- Retirementgate punishes middle Australia
- Assistant Treasurer speaks about Retirementgate
- Save Our Super responds to Retirementgate criticisms from Assistant Treasurer
- Less Age Pension now, more Age Pension later?
- Age Pension changes: where is the long-term financial modelling?
- Assistant Treasurer supplies limited modelling
- Age Pension changes designed to capture ‘sitting ducks’
- High effective marginal tax rates highlight the Age Pension savings trap
- Seeking further detail, or revised Age Pension policy
- For more information…
Earlier in 2017, SuperGuide published a series of articles on the financial hit that many retired Australians experienced when the harsh changes to the Age Pension assets test took effect from 1 January 2017. The articles were published, with the assistance of advocacy group, Save Our Super, and with financial modelling conducted by Sean Corbett.
We consider the January 2017 changes retrospective, and the immediate effect of the changes was to ambush more than 300,000 existing retirees who could do little to mitigate their circumstances. The January 2017 Age Pension changes also threw into disarray the retirement plans of many hundreds of thousands of Australian within at least 5 years of retirement.
At SuperGuide, we named this government policy debacle ‘Retirementgate’. In short, the retirement savings ‘sweet spot’ is $400,000, OR more than $1 million, for a retired home-owning couple, and nothing in between, due to the effect of the harsher Age Pension assets test. (Since 1 January 2017, retirees have lost $3 of Age Pension a fortnight for every $1,000 over a certain assets threshold, compared with only losing $1.50 of Age Pension for every $1,000 over the threshold before January 2017.)
During 2017, and also subsequent to publication of the Retirementgate articles, Save Our Super’s founder, Jack Hammond met with, and also corresponded with, Assistant Minister to the Treasurer, Michael Sukkar MP. Minister Sukkar has now responded in writing to the issues outlined in the SuperGuide articles (primarily sourced from the underlying papers prepared by Save our Super).
Before we share the response of the Assistant Minister to the Treasurer, for your convenience and as a refresher, we outline to our readers what Retirementgate is all about.
Retirementgate punishes middle Australia
Based on financial modelling by Sean Corbett, for a retired couple who own their home, the practical effect of the 2017 Age Pension changes is that you receive more total retirement income (including Age Pension) with $400,000 in super, than you do with $800,000 in super, or even $1 million in super.
Australian couples with more than $400,000 in retirement savings are effectively taxed at 150% for each additional dollar of lifetime super savings between $400,000 and $800,000, according to the Save Our Super paper.
Under the post-January 2017 rules, the most desirable superannuation savings targets are $400,000 or $1,050,000, and to accumulate over this $650,000 divide using the post-July 2017 superannuation concessional contributions limits would take 26 years, according to Save Our Super (SOS).
The long-term effects of these astounding findings from the SOS paper, is that there are now incentives for Australians to change their saving behaviour by relying persistently on a significant part Age Pension. According to SOS, such a change in behaviour is likely to reverse over time the government’s claimed budget improvements, and damage the sustainability of the retirement income structure. By crimping Australians’ aspirations to achieve rising real living standards in retirement, the long-term effects of these measures will necessitate further change to policy. SOS believes this uncertainty is a threat to the retirement planning of millions of Australians.
Note: Save Our Super has made it clear that the organisation is not arguing that individuals should limit their lifetime saving: “We are simply observing that because perverse incentives have been created by the Government’s 2017 policy changes, some people will, in practice, quite logically follow those incentives to limit their savings assessable under the Age Pension assets test. This only needs to happen at the margin to create problems for sustainability of the Age Pension and for the policy framework determining the interaction between the Age Pension and the superannuation system”.
According to Save Our Super, a couple who own their own home face the largest perverse incentive in absolute terms, where doubling the amount saved by $400,000 can reduce total annual income by roughly $11,000.
As SOS has argued, the impact of policy change on the federal budget and on retirement living standards is inescapably a long-term issue requiring examination over a time horizon of 40 or more years. According to SOS, such long-term modelling was published for the 2007 reforms (introduction of tax-free super and removal of benefit limits), but has not been forthcoming for the 2017 changes.
In SuperGuide’s view, based on the commentary above (and the commentary contained in the SuperGuide Retirementgate series), the introduction of the 2017 measures without long-term modelling of the impact of such measures, is an expensive mistake, and needs to be seriously reconsidered. Although reversing or modifying the Age Pension assets test changes may cause short-term embarrassment for policy makers and political leaders, such action I suspect is better than being voted out of government, or losing your job. For a compilation article covering the Retirementgate series, which includes links to all Retirementgate articles, see SuperGuide article Retirementgate: Government’s Age Pension debacle hits middle Australia.
Assistant Treasurer speaks about Retirementgate
As a result of the meeting and series of correspondence with Jack Hammond, founder of SOS, the Assistant Minster to the Treasurer, Michael Sukkar MP responded in writing challenging Save Our Super’s modelling and re-emphasised the government’s motivation for introducing the harsher Age Pension assets test.
Quoting directly from 9 August 2017 response from the Assistant Minister to the Treasurer (AMT), Minister Sukkar says:
Response from Assistant Minister to Treasurer (dated 9 August 2017) (extract)
It is not the role of the Age Pension to support retirees with a higher level of assets to maintain their capital base.
It appears your analysis only covers the first year of retirement. Therefore, it does not capture that wealthier retirees are likely to qualify for more Age Pension as they age and draw down on their wealth.
Additionally, your analysis is based on drawdowns of only five per cent per year. A retiree with $1 million will be better-off than a retiree with $400,000 on a lifetime basis if they draw down their private savings more rapidly. Encouraging retirees with the means to do so, to draw down on their savings, was one of the aims of introducing a steeper taper rate.
There was no evidence of retirees not saving or dissipating their assets in response to this taper rate in the period pre-2007, when the taper rate was at a similar rate to that announced in the 2015-16 Budget. Indeed, the data indicated that many age pensioners were maintaining or increasing their asset holdings throughout their retirement years.
Save Our Super responds to Retirementgate criticisms from Assistant Treasurer
Save Our Super addressed the AMT’s response in a letter dated 2 September 2017, acknowledging that the changes to the Age Pension do indeed mean wealthier retirees draw more on their own savings, but the impact is much more widespread – hurting middle Australia.
Save Our Super’s Jack Hammond outlines the fuller effect of the changes in his 2 September response to the AMT. Quoting selectively from his response, Jack Hammond says:
Response from Jack Hammond (Save Our Super) (dated 2 September 2017) (extract re hurting middle Australia)
Unfortunately, the impact on wealthier retirees is neither the only, nor the most important, effect of the change. More importantly for retirement income policy sustainability, the 2015-2016 Budget change created, from 1 January 2017, very high effective marginal tax rates of well over 100% over a wide range of superannuation balances. These high effective marginal tax rates constitute a ‘savings trap’ over a wide range: those already retired who happen to fall within that newly-created range are encouraged to dissipate savings in this range at no cost to their combined superannuation plus part-Age Pension income, and those still saving are encouraged to stay below the savings trap range.
Save Our Super enumerated the example of a couple who own their own home, and draw down 5% annually of their superannuation balance (as is required for allocated pensions paid to those between 65 to 74 years old). For this household type, a range of super savings between $400,000 and $1,050,000 earns no reward over the 65-74 age range. Correspondingly wide savings traps apply for other household types of retirees. SuperGuide has elaborated on those findings.
We note your advisors do not apparently dispute the creation by the Government of effective marginal tax rates on superannuation savings of well over 100%, nor that the resultant savings trap is very wide.
These wide savings traps discourage today’s middle income earners from greater self-financing for retirement, which was the key objective of the Howard/Costello Age Pension and superannuation reforms of 2007 that the Government has now reversed. Current policy encourages a retirement strategy for continuing access to a part Age Pension at a large percentage of the full pension (94%, for the case we illustrate of a couple who own their own home).
Less Age Pension now, more Age Pension later?
Save Our Super’s Jack Hammond also responded to the AMT’s criticism of looking at only the first year of retirement and focusing on 5% drawdown. The AMT claims this analysis does not capture that wealthier retirees are likely to qualify for more Age Pension as they age and draw down on their wealth.
We reproduce relevant sections of Jack Hammond’s 2 September 2017 response below.
Response from Jack Hammond (Save Our Super) (dated 2 September 2017) (extract re looking only at Year 1 of retirement)
Your advisors note (as we do in our papers) that the static analysis we have presented concentrates on only the first year of retirement (or more precisely, any years between age 65 and 74 when only 5% drawdown of superannuation balances is required). Your advisors correctly note that a need to draw down super faster in early retirement to make good reductions in the part Age Pension is likely to be offset by greater access to the Age Pension later in retirement: that is, superannuation balances will be exhausted earlier. We make the same point ourselves, which is why we argue the properly measured fiscal impact over time of the restriction is doubtful. Any claimed fiscal savings over the forward estimates period could be more than outweighed by greater reliance on the Age Pension later.
It is a complex challenge to assess changes to policy that take effect with very long time lags, as is typical of retirement income policy. That is why previous governments have presented formal modelling, over a 40 year horizon, of the combined effects of Age Pension and superannuation policy changes.
Such formal, long-term modelling can account for the interactions of demographic change, income growth, the maturation of the Superannuation Guarantee system, the growth in life expectancy at retirement and its consequence for greater ultimate recourse to the Age Pension once lifetime savings are exhausted.
It is disturbing that there has been no publication of any such formal, long-term modelling of the 2017 changes, unlike the extensive public releases of RIMGROUP modelling of the 2007 reforms that the Government has now reversed.
Your advisors claim that a retiree with $1 million in superannuation will be better off over a lifetime than someone with a $400,000 balance if they draw down their savings more rapidly than the 5% per annum we illustrate for retirees between age 65 and 74. Depending on assumptions about real investment returns, real wage growth and inflation, we agree that the cumulative income (Age Pension plus superannuation drawdown, in constant dollars) over retirement of someone with early drawdown a $1 million superannuation balance and subsequent access to a part or full Age Pension is likely to be higher than someone with a $400,000 balance.
The examination of this cumulative retirement income perspective by Sean Corbett, whose modelling underpinned the Save Our Super and SuperGuide analysis, shows that savers in the ‘savings trap’ zone receive back, in constant dollars of combined superannuation and Age Pension over their entire retirement, about 65 percent of any additional amount they contributed decades earlier by forgoing consumption during their working careers. Usually, a saver would expect to get back what they saved, plus interest. But under the Government policy, they get back about 35 percent less than they saved, even having been compulsorily denied access to their savings over the multi-decadal periods common in superannuation saving. This is, of course, a consequence of the very high effective marginal tax rate of over 100% that we identify, and that your advisors apparently do not dispute.
This finding underscores that Government policy change in 2017 has produced a very poor return on thrift. Indeed, the discouragement to saving is even worse than a simple comparison of constant dollars saved to cumulative constant dollars returned, since every saver has a time preference for a dollar today over a dollar decades hence (and subject to future unpredictable changes in Government policy). Time preference demands the saver get back more than they put in. Instead, the Government policy gives them about 65 cents in the distant future in reward for forgoing a dollar of consumption today [SuperGuide’s italics].
Finally, and most surprisingly to us, your advisors claim “there was no evidence of retirees not saving, or dissipating their assets, in response to the” high Age Pension taper rate in the pre-2007 period that has been reintroduced on 1 January 2017. Anyone who had studied the 2007 reforms, their documentation and their modelling would understand that the evidence was the persistence before 2007 of high reliance on the full Age Pension. To ignore that evidence is Nelsonian: putting a blind eye to the telescope. The pre-2007 high taper rate on the assets test for the Age Pension had been in place for some time. Savers had adjusted to it by staying out of the savings trap it created, and fully exploiting the Age Pension.
Age Pension changes: where is the long-term financial modelling?
Mr Hammond also reminded the AMT about the policy objectives of the previous 2007 relaxation of the Age Pension assets test. Relaxing the taper rate to $1.50 per fortnight (rather than $3) was designed “to reduce the disincentives to higher saving that permanently locked many retirees into a full Age Pension”. Mr Hammond then quoted from the 2006 discussion paper introducing the relaxed taper rate (which was reversed from January 2017), and the extract is set out below:
Coalition government 2006 discussion paper (extract)
The assets test is very punitive as retirees must achieve a return of at least 7.8 per cent on their additional savings to overcome the effect of a reduction in their pension amount. This high withdrawal rate creates a disincentive to save or build retirement savings. (p 37) …
It is proposed that the pension assets test taper rate be halved from 20 September 2007 so that recipients only lose $1.50 per fortnight (rather than $3) for every $1,000 of assets above the relevant threshold. This would mean that retirees would need to achieve a return of 3.9 per cent on their additional assets before they are better off in net income terms — that is, after taking account of the withdrawal of the Age Pension. (p 37) …
The reduction in the assets test taper rate would increase incentives for workforce participation and saving especially for those people nearing retirement who will still depend on the Age Pension to fund part of their retirement. (p 38)
Note: For historic background to Age Pension changes, from 2007 up to the introduction of the harsher Age Pension assets test in 2017, see SuperGuide article Age Pension dramatically different 10 years ago.
Jack Hammond concluded his response with a request for details of any long-term modelling that had been conducted assessing the impact on retirement incomes and federal budgets, as a result of the Age Pension and superannuation changes introduced by the Abbott and Turnbull governments.
Assistant Treasurer supplies limited modelling
The AMT responded to Jack Hammond’s letter and request and supplied some modelling conducted by the Department of Social Services for couples and singles. The AMT also dismissed the issue of high effective marginal tax rates for Age Pensioners. An extract from the AMT’s response is set out below:
Response from Assistant Minister to Treasurer (dated 31 October 2017) (extract)
The Department of Social Services (DSS) modelled the cost of pension payments for a partnered couple most affected by the changes, that is, a couple with around $850,000 in assets. The analysis compared the cost of pension under the previous assets test rules, where the couple spend the income generated from the assets but do not draw down from their capital, versus the cost of pension for the same couple under the assets test changes, assuming they continue to spend their income and they replace their reduction in pension by drawing down an equivalent amount from their capital. The analysis shows that the cumulative cost of the pension for the couple would be lower under the assets test changes for the first 30 years from their commencement on pension. Based on Australian Bureau of Statistics data, the life expectancy for a 65 year old female is an additional 22 years and for males it is about 19 years.
DSS modelled the cost of pension payments for a single home owner pensioner most affected by the changes, that is, a single pensioner with around $550,000 in assets. The analysis compared the cost of pension under the previous assets test rules, where the person spends the income generated from the assets but does not draw down from their capital, versus the cost of pension for the same person under the assets test changes, assuming they continue to spend their income and they replace their reduction in pension by drawing down an equivalent amount from their capital. The analysis shows that the cumulative cost of the pension for the person would be lower under the assets test changes for the first 37 years from their commencement on pension. Based on Australian Bureau of Statistics data, the life expectancy for a 65 year old female is an additional 22 years and for males it is about 19 years.
In your correspondence, you suggest that the asset test taper rate would create high effective marginal tax rates (EMTRs), acting as a disincentive to save. However, this approach does not account for the capacity of affected people to draw down on their assets to replace the foregone pension.
Examining the assets test taper change through an EMTR prism also suggests the only expectation in retirement should be that people earn income off their superannuation and other retirement savings while retaining their capital base intact with the Age Pension operating as an income top-up.
This interpretation means the Age Pension system would support individuals with significant assets to maintain their wealth, supported by the taxpayer, rather than using that wealth for themselves in retirement. This would be contrary to the objective of superannuation, which is to provide income in retirement to supplement or substitute the Age Pension.
Individuals can draw on their assets (that will increasingly have been subject to generous superannuation tax concessions) for self-support during their retirement. Under the previous asset test settings, pensioners with substantial superannuation assets were able to receive part-pensions with little expectation that they draw on their assets to meet their needs in retirement. DSS data analysis undertaken prior to the 2015 budget announcement of the assets test changes showed that the majority of pensioners were either maintaining or increasing their level of assessable assets, rather than the level of their assessable assets decreasing.
Age Pension changes designed to capture ‘sitting ducks’
Save Our Super’s Jack Hammond requested formal modelling over a 40-year horizon, of the combined effects of the Age Pension and superannuation policy changes (which had been conducted before the introduction of the 2007 Age Pension and super reforms). According to Jack Hammond, the two DSS examples provided by the AMT fall well short of comprehensive modelling.
Quoting directly from Jack Hammond’s response to AMT:
Response from Jack Hammond (Save Our Super) (dated 8 November 2017) (extract re financial modelling)
Only such formal, long-term modelling can account for the interactions of demographic change, income growth, the maturation of the Superannuation Guarantee system, the growth in life expectancy at retirement and its consequence for greater ultimate recourse to the Age Pension once lifetime savings are exhausted.
I must say that the DSS modelling of the 2017 changes forwarded in your letter is far, far short of the comprehensive modelling that I sought.
The DSS findings merely report (without clarifying assumptions) examples of retirees in one of two household types, with one of just two particular asset levels and in receipt of a part Age Pension. It examines those with pre-existing life savings caught at 1 January 2017 in those two cases — ‘sitting ducks’ as we might call them — who draw down their capital to make good the Age Pension reductions from 1 January 2017. It concludes that the Government’s Age Pension cumulative payments to such retirees will be lower for 30 years (or 37 years, depending on the case), whereas a 65 year old retiree’s life expectancy is only 22 years (if female) or 19 years (if male). If I may put it more bluntly, savers in such situations will (on average) die before their reduced remaining savings entitle them to a sufficiently higher future Age Pension to outweigh the initial reduction of their Age Pension from 1 January 2017.
I take it that the point of these slightly macabre DSS conclusions is to imply that the expenditure by the Government on the Age Pension just for such ‘sitting ducks’ will be reduced over all their remaining life, not just for the forward estimates period. But that claim, if true, is much less than modelling the effect of the Age Pension changes over time on all savers, and even less still than modelling the combined effects of 2017’s changes in both Age Pension and superannuation arrangements on retirement income trends and overall Government expenditure.
The changed incentives from creating a wide range of very high effective marginal tax rates at a practically important level of life savings will reduce the future supply of ‘sitting ducks’…
High effective marginal tax rates highlight the Age Pension savings trap
Jack Hammond noted in his 8 November 2017 response to the AMT that the Minister’s advisers implied that without high effective marginal tax rates, retirees should aspire to “live on superannuation income and never run down their savings”. Save Our Super Hammond agrees that Age Pension rules should not mean that retirees never draw down on their capital base. Jack Hammond responds directly to this issue in his 8 November 2017 letter:
Response from Jack Hammond (Save Our Super) (dated 8 November 2017) (extract re high effective marginal tax rates)
The required minimum drawdowns of superannuation retirement-phase allocated pensions sharply increase with age to force capital depletion. If a government was, for some reason, concerned that retirees were not depleting their savings rapidly enough — an odd concern, to be sure, for a Coalition Government — it would be simple and much more transparent to require an even sharper acceleration of minimum drawdowns than at present. (Of course, faster mandated drawdowns would expose retirees to greater risk of severe market downturns such as occur about every decade.)
To take another perspective on the depletion of a life savings in retirement, respected financial industry professionals estimate that to buy a financial product yielding an income stream equivalent to the Age Pension for a couple would cost over $1 million at today’s interest rates. Our understanding is that such a product would have no residual value: its capital cost would be fully consumed at an average life expectancy in providing the necessary income stream, given the need to maintain liquidity and weather market shocks.
To save over $1 million requires a couple’s savings somehow to leapfrog a wide savings trap created by the 2017 Age Pension policy changes. That in turn is hindered by the 2017 superannuation changes. To attempt to leapfrog the savings trap and to fail, would be to be left worse off than to have followed an ‘Age Pension first’ strategy that used savings that would otherwise have been caught by the high EMTRs in ways outside the Age Pension asset test, such as in improving the principal residence. That is the conundrum at the heart of the misguided 2017 policy changes.
Good policy requires sophisticated modelling of the long-term implications of future, sustainable Age Pension and superannuation changes. Such modelling will need to be published and tested in order to build broad public support for change in a field where the 2017 changes have destroyed trust and created policy instability.
Therefore, as I previously requested, would you be so kind as to send me, as soon as possible, the following information: namely, any detailed, formal, long-term modelling of the impact on retirement income outcomes and the budgets of the changes made by the Abbott and Turnbull Governments to the Age Pension and the superannuation system which they have introduced.
Note: Footnotes that appeared within the extracts from Jack Hammond’s correspondence have been removed, for readability.
Seeking further detail, or revised Age Pension policy
Along with Save Our Super, the team at SuperGuide look forward to sighting the long-term modelling used to formulate the latest Age Pension superannuation changes. Alternatively, SuperGuide looks forward to the federal government reversing or modifying the Age Pension assets test changes, notwithstanding the short-term embarrassment for policy makers and political leaders.
For more information…
For a compilation article covering the Retirementgate series, including links to all Retirementgate articles, see SuperGuide article Retirementgate: Government’s Age Pension debacle hits middle Australia.
For a summary article of the July 2017 superannuation changes, see SuperGuide article Latest superannuation changes: 2017/2018 guide.
For the latest Age Pension rules, including the latest Age Pension rates and thresholds, see SuperGuide article Age Pension: September 2017 rates apply (until March 2018).