The practice of referring to very wealthy folk as 'millionaires' began back in the 1700s. It remains a shorthand way of saying that someone is really loaded. Even recently, the headlines about Peter Freedman’s generous $5 million donation to the Sydney Festival often referred to him as a 'millionaire'.
The term turns up during talk about retirement incomes, pensions, taxation, franking credits and the like. For instance, one frequently reads an argument that says, 'future taxpayers cannot fund pensions for millionaires'. Or words to that effect.
This has to stop
The premise of statements like these is false. It presumes that if you’re a millionaire you are very wealthy. The implication, therefore, is that you are greedy if you have $1 million in assets and think you should receive any tax concessions.
Of course, there is a degree of wealth that, in any fair society that values equitable outcomes, will mean that reduced tax rates are not appropriate and shouldn’t be given. My point in this article is that this point on the spectrum is NOT as low as $1 million. It’s somewhat higher than that, but we need to stop thinking of someone who, at the time of their retirement, has accumulated $1 million in investment assets, as being very wealthy.
Don’t get me wrong, they’re not poor, but they’re not rich either. To think that they are is simply outdated.
Let me tell you a story of a man named Jed. He was a poor mountaineer who barely kept his family fed. Most of you know what I’m talking about, I’m sure. In the 1960s there was a popular comedy called The Beverly Hillbillies, in which the 'poor mountaineer', Jed Clampett discovered oil on his property. The next thing you know old Jed’s – you guessed it - a millionaire. The family left the remote country to live in Beverly Hills. The Clampetts didn't change their lifestyle even though they lived in a mansion and were one of the best customers of the local bank. The humour of the culture clash between the hillbillies and their neighbours (including banker Drysdale) highlighted the gulf that existed between ordinary folk and millionaires.
We have well and truly moved on
But we are no longer in the 1960s, let alone the 1700s. By the 1970s, financially literate people started to realise that those who used to be called 'millionaires' were now actually worth tens of millions. The term ‘multi-millionaire’ came into vogue, and is a more appropriate short-hand for 'very wealthy'. (And it should be used for the generous Mr Freedman who has a net worth in the hundreds of millions of dollars.)
This is largely because of inflation. $1 million today simply can’t buy the lifestyle that it could when old Jed struck it rich. In fact, it couldn’t even then – the fictional Jed Clampett actually became a multi-millionaire, with a net worth of something north of US$25 million in 1962 dollars. He couldn’t have bought the house he lived in if he had much less than that!
Let’s put this into perspective:
- Inflation means that to purchase the basket of goods and services that you could with the equivalent of A$1 million in the early 1960s you now need $15 million.
- Back then, $1 million was 385 times average annual earnings, but now it's only 17 times average annual earnings.
- In 1960, you could invest your $1 million in bank deposits paying 3% and earn as much interest in one year as it would take the average worker 12 years to be paid. Now, investing $1 million at 3% earns you half a year's worth of average earnings. (And that says nothing about investing at 2020’s interest rates!)
Quite simply, the wide gulf between ordinary folk and millionaires no longer exists because being a millionaire does not make you wealthy! If invested wisely so that you earn better than bank deposits, it can make you comfortable, giving you in retirement an income that keeps you in the ballpark of the average working Australian.
Fortunately, the government understands this. That’s why the cap that the Government introduced a couple of years ago for the tax-free earnings base for super in pension phase was at $1.6 million. That amount invested conservatively makes someone's retirement income about the same as average earnings. (Or it did at the time – now the investment strategy needs to be somewhat higher risk, with interest rates falling to current extremely low levels since then.)
It's time to cut out the millionaire references
So can we please stop bleating about tax levels for self-funded retirees who invest the cap or less as if being a 'millionaire' in 2021 means you could dine from a 'fancy eatin' table' in the pool room of your 10-bedroom mansion!
Yes, accumulating $1 million to invest for retirement is a stretch, if not impossible, for a lot of people. But policy needs to be based upon reality, not upon an emotive notion recalling when the concept of 'the millionaire' referred to only a handful of privileged people.
By the way, the mansion that was used as the Clampett's home in the TV series sold a year or two back for $350 million. Can I rest my case now?
Warren Bird is Executive Director of Uniting Financial Services, a division of the Uniting Church (NSW & ACT). He has 30 years’ experience in fixed income investing. He also serves as an Independent Member of the GESB Investment Committee. These are Warren’s personal views and don’t necessarily reflect those of any organisation for which he works.