Pension’s petty cash problem

In case you missed Part I of the Hello Humans Super Special, which I highly recommend you get into, here’s the gist: The Super system is fucked. Though it was designed to eventually replace the aged pension, few Australians will have enough in their Super to retire on, meaning at least half of the population will need to draw from both Super and Pensions, indefinitely.

But there is a problem:

The pension system was designed in 1928, when the average life expectancy was 55 years of age, “and hasn’t been touched since”, according to Trevor Berryman, retirement specialist for National Mutual / AXA for more than 20 years until he himself, retired.

“The aged pension was designed hoping you would die at 55. Modern life expectancy is about double that today, but they haven’t changed anything. Not a single thing.”

Berryman claims the aged pension won’t be there when my generation reach retirement, but economist, Professor Steve Keen, Head of Economics at London’s Kingston University disagrees.

“The majority of Australians are not being provided for through Super, so you can’t eliminate pensions because you’d have people starving to death,” he said.

The urgency of providing for a growing ageing population cannot be understated. In 2014, 15% of the population (3.5 million people) were aged 65 and over, and by 2054 this is projected to increase to 21% (8.4 million people), according to the Australian Federal Institute of Health and Welfare.

The number of Australians aged 85 years and over will more than double, from 455,400 in 2014 to 954,600 by 2034, (a 110% increase).

The number of people living to the age of 100 and beyond (so-called centenarians) is expected to increase dramatically over this period, from about 4,600 in 2014 to 15,700 in 2034. Another 50 years on, in 2084, there is expected to be more than 100,000 centenarians.

We are going to have to find a way to support these people, one way or another.

Assume your average 18 year old intends to retire in 50 years and expect to live a further 30 years. Assume they want the equivalent, at today’s prices, of $40,000 per year for 30 years in retirement. Let’s assume they have started saving for Super at 18 and retired at 68 and live until they are 98.

Assume the real rate of return on saving is 3% per year across the next 65 years.

You would need to put away $7000 a year into Super every year for 50 years, assuming a compounded rate of interest 3% above the inflation rate, which would require a balanced (and so risky) portfolio of investments, and not just safe deposits.

According to ASFA, To enjoy a modest retirement, a couple needs $35,000  each a year in spending and individuals need $50,000. Assuming everyone retires at 68 and dies at 98, each individual would need $1.5 million, spread over 30 years, to enjoy a modest retirement.

But at a 3% per year return on a diminishing balance, you would have needed to save, including accumulated interest, $980,000 on retirement to fund this spending.

There are obvious problems with these assumptions. First of all the second half of this equation doesn’t account for inflation. Second it assumes everyone is full-time employed over this period and therefore receive regular employer super contributions, or can and do regularly make voluntary contributions. It also assumes most people can afford to invest $7000k a year for 50 years. It also assumes all of these people are only drawing from Super. With an increasingly casualised workforce, let alone the degree of apathy over Superannuation, the chances of this are diminishing.

Pensions currently account for up to a third of Australia’s GDP and Super is increasingly becoming a tax haven for the top end. This is evidenced by the fact that you can own a $5 million house, draw from Super and still be eligible for government assistance.

That figure is only likely to increase.

Economist, Dr Steven Hail of Adelaide University that the problem with providing for an ageing population has nothing to do with a shortage of dollars and everything to do with providing sufficient goods and services for that ageing population to consume, without going beyond the productive capacity of the economy and causing inflation, ecological collapse and/or both.

“Money is not the problem,” he said. “It really isn’t.”

“It is not true that tax-advantaged super will do anything at all to help with the cost of providing for the increasing proportion of retirees in the decades to come. If anything, the opposite will be the case.”

Part of the problem (a significant part), is that billions of dollars have been hidden from the government – and by extension the economy – in property-related tax havens.

The increasing use of property for speculation has resulted in a whole bunch of real estate, and surrounding finance being completely removed from the tax system.

I spoke to a 70-year-old business owner nearing retirement on the condition of anonymity who revealed that though he could qualify for a pension, he has opted not to.

“All I’d have to do if I wanted to draw a pension is buy a house,” he said. “And I can afford to. But it doesn’t suit my needs. So I don’t. And I think it’s wrong.”

(The soon-to-be retiree recently sold his house in favour of renting).

“I have friends who take pride in it, about how their accountant has managed to swing it so they can own six, seven, eight, nine properties, draw from Super and claim a pension,” he said.

“It is disappointing because the tax system allows for it. They haven’t earned it. The tax system allows them to do it. And they are encouraged to make losses so they can negatively gear the properties. It’s a joke.”

“I’m entitled to a pension and people pay all their lives so they can, but if you don’t need it, why are you driving people into these schemes where they can take all their assets and put it into property? Because it’s not a part of the tax system, so they can get a pension.

They’re proud of that?”

Emeritus Professor of Economics, Politics and History, Geoffrey Harcourt said private residences should be included in the assessment for the aged pension.

He also recommended introducing a ‘legitimacy surcharge” or tax to discourage speculation.

“Owners could justify in their tax return the purpose of buying or selling a house, such as expanding for a family or caring for elderly parents” he said.  “You could still do it even if you do not have a ‘legitimate’ reason, but you would have to pay a surcharge, a penalty tax. It would be an incentive to reduce speculation.”

Arguably if pensions are good enough to provide for every Australian Federal Government past and future, forever, it should be good enough for the Australian people.

Certainly it’s a seductive argument. But then if you read Part I, you already know how seriously I take my responsibility to earn and invest my own Super to support myself in retirement.

Though if a fully-funded pension plan is what would finally force this government to take seriously its responsibility for job creation, then I’m not entirely against the idea.

Anything that facilitates diverse productive resources & infrastructure, the kind that creates the jobs and spending necessary to avoiding another financial crisis, cannot be bad.

If bailing out the boomers is what it takes to save the economy, so be it.

Stay tuned for Part III coming up later this week where we discuss some potential solutions.

Claire Connelly is working on her first book, How The World Really Works, a guide to recognising rhetorical red flags and immunising yourself against bullshit. You should definitely buy it when it comes out. A podcast of the same name will also be launching in the coming months. Stay tuned!