Superannuation no good for under 50s, invest the absolute minimum amount into Super; No salary sacrificing, no co-contributions, no non-concessional contributions. Ignore calls to save tax and boost your super
Tweet Topic Started: 7 Feb 2013, 08:25 PM (6,852 Views)
THE superannuation industry has hit back at suggestions that tax breaks on super for Australians are too generous.
Mooted changes to superannuation tax concessions worth billions of dollars have been high on the political agenda since November, when Treasury secretary Martin Parkinson questioned whether the tax breaks were too high and favoured the rich. He said the super system risked becoming too much of a burden on the budget given the ageing population.
Treasury estimates the budget misses out on more than $30 billion a year in tax revenue through super, a figure it expects will hit $45 billion by 2015, overtaking the capital gains tax break on housing as the single biggest concession.
But financial consultancy Mercer said when compared with the world's best retirement savings systems, super rules in Australia were not overly generous.
''When the Australian approach is compared to countries with world-class retirement income systems, the after-tax retirement benefits provided to Australians are lower than five of the eight countries,'' said David Knox, a senior partner at Mercer. Mercer modelled its retirement systems against eight other countries that are considered to have the best pension systems in the world.
It showed the net retirement benefits for an average British worker would be 16.4 per cent, or $43,534, higher than for an Australian, while an American worker would be 11 per cent, or $29,273, higher.
Australian retirees were also expected to be worse off than those in Canada, Switzerland and the Netherlands, but better off than those in Denmark and Sweden.
These days superannuation works like a wealth transfer from young working people to baby boomers. If the major parties want the youth vote, they could start by ending super concessions, writes Ian McAuley
As Ben Eltham wrote last week, for a brief moment we managed to have a debate on superannuation policy, before the Prime Minister squashed the idea of applying a tax on withdrawals from funds with high balances.
The slightest hint of a clawback of the Howard government’s generous concessions to "self-funded" retirees (in reality people whose retirement accounts have been significantly funded by tax concessions and windfalls such as inheritances) brought squeals of protest.
The most outrageous protest was from Pauline Vamos, Chief Executive of the Association of Superannuation Funds of Australia, who, on Wednesday morning’s ABC Breakfast Program, said "for people to really have a comfortable standard of living throughout their retirement you’re looking at least at two and a half million dollars" as the requisite balance.
That figure needs a reality check. Assuming one’s retirement balance is to spin out over 30 years from age 65 to 95, and that it generates a real (after inflation) return of 5 per cent a year (a conservative estimate), then plugging those figures into the annuity formula we learned at high school gives the retiree an indexed tax-free pension of $163,000 a year. That’s among a group who generally have no mortgage payments and who do not bear the costs associated with working. To put this figure in perspective, the median after-tax annual income of aged couple households in 2009-10 was around $34,000.
Yet Vamos, and others who defend the privileged position of those with high superannuation balances, are speaking for a significant constituency. It’s a constituency with an inflated sense of entitlement, generally known as the "baby boomers" — that cohort of Australians born in the years after the Second World War, and who are now in or approaching retirement.
Baby boomers have enjoyed extraordinarily good economic fortunes. While their parents had endured the 1930s Depression and the war years, they grew up in an economy with full employment and rapidly rising living standards.
Thanks to Commonwealth scholarships for undergraduate and postgraduate studies there was free university tuition, with generous living allowances for those whose met means tests, paid for by people who had largely missed out on tertiary education. (Menzies, unlike later Liberal Party leaders Howard and Abbott, recognised the value of investing in higher education.)
On graduation baby boomers could pick and choose their employment; these were the days when an unemployment rate above one per cent was regarded as a policy failure.
If they bought a house in the rapidly growing suburbs they paid only for the house and bare land. The cost of local infrastructure (drainage, sewerage, street lighting, street and sidewalk pavements) was met by public expenditure. Now those expenses are paid for by developers, who pass them on to house buyers.
They took on heavy mortgages, but the inflation of the 1970s, which peaked at 18 per cent, rapidly reduced the real burden of their mortgages. That was another transfer from the previous generation who saw their savings largely wiped out.
Then over the last 20 years many borrowed heavily to buy houses and apartments to be rented out. These are highly geared investments, subsidised by tax concessions which allow double counting of expenses against income. The result was a large expansion of private debt, and a strong rise in house prices. For the next generation housing has become increasingly unaffordable and rents have risen in tandem with house prices.
Many baby boomers had jobs in the public service or in large corporations with generous defined-benefit superannuation. As they aged there came the Howard government superannuation tax concessions which allowed many to accumulate large balances.
Having done so well from the taxes and transfers of previous generations, we might have expected the baby boomer generation to display some sense of obligation and show the same generosity to the coming generation. After all, aren’t these the same people who were so socially concerned in the 1960s student movements?
But those who took to the streets in the 1960s to campaign for university funding have raised hardly a whimper as successive governments have introduced student fees and starved universities of funding. As they have prospered themselves and approached retirement they have been happy to pass the tax burden to the younger generation.
They may see themselves as the liberal generation which broke down barriers of race and sex discrimination, and who, during the Vietnam War, mobilised the nation’s largest protests. But that’s a self-serving interpretation of the past.
As with most movements the true reformers were small, dedicated groups, often working quietly in the background, while most student politics were about establishing positions within the student Labor or Liberal clubs, as stepping stones to political careers.
The main issue in the Vietnam War was not the war itself (something happening to people far away), but the draft (something happening to baby boomers). Only after the Commonwealth introduced conscription in 1964 did the protests swell, as the repeated chant became "hell no, we won’t go".
If the baby boomers could be gathered once again in large crowds, that chant may now be "hell no, we won’t pay".
Governments (and opposition parties) would do well to ignore baby boomers and push on with reforms to superannuation and other tax breaks. Baby boomers make a lot of noise, but in reality they have dealt themselves out of political power, for they are unlikely to change their votes. Most older voters are close to "rusted on" supporters of the Coalition. Having benefited so much from public revenue, they now throw their support behind the party of low taxation.
In fact, taking a strong move on those with high superannuation balances may be a politically astute move for the Government, if it could present it in terms of rendering the public revenue system less biassed against young people and making the most privileged demographic group Australia repay some of their debt to the society. There is a large pool of young people not on the electoral roll whose disillusionment could turn to enthusiasm if they believe Labor really cares about them and their future.
There are opportunities for the Coalition as well, but its displayed hostility to easing electoral enrolment by young people sends a poor signal, and so far, as it develops its policies, it has shown no enthusiasm for funding education.
Perhaps neither of the main parties really cares about the young. If they cannot get a voice in the main parties it may be time for younger Australians to form new political groupings.
Almost 1 million people now have their own funds, with annual growth in the number of do-it-yourself funds running at about 8 per cent.
More members of large funds are striking out on their own, mainly because they want more control over how their retirement savings are invested, and because of disillusionment about the poor performances of large funds.
For many people, especially higher-income earners and those with their own businesses, running their own funds can make a lot of sense.
But they are not for everyone. Those with small account balances and those not prepared to put in plenty of time and effort are probably going to be better off sticking with a large fund with low costs and cheap life insurance.
And although the returns of large superannuation funds have been poor since the onset of the global financial crisis five years ago, they are improving. Over 2012, the typical balanced investment option, where most people have their retirement savings, produced a return of more than 10 per cent. There is every chance returns will be good again this year.
PUBLISHED: 11 hours 17 MINUTES AGO Phillip Coorey and Sally Patten
The Gillard government will defend its plans to raid superannuation at the May budget by adopting Treasury’s argument that such a move is critical to sustaining the tax revenue base as the population ages.
After again leaving open the option of cutting tax concessions for the well-off on superannuation contributions and earnings, Prime Minister Julia Gillard argued on Tuesday that while Labor would “safeguard superannuation’’, revenue, too, needed to be sustainable. “We’ve always got to make sure that the system is sustainable and is meeting the nation’s needs and the needs of individuals,’’ she said.
This stance was backed by the chief executive of the $60 billion AustralianSuper fund, Ian Silk, who declared that the big tax breaks which have fuelled superannuation savings for decades are unsustainable and will have to be scaled back. “It is inevitable we won’t be able to maintain the current tax settings on super,” Mr Silk told The Australian Financial Review.
“This is not about arguing for more taxes but a recognition that the current settings pose a huge problem for any government.”
The Financial Review understands Ms Gillard was referencing comments made several months ago by Treasury secretary Martin Parkinson in which he said the tax concessions granted on superannuation would become increasingly unsustainable as the population aged and the tax base dwindled.
“With the Commonwealth budget coming under increasing pressure over the next few decades, the fiscal sustainability of all policies, including superannuation, will demand greater public scrutiny,” he said.
Dr Parkinson spoke following the release of Treasury’s 2012 tax expenditures statement, which showed tax revenue foregone on superannuation would, for the first time, outstrip that foregone on housing.
For 2012-13, it was estimated the government would forego $31.8 billion in tax revenue related to super concessions compared with $30 billion forgone on housing tax concessions such as capital gains tax and negative gearing. By 2015-16, it is projected superannuation-related concessions will result in $44.8 billion foregone, compared with $30.5 billion on housing.
Sacked cabinet minister Simon Crean, who was a member of the cabinet’s expenditure review committee until Thursday’s botched leadership coup, has urged the government to drop its plans to raid super for high-income earners. Mr Crean, who will not be replaced on the ERC, said targeting super would be “trashing’’ the legacy of the Hawke-Keating government, which championed super, introducing the compulsory superannuation guarantee.
Ms Gillard campaigned in Perth on Tuesday with her new Resources and Energy Minister, Gary Gray.
On Monday, Mr Gray, who is fighting to hold his marginal Perth seat of Brand, appeared to distance himself from Ms Gillard on foreign workers by emphatically endorsing the 457 visa program for temporary skilled workers. On Tuesday, Mr Gray appeared to defend the right of the states to increase mining royalties, a practice Ms Gillard and Treasurer Wayne Swan have attacked because it gouges the proceeds of their mining tax.
Mr Gray said a combination of the minerals resource rent tax and “the increases in royalties that various state governments have introduced’’ meant the minerals sector was contributing to state and federal coffers “in a way that has never happened before, and that’s a good thing’’. Tax concessions on earnings and contributions prime targets
Cabinet’s expenditure review committee, which met all day Tuesday, is looking at superannuation concessions to fund the government’s Gonski school funding reforms and its proposed national disability insurance scheme. Combined, the two policies will require an estimated extra $14 billion in annual revenue by the end of the decade, when they are fully operational.
The whole purpose of super is for retirement. Paul Keating’s vision was a pool of savings that would offset our CAD.
Malinvestment, greed and vested interests have corrupted this outcome.
The push for residential property in super in my opinion is as ridiculous as buy and hold a parcel of shares.
The whole thing in my view is having sufficient liquidity within your portfolio to cope with volatility and take opportunities. Most people are apathetic and can't give a rats.
Super was created to give more power to the unions.
Read this quote from the 28 September 1989 edition of the Sydney Morning Herald:
Quote:
‘The Treasurer, Mr Keating, has urged the trade union movement to use the billions of dollars generated by superannuation over the next 20 years to increase its own industrial clout.
‘Mr Keating told [trade union] Congress delegates that the development of union-run superannuation funds would give the union movement “institutional muscle” to supplement its already substantial industrial strength.
‘He suggested that the additional clout could prove a potent weapon against conservative administrations intent on eroding the power of the union movement.
‘In a “hostile political environment”, unions could flex their institutional muscle in the financial sector instead of simply “passing motions in the trades hall”, he said.’
Keating was killing two birds with one stone and he was a heck of a salesman.
Actually it did a third critical thing. Attaching giant super funds to Unions required the unions to act in the interests of the funds, often ahead of the interests of their members.
Unions have been brought into the game and now have to be concerned about what the market thinks and stock movements etc.
So where a policy might advantage Workers but disadvantage wealthy investors or super funds the unions come out against their own members.
It’s a genius move and has the Unions now well and truly part of the big business interest.
One of the key mechanisms that large capital has used to gain control over the politics of regulation is to give a little bit to the mums and dads.
Making the punters feel like they are part of the game means they can be easily manipulated to support agendas that smash the small and feed big capital.
The purpose of superannuation when devised by Paul Keating in 1985 was quite simple – to protect and enrich the Sydney finance industry by feeding them captive customers.
When the Victorian Liberals ruled Australia from 1949 to 1972 it was Melbourne’s manufacturing industries which were protected – through import tariffs. That may have damaged the country as a whole, but it fulfilled its primary purpose of enriching the friends of those in power.
Manufacturing protection was a system that collapsed under the weight of its own inefficiency. But rent-seeking is the defining characteristic of Australia. It didn’t go away.
It simply moved its base from Melbourne to Sydney.
Superannuation has failed in almost every respect – except that for which it was devised.
It began as a voluntary scheme, but it was soon made compulsory for wage and salary earners.
It was originally a savings scheme, but for those born after 1960 the age at which they can access those savings is pushed out ever further. Realistically, young people are never going to see any of the money they believe they are putting into a savings scheme. They will die with large balances unaccessed, and the Government will reclaim them on the grounds that tax-advantaged savings should not be a windfall to their heirs. It will be a de facto death duty.
It has not increased national savings levels.
Much of the so-called savings has in fact been recycled straight back to government through the sale of government monopolies, through tax-farming arrangements (such as the sale of road-tolling rights), and through hideously expensive public-private “partnerships” to finance government capital expenditure.
The one and only thing that superannuation has succeeded in doing is the one thing it was set up to do – enriching fund managers and their support industries (mainly in Sydney) by feeding them captive customers who must pay at least 1% pa year-in-and-year-out on what they are told is their savings.
Like Melbourne manufacturing protection, it is a system that will eventually collapse under the weight of its own inefficiency.
It has significantly compromised the ethics of the unions and has been instrumental in turning the parties into the corporate support party.
The heavyweights of the financial services industry will travel to Canberra next week to lobby treasurer Wayne Swan to leave the superannuation system alone, Fairfax Media reports.
According to the media outlet, the big four banks – Westpac Banking Corp, Commonwealth Bank of Australia, National Australia Bank and Australia and New Zealand Banking Group – will join a delegation headed by John Brogden of the Financial Services Council and set to include other banks and super industry bodies to oppose any government plans to raid earnings on superannuation accounts in the May budget.
The government is reportedly mulling a move on the superannuation system in a bid to rein in the federal deficit.
Executive director of the Self Managed Superannuation Fund Owners Alliance, Duncan Fairweather said the government would likely sell any super raid as taking from the rich and giving to the poor, and seized on comments made by Craig Emerson over the weekend.
''It looks like the government will bring in new measures and disguise them as an attack on the rich, but over time there will be a wider effect. Craig Emerson should explain what he means by 'fabulously wealthy','' Mr Fairweather said.
The superannuation debate has missed one vital ingredient used by Australians to minimise tax-dividend franking credits. If the Gillard government tries to raid the superannuation lolly jar by placing a tax on earnings inside super there will be a rush by super funds to invest in company shares that pay large dividends that are fully franked.
Those arguing against changing the tax rules on super have been endlessly talking about tax effective schemes such as family trusts and negatively geared property investments.
But filling superannuation funds with stocks with high-yielding, fully franked dividends is a very effective way to ensure earnings will be minimally taxed.
Franking was introduced in the 1990s to avoid shareholders being double taxed. If the companies in which they hold shares have paid corporate tax then the dividends would not be taxed as income in the hands of shareholders.
Under the current super rules, the earnings from any investments
inside a fund are taxed at 15 per cent while the fund is in its accumulation phase.
Investing in companies with franked dividends has been a handy way to lower income tax to less than 15 per cent. (Given most balanced super funds have a third or more in listed companies that pay franked dividends, the average tax rate gets watered down to about 10 per cent.)
If the government increases the tax rate to 30 per cent for all earnings inside the super fund (for people with balances over a certain amount), superannuants will be looking for more tax effective investments to reduce this rate.
This would lead to a focus on fully franked dividends and away from the lower yielding stocks that don't pay fully franked dividends - particularly resource stocks.
There are a few stalwarts in this regard that stand out. The first is Telstra. It has been particularly popular over the past few years because it has effectively guaranteed its dividend - which removed the risk that it would fall if the earnings hit a glitch. Its dividends are fully franked.
Australian banks are also standout providers of fully franked dividends with reliable earnings. They too have become favourites with investors looking for tax- effective yields. Some property trust and infrastructure investments also fall into this category.
Even without the threat of changes to the super tax, investors have been engaged in a love affair with high-yielding shares - and in Australia those companies with franked dividends are particularly popular.
The increased interest in these companies will have the inevitable effect of pushing up their share price - which could put them into territory of being overvalued.
Superannuation is designed backwards. It gives the biggest subsidies to those who need them least. For Australians on truly enormous incomes those subsidies are obscene.
The notion the super-rich wouldn't save for their old age is laughable. The idea that without government support they would fall back on the pension and be a ''drain on the public purse'' is not only wrong but, in the context of what's handed to them, almost sick.
Think about an executive on $1 million a year. Not quite one of Joel Fitzgibbon's ''battlers'', but someone several rungs above.
His or her firm pays a legislated maximum of $17,190 per year into a super fund of his or her choice, perhaps a self-managed one. Instead of being taxed at his or her marginal rate (45 per cent plus the 1.5 per cent Medicare levy) the payment has until now been taxed at just 15 per cent. So instead of paying $7993 the executive pays just $2578. The gift from the tax system is $5415.
In the last budget the government promised to boost the tax rate for very high earners to 30 per cent, cutting the size of the gift to a still substantial $2836. That it took Labor so long to at least recognise the need to more properly tax millionaires is an outrage. That it didn't go further is a disgrace.
Here's a tip, from someone who can only begin to imagine the spending and saving habits of millionaires: They don't need incentive payments in order to save, they'll do it anyway.
But if you're harbouring doubts, remember that millionaires are compelled to save. As for all of us, super contributions are compulsory. The government is handing millionaires a gift of $2836 a year in return for something they'll do anyway.
A middle earner on the average male wage gets $1293. Low earners get nothing, even after the new Low Income Super Contribution that the Coalition has implausibly threatened to revoke re-imposing a tax penalty for low-income contributions.
Imagine the outcry if instead of tax dollars, the government openly paid cash into the accounts of high earners to help them with their savings. Imagine if the government suggested paying more into the accounts of high earners than low earners.
Under current arrangements, all earnings on assets supporting income streams (superannuation pensions and annuities) are tax-free, in contrast to earnings in the accumulation phase of superannuation, which are taxed at 15 per cent. However, Mr Swan announced that from July 1, 2014, future earnings (such as dividends and interest) on assets supporting income streams will be tax free only up to $100,000 a year. Earnings above $100,000 will be taxed at the same concessional rate of 15 per cent that applies to earnings in the accumulation phase.
For people aged over 60, concessional caps will be increased from $25,000 to $35,000 from July 1. That concession would be extended to those aged 50 and over from July 1, 2014.
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