You've worked hard, but are you 'entitled'?

Re: the relentless franking credit mantra (groan!) .. an interesting article about Dick Smith’s less-entitled view: https://www.sbs.com.au/news/ridiculous-dick-smith-calls-for-franking-credit-reform-after-revealing-500k-rebate

Except Dick misses the point. That being that the issue is how someone as wealthy as him is on a zero tax rate in the first place.

As I’ve said ad nauseum, the problem here – if there is a problem – is with the tax rate some people are on, not with the fact that those on zero tax get franking credits!

If Dick’s philanthropy means he’s giving away enough of his income that he’s paying no tax, then he should just pay his credits to causes he believes in rather than advocating that those on zero tax simply because their on low incomes or self-funded retirees shouldn’t get them!

Smith is a great man, a generous man, but he is usually wrong on public policy issues because he sees them through the lens of his own experience and ignores broader considerations. This is another example of that.

Exactly – he missed the point completely, but the media don’t care – they’ve latched onto “franking credits”, a topic they clearly don’t understand, as a force for evil and they’re not going to let it go.

And the problem with that is that it drowns out any conversation about what, as you say, if anything, should be done instead.

If Dick has too much money, I’m happy to have some, or give it to charity, but don’t pop up like a Jack In The Box saying stuff like this that may have effects on thousands and thousands of people who’ve structured their financial lives based around the rules of the day with the thought that investing being a long term proposition, they should be able to have some confidence in public policy.

There are many, many better ways to raise funds from a targeted selection of high income retirees, if that’s the aim, but this is just a blunt tool.

People commenting on the media articles in the SMH and Guardian etc. are quite terrifying too – because now they’ve latched onto “franking credits” as something they hate. The level of misinformation and deliberate “I don’t want to know!” thinking out there is astounding.

Yes, Geoff, which is why I’ll continue to dip into this issue whenever I see a misguided comment on it.

The days of being able to believe that a solid public debate and intelligent politicians and bureaucrats working together to make good policy seem a distant memory.

But that approach works so much better. I remember when Peter Costello was running surpluses and the government didn’t need to borrow. He thought that he should just ‘pay off Labor’s debt’, but had the good sense to invite the public, including people like me who actually invested in government bonds (when I was at Colonial First State) to have a robust discussion. Through that process we were able to work with the government to keep the Commonwealth Bond market alive, rather than just simply going with the easy political approach. The nation has since been very glad about that and the market has proven to be a continued cheap funding source for government.

If only that had happened with franking credit refunds we’d be in a better position, but the coalition stuffed their inquiry with the way they handled it and the ALP didn’t take it seriously in the first place.

All along my concern has been with the making of good policy. It just happens that franking credit refunds was the catalyst for me getting so involved.

A lot of older Australians live in a big house and on their investment returns. With some insight they could see how more enjoyable life might be if they contemplated downsizing to a smaller place with lower costs and then start accessing prudently the remaining proceeds and some of their investment base in a sure, slow burn way. Doing that and with the remaining funds still giving investment returns allows many to live a life less constrained and for much longer than they might assume. And if required, forget giving the house and inheritance to the kids if you needs should come first.

The issue for most retirees who lost their part pension was that they had planned their retirement saving around government policy while they were working but had that policy removed when they were in retirement. Elected governments have the right to change policy settings but in the past this has always meant “grandfathering” those already receiving a part pension in retirement, you might recall when Howard was forced by public opinion to bring pollies super in line with everyone else’s it did not include existing lollies only new ones as it would have been unfair to those existing pollies.
What most people also fail to understand is that super savings are meant to be spent in retirement not just the earnings from the capital, this logic at some point will force governments to mandate that super can only be taken as an income dictated by actuarial calculation. The recent franking scare clearly highlighted that most self funding retirees dont understand that they are supposed to spend their capital as well as the earnings!

Brian
We already have a system that forces people to spend the capital in their superannuation. If you have a super pension fund, you are required to withdraw a set percentage of your fund, in cash, every year, regardless of the income earned by the fund. That percentage increases with age. At age 65 it is 5%, at age 85 it is 7% and at age 95 it is 14%. An accumulation fund does not have this requirement, but that fund’s earnings is taxed at 15%. Failure to take that minimum pension means the super fund loses its tax-exempt status and will be taxed as an accumulation fund and so the ATO monitors this requirement very closely.

In a super pension fund, at some point, there will be insufficient income to satisfy that minimum pension requirement and so it means that capital must be progressively liquidated. Regardless of what you start with with, a super pension fund will be depleted over time – it is designed to – and many people run out of super before they die.

In fact there is a good argument that says, given our increased longevity, these minimum pension rates are too harsh as they force people to use their capital too quickly.

Having read all of the comments on this subject I feel the need to add some thoughts:-

1 Overall I’d suggest that any nation that adds value and pulls its weight should respect its older age people – for their service, often their duty and because they are as integral to the country’s ethos as other groups. Moreover – in Australia at least – our society would seriously falter without seniors contributions – monetary and practical – across the board.

2 Government, families and the national ethos should all message the young to be as independent as possible in life ie stand on own two feet. That applies strongly to preparing for when we are no longer able to earn a wage/salary. That means saving and investing sensibly!

3 Australia never brought in universal retirement income system in the name of superannuation. Our superannuation system was crafted first as a means of “calling off union pay demands and strikes” by introducing a deferred income accumulation system via compulsory wages saving”. Therein lie many of our system’s problems!

4 Any future review/redesign of Australian superannuation should also consider a “compulsory-towards-retirement salary deduction system” similar to UK and USA. So post 18 and working all contribute a set percentage to government that gets returned to the individual post retirement age as a pension. Such a system doesn’t preclude other forms of saving for retirement whilst working. So retirees have a dual income in their retirement – all through their own savings. Such a change to our own system would surely prevent government from continuing to “change” our superannuation system as another way of making money out of its older generation. carlo

Was it a myth? https://thekeyz.wordpress.com/2017/08/25/how-australian-politicians-have-pissed-pension-funds-up-against-the-wall/

Scroll down and look a the exchange between Stefy and me on this issue.

Warren Bird, your late father in law was right. Read the following article about the compulsory National Welfare Fund set up by PM Chifley. https://morningmail.org/who-stole-the-pension-fund/

For a different take on the National Welfare Fund, this article is interesting. https://www.abc.net.au/news/2014-05-27/berg-chifleys-political-time-bomb-70-years-in-the-making/5480154. Sounds to me like it’s a good thing that this scheme disappeared from view. The insinuation that folk have been diddled by this seems off the mark to me. It wouldn’t have funded anywhere near the amounts that have actually been paid out in old age pensions in the years since. Government and taxpayers have in reality been much more generous than a strict payout from the Fund would have supported. (Not unlike Medicare. The money raised by the 2% tax levy is way short of what’s actually spent on medical rebates.)

Governments should raise taxes, put it all into consolidated revenue and spend according to social and economic needs and priorities at the time, within a responsible fiscal framework.

Too many people are rorting the system.
Do what the poms do and pay everyone the same old age pension regardless of their position.
It's not enough to live on so people take responsibility to fund the lifestyle they want.
I don't qualify for an Australian pension as they say I have too much. That's because I bothered to save & invest my money rather than put it through poker machines & the keno.
I can't believe how much the "poor" people I know spend on betting.
On average income I'll retire on more than most people I know earn working due to the great tax position retirees have in Australia.

I'm (just) in my 60s and I have heard the "we will look after you" promise from a couple of sources over the years:

1) Elderly talk-back radio callers occasionally mention it when pensions/retirement issues are up for discussion. Some remember it with great clarity and can even get quite cranky when the host of the show reminds them that this "promise" hasn't applied for 50 years and that, in any case, the idea of an eternal government promise is somewhat fanciful.

2) I have overheard certain views circulated in the vicinity of the in-laws suggesting that the so-called "promise" is something that can find itself handed down from generation to generation - if not as a literal promise, at least as a general philosophy from which one can confidently launch a life of moderate aspiration.

It surprising how many people say "I am entitled to a pension because I have paid taxes all my life". Receipt of a Govt pension depends on assets and income and has nothing to do with taxes paid. It is really a safety net to supplement shortcomings in personal provision for retirement by way of schemes such as superannuation.

Agree, Bill. They don’t realise that paying taxes throughout their working life is more about paying for the govt services “of the day”, rather than the govt somehow setting this money aside for their pensions in 40 years’ time – which is a silly notion really. I’m 56 and just retired and always planned to never have to rely on any govt largesse full stop.

Too right Bill ! I couldn’t agree more.

Too often, it is the boomer generation that believed the Government (more fool anyone who does) that they would look after them and take the entitlement mentality that “eeeeh, I paid taxes all me life”, to which I say “Did you use roads, schools, hospitals etc. ? Because that’s where your money went”.

Then they bleat that “we’re self-funded retirees” while conveniently forgetting the fact that they have a part pension.

Gen X and anyone after them will be the REAL self-funded retirees, because there will be no pension when we retire. If there is, you either won’t want it or won’t qualify for it, because they’ll means test your house. Watch.

I can see it now “Oh, your house is worth $1m, can’t you sell it and live somewhere cheaper ?”

My opinion is that the means testing of the pension provides an incentive for some people to spend their money frivolously on holidays etc. and not save much for their own retirement. The super guarantee system provides the most benefits to those with higher income/wealth and the tax concessions will no doubt, eventually cost more than providing the pensions it was supposed to supplement/replace. A better policy would be to provide a universal non means tested very basic age pension to everyone like they do in New Zealand. Then any one that does not save would have a very basic lifestyle in retirement, while those with means would not receive a disproportionately large share of the current super tax concessions. Basically, I see the super guarantee system as a policy failure which seems to become increasingly complicated over time while being subject to continual meddling by the politicians of the day.

100% spot on. The Australian Centrelink Asset Test simply encourages a retired couple to blow their savings until they are only left with about $450,000, at which point they collect the full Centrelink Age Pension.

This is perverse. The NZ system wins hands down for logic, as it really encourages saving, not spending.

I am astounded that struggling investment managers, looking for new funds, have failed to address such a ridiculous system. Our industry lobby groups are seriously brain challenged.

I am 50 and saving the maximum amount for my SMSF as I know the good times and decent incomes might end anytime soon. If only people could take responsibility for their lives and not expect the government to provide any more than the basics for a modest retirement. I think the whole premise of self-funded retiree is about owning your own home and having enough funds to enjoy yourself. Hardly anybody will amass the $2-3M needed to retire at 65 and live comfortablty to 85, not with the limits of 25k and the financial shocks that come every 10yrs or so.

Shawn, 2 to 3 million to retire at 65 and live comfortably to 85? By that rationale you will spend $100k to $150k of your capital plus investment returns per annum. That is a lot of vintage Penfolds Grange and caviar.

There’s another “entitlement” that rivals that of the “age pension entitlement”, and that’s the “inheritance entitlement”.

It cuts both ways - parents who feel entitled to receive the age pension so they can not spend their wealth and family home so their children can inherit it all.

And in some families inheritance is means tested - the “battling” children are somehow entitled to inherit more from their parents than the children who “don’t need it” as they worked harder and saved.

Easier to not rely on governments or inheritances, and avoid the emotional labour that comes with all that, and be free and self-funded.

Old people just bitching about money while the undertaker is parked around the corner waiting is amusing to read. At 60 there’s only a 1 in 3.5 chance of seeing another 20 years.

To hear people complain about the “neighbours” travel OS & having nice toys while,getting a part pension is just sour grapes from people who don’t know how to live.

It’s a good idea to live while your actually alive. No pockets in a shroud. Spend it while you can..

I retired from financial planning at 50.....10 years ago.

"a 1 in 3.5 chance of seeing another 20 years":

A 1 in 3 chance of not 'seeing another 20 years'.

https://www.abs.gov.au/AUSSTATS/abs@.nsf/allprimarymainfeatures/97E435FA3B82A89DCA2570A6000573D3?opendocument

Luck the demisers; those who remain must watch their coin.

True words Keith. My old man retired at 56 after 38 years of service. He had a triple bypass at 57 and he is now 83 and has lived everyday as if it was his last. He still runs 3km round the local oval and plays competition table tennis. Me and my siblings have actively encouraged our parents to spend every cent on enjoying themselves and leave nothing in the tank. They have done thus.

Yes, since Keating in '92 people were forewarned they can't necessarily rely on the age pension forever, and there will come a point eventually when it becomes unaffordable. That was the main point of SG contributions. People have selective hearing sometimes.
This situation remains and while Labor had a very poor/unfair policy, I believe they were right in identifying that something serious needs to change fiscally (tax and/or spending) for the Government's accounts to be sustainable into the future. Sadly proactive changes are even more unlikely due to political ramifications, so I expect it will take a future crisis to create a mandate for any serious change.
The exclusion of PPOR from asset tests is an example, I guess it's never going to be changed politically, but seems an odd policy that I'm sure is taken advantage of by people upsizing into retirement to qualify for the age pension. As per the example above, why should selling one's home due to going into aged care suddenly cause someone to lose their pension and start paying taxes? Doesn't seem right to me, I would be wanting to encourage retirees to downsize, and wanting to support people as they transition into aged care, not the opposite.
Australia's had a great run and let's hope it continues, but also anticipate that it won't last forever, there will be tough times ahead too and those will be the times when these "entitlements", rules and tax anomalies are likely to be re-assessed, probably when there is little or no choice but for the country to take serious action. Hopefully the circumstances won't be as dire as those seen in Southern europe over the past decade!

I get quite annoyed by the current aged pension regime.

My wife & I are self-funded retirees. We are still living in the house we bought 36 years ago. No overseas trips for us. Worked hard to pay off the mortgage & support our 2 kids.

I see so many people in our neighbourhood who are on the pension that go for their regular overseas trips, have more than 1 car on their concessional registration, have Foxtel, etc etc. How on earth is that allowed? They of course have a right to these assets & services but they have no right to expect taxpayers to fund it.

The politicians of both sides are incompetent. The rate of take up of the aged pension has been increasing for years such that now almost half of all retirees are getting at least a part pension. Any half competent business would have taken steps years ago to address it.

Peter, it is no mystery. When Morrison slashed the Pension Asset Test thresholds a few years ago, people had worked it out on the back of an envelope the next day after Budget night. Without even seeking advice. It was a no brainer.

Retired couples are smart. If the Fed Govt incentivises them to spend their savings, in order to get a higher Centrelink Age Pension -- spend & spend hard they will do, until they get down to that magical $450,000 mark. It's insane. Why the NZ system works & our system is a failure.

The notion that in essence the average person works for years paying tax and then gets a pension and healthcare exists; like it or not its a genuine expectation and thus 'real' in countless peoples psyche - a generational social 'contract' between productive honest citizens and wasteful disengenuous government.
The extent to which goalposts are gradually shifted and its thus ultimately not/slightly honored is another matter. Nowadays government needs to be more direct (KISS) in messaging because exactly the reverse is now true for the average person.

A couple of points, the Commonwealth has responsibility under Sub-Section 51(xxiii) of the Australian Constitution. When the then Government introduced the Invalid and Old Age Pension Act 1908, the Age Pension age of 65 was based on the life expectancy of a 16 year old male. This was 46.12 years (i.e. to age 62.12). To put this into perspective, if the same criteria was used today, the Age Pension age would be 81!
Further, in the 1908 Act, the family home was included where the value of the recipient's total assets was over £100.
From 1908 until 1945 there was a separate appropriation from Consolidated Revenue specifically for the Age Pension. In 1909 it was £1,000,000 over two years when Australia had an estimated population of 4,270,000. This had increased to £27,000,000 p.a. by 1945 where Australia’s population had grown to 7,391,000. It could be suggested that this to was unaffordable in the long run.
The notion of "the Government will look after me" probably comes from the National Welfare Fund that operated from 1945-1950. Under this, personal income tax was split into two components, with one component being used exclusively to finance social security cash payments. This fund was merged into Consolidated Revenue in 1950.

Means testing is mean and counter productive.

Sharing the age pension budget across all age eligible would embolden both savings loafers and investment loafers to quit loafing.

The recognition that people needed to save to fund their own retirement particularly considering the demographic changes in our population which led to the introduction of a universal superannuation system was one of the best and most far sighted measures adopted by Australia.

However, the Grattan Institute has recently argued against any higher superannuation contributions on the basis that “... person's lifetime income would be almost 1% lower – about A$30,000 lower.”

The rationale for their claim is that a typical Australian worker would see the income from their savings supporting their retirement offset by lower pension payments due to the pension asset test. In other words, a clever worker should spend all their money now and collect a higher government pension in retirement.

What a short sighted and unworthy message – self reliance is bad and, even though you could take steps to look after yourself, we recommend that you arrange your affairs to maximise welfare payments which, of course, have to be paid for using future, younger taxpayer's monies. But then left wing economics always says that relying on government spending is the answer to everything.

“unworthy message”: The message is that the Age Pension and Superannuation systems are not efficiently integrated. Income taxed Age Pension for all age eligible and Superannuation earnings, but not Superannuation withdrawals, would achieve efficient integration.

Sorry to go after the man and not the ball however, Warren, you have been duped by various government propaganda.
Governments are always looking to increase their income from the constituency. Basic fact! Show them a way increase the income they are spending and they will take it. It is a money grab, just as the next move any Aust Govt takes will be to change the rules around supper. Another money grab
Never mind that the propaganda will push the line of "fairness".
Is it fair that some have over a limit, to exclude them from getting a pension. If, because of your hard work and diligent savings you are over the limit why should you miss out on a pension.
From my point of view it is so that the Govt has more money to spend. In the immortal words of the astute Australian businessman Kerry Packer "As a government I can tell you you're not spending it that well that we should be paying extra."Apr 8, 2015
I do remember the various Govts in the 60 saying they would pay everyone a pension, if they paid their taxes and contributed to society. Not look after them, but return to them some of the money that have paid to keep our society rolling. Then they changed their minds. Never mind that they had good cause to change, the principle is that that changed their minds.
It saddens me to see people looking for what I call is a return from the Govt for 50 years of paying tax as being a request for the Govt to look after them.
Warning....watch A Govt go after some of the money we have all accumulated in Super.

Ironically, the Parliament was established in the 13th Century as part of Magna Carta to restrict the Crown from extracting taxes whenever they liked and for whatever reason and to allow those who paid the tax to determine how much and discuss how it is used.

Now, Parliaments have taken over the roll of the Crown and levy taxes and then determine what to spend it on, increase regulation, and provide more power to the mandarins.

Over the last 800 years, whenever the Crown or Parliament get in the way of people's lives the people react to try and take back control of their lives.

This can be seen in the rise of "populist" leaders and the increase in those wanting to be contractors and the rise of the "gig economy".

A good read Warren

I have given a couple of lectures on Super to University of the Third Age Groups.

People are very surprised to know that maybe 70-to-75% of Australians over 65 years of age depend on the Age Pension in full or in-part.

Self-funded retirees are a minority; and most of these have moderate incomes.

Hi Guys. Well I am of the same vintage and I remember clearly the concept that people "paid" for the pension and therefore were entitled to it. But there is a very good reason for the belief. The current Income Tax law was the successor to the Income Tax and Social Services Contribution Assessment Act which operated up until at least the mid 1960's. This act levied a tax on taxpayers each year which went into consolidated revenue and was supposed to provide for pensions upon retirement. Clearly the current system does not have this clear nexus between the tax system and superannuation or pension benefits, but there is a clear origin of the concept from those times. One thing we know for sure is that governments of any political persuasion will do what they will with an eye to the next election - ( as do listed enterprises) - so we have a system of contributions to super on our behalf by employers which was a hard won slog which required sacrifice on the part of the working taxpayers over many years ( you will remember that this was part of "the accord") so that employers and the economy as a whole could pay for it. We need to constantly remember that the pension is a "safety net" and not a right. Although there are many who would argue that the net ought to be broadened from time to time - all legitimate depending on your point of view. Net result of this is that your first responsibility is do something for yourself, no matter how small, because every bit counts! Of course, that is if Bowen and his crew don't change the rules because you somehow come from the "big end of town". In the Whitlam years, this same concept existed, although the Treasurer at the time (Frank Crean) publicly stated that anyone over the level of a Class 4 in the APS was a "fat cat". The terminology might change but the leopard still retains its spots!

I’m 24. It’s a waste of time saving for retirement. It’s too hard - especially with negative real returns on safe assets and high valuations for shares and property. Just save enough to reach the asset test limit and the pension gets more luxurious every year. Self funded retirement is only for high income earners.

This comment explains why youth is wasted on the young. Aaron, why don't you apply the magic of compounding? Or were you not paying attention at school when this was taught. Even the smallest regular contribution into a savings vehicle reaps huge rewards 40 + years later. It has nothing to do with high valuations of shares and property - it has everything to do with saving and not spending.

Aaron has a point though the current system penalises the middle ground. There's absolutely no point being a low-end self-funded retiree. You either need to be well and truly rich, or you're better off having a decent lifestyle and spending your way below the threshold for the pension. From today's starting point I can see it would be very discouraging for younger adults. However Greg has a point too, as you can't assume this system will stay the same forever. It is not sustainable and eventually something is going to change. There may be a year where the pension stops getting more luxurious (?) and heads in the opposite direction.
Hopefully policymakers eventually find a way to make it fairer for those people who end up being stuck in the middle.

The concept was never taught at my school, Greg. I came from the wrong side of the tracks.

Introduce a progressive tax on age pension just like many countries. This will create an inclusive society. Abolish age pension will create an underclass that will create many issues.

Aged pensioners are some of the richest Australians. Wealth is in their principal place of residence and with interest rates at low levels you need to have saved at least $1,000,000 just to match the single pension. Why bother, just use the Gov for your fixed income. It is also advantageous to access retirement housing if you are on the pension-much cheaper.

Exactly Jill. Save $300-$400k with your super guarantee and you’re set.

Jill, Yes, the full aged pension may be worth about the same as $1m invested in no risk fixed income, due to unprecedented low interest rates and pensioner concessions, although $800k is closer to the mark. However, a pensioner can’t access that $1m whereas a self-funded retiree can. If 80% of that $1m was invested in index ETFs, franking credits alone would deliver about half the aged pension. The remaining 20% could be in a prudent mix of cash, debt, bonds, hybrids etc. The self-funded retiree is not being totally unsupported by Government.

Yes, this is exactly the reason PPOR should be included in means testing. Unless people think it's fair that "Aged pensioners are some of the richest Australians". Also as per my other comment I guess there is very little chance of any political party trying to change this as they will never get elected/re-elected. Will have to wait until such time as the country runs out of money and something really has to change...

Age pensions are subjected to assets and income tests.

And are punished for helping their kids with a leg up into housing market,as it is added to assetts

To nothappy, how so?
If someone has the cash to help their kids then they already have that in their assets. Changing it to an interest free loan to the kids or a part share in a house for them doesn't add to existing assets, so how can there be any "punishment"?

I'm not in my 60s, but not far away, and I've never heard the "we'll look after you" message either. I've always been a numerate person, but wasn't particularly well paid for the first two decades of my employment life, and when Keating's system started, with the well-publicised slow ramp up period from 3% to 9% it was quite clear to me that I was going to be at a significant disadvantage, given I was already 32, to someone who entered the workforce at 9% and worked their entire life at that rate, or higher, so I shovelled every spare cent I could via salary sacrifice into super for years, until my calculations indicated I'd "caught up," and then I just kept going.

Of course it was easier then with low house prices and high contribution allowances, but I still always saw it as my role, as a functioning adult, to look after myself in retirement, and I tried over the years to point out the very large writing on the very large wall I could see quite clearly in front of me to friends and relatives, but not many were interested.

Result is that I will retire, absent adverse events, when I'm 60 with a sufficient and growing income stream and most of my friends and relatives my age look like they will have to soldier on for another 5 years or so - and some are starting to panic about super balances. Too late, alas.

Luck plays a part - good health, largely continuous employment, un-cursed by needing a "career" as life fulfilment came from other sources - but as they say "The harder I work, the luckier I get."

I am frustrated by seeing people only a few years older than I am - there's a story in ABC News online today - who have chosen to work in careers that have given them satisfaction but not so much financial reward clamouring for pension increases and caring about deeming rates. "XXXXX, who worked in arts administration and is 63, doesn't have much super" etc.

There will always be people who, from circumstances beyond their control, will need assistance in their later years, but there seem to be a hell of a lot of people now in situations that they've had a lifetime of work to avoid, begging for scraps from the government. It can't end well given the demographic shifts under way at the moment.