performed long term modelling of these relative costs and benefits, it is likely that the tax expenditures will significantly outweigh the savings in the Age Pension outlays relating to superannuation."

Henry Review (one of the preliminary papers) regarding proposal to increase super to 12%:
http://taxreview.treasury.gov.au/content/StrategicPaper.aspx?doc=html/Publications/Papers/Retirement_Income_Strategic_Issues_Paper/Chapter_2.htm Page 11:
"An increase in the superannuation guarantee would also have a net cost to government revenue even over the long term (that
is, the loss of income tax revenue would not be replaced fully by an increase in superannuation tax collections or a reduction in Age Pension costs)."

BubbleBoy

20 Jul 2011, 09:37 PM

there are other systems that have a similar net cost to the government but might give better outcomes - such as using the money to put in a sovereign fund to provide benefits in the future??