- 1. Retirement savings ‘sweet spot’ is now $400,000, for most Australians
- 2. Australian couples with savings between $400,000 and $800,000 are effectively taxed at 150% on savings
- 3. Holding savings between $400,000 and $800,000 means losing money
- 4. Only when super savings rise to $1,050,000 can a couple receive more retirement income than holding $400,000 in savings
- 5. Actuarial value of a full Age Pension for a couple is more than $1 million
- 6. Due to July 2017 super changes, the $650,000 savings trap makes it more sensible to run down assets
- 7. No official modelling for the 2017 Age Pension and super rules
- 8. Reversing a system after only a decade without grandfathering
- 9. 2017 Age Pension and super changes reflect hunger for government revenue within 4-year forward estimates
- 10. Small change in percentage of self-funded retirees became a concern
- 11. Harsher Age Pension asset test will not make the system fairer, as proponents claim
- 12. Strong incentives for 40-60 year age group to spend rather than save
- 13. Long-term Federal Budget concerns
- For more information…
For a couple who own their home, the retirement savings ‘sweet spot’ target should be $400,000, to ensure maximum income (utilising super savings and Age Pension entitlements under the 2017 changes), according to a paper written by advocacy group, Save Our Super.
Only when superannuation savings increase to $1,050,000, can a retired home-owning couple expect to receive more income in retirement than from saving $400,000 and taking 94% of the full Age Pension. Disturbingly, any couple with more than $400,000 and up to $1,050,000 in super, will receive less total income (including Age Pension entitlements) than a home-owning couple with $400,000 in super, based on the analysis in the Save Our Super paper.
SuperGuide has coined the term ‘Retirementgate’ for this budgetary and retirement policy debacle (for Trish Power’s take on the debacle see SuperGuide article Treasurer Morrison’s ‘Retirementgate’ encourages Aussies to spend and take Age Pension).
SuperGuide invited advocacy group, Save Our Super, to highlight the immediate and long-term implications of the federal government’s latest changes to super and the Age Pension. The authors of the paper, Jack Hammond QC, founder of Save Our Super, and Terrence (Terry) O’Brien, a retired Treasury official, have uncovered shocking outcomes for middle Australia hoping to create a comfortable retirement.
SuperGuide has compiled 13 findings from the Save Our Super Paper, which are set out below. Alternatively, for those readers seeking an overview of the paper, see SuperGuide article, Retirement income and savings trap caused by Coalition’s 2017 superannuation and Age Pension changes (authored by Jack Hammond and Terry O’Brien), which includes a link to the original, longer paper.
Our list of findings below does not cover all of the points of the longer paper, so I encourage you to read the article above, and also the longer paper.
1. Retirement savings ‘sweet spot’ is now $400,000, for most Australians
Lifetime retirement savings for a home-owning couple should be self-limited to $400,000, which will enable the optimum use of the Age Pension. With $400,000 in super, a couple can receive 94% of the full Age Pension, delivering a total income of $52,395 (based on September 2016 Age Pension rates). Under the new rules, regardless of whether you saved $600,000 or $800,000 or even $1 million, you cannot secure more than $52,395 until you have $1,050,000 in super and relying solely on your super savings.
2. Australian couples with savings between $400,000 and $800,000 are effectively taxed at 150% on savings
Doubling the effect of the Age Pension taper rate from 1 January 2017 (losing $3 for every $1,000 of assets over the assets test threshold, rather than losing $1.50 for every $1,000 of assets), means that Australian couples are effectively taxed 150% for lifetime super savings between $400,000 and $800,000. This hit means that doubling super savings will convert to about $11,000 less total income each year. In the Save Our Super paper, they call having $800,000 in super ‘the pits’ because at that level, Australian retired couples are the worst hit from the January 2017 Age Pension changes. Under the 2007 Age Pension and super system (in place until December 2016), for every $50,000 step up in super savings the reduction in Age Pension rate was designed to still ensure an increase in combined income
3. Holding savings between $400,000 and $800,000 means losing money
Quoting from the Save Our Super paper: “Between superannuation balances of $400,000 and $800,000, an effective marginal tax rate of 150% means that if someone has committed $20 extra to superannuation when working, and on retirement draws $1 of income from that saving, their combined Age Pension plus superannuation income falls by almost $0.60, compared to if they simply spent the $20 when they earnt it and drawn a larger Age Pension in retirement. Those incentives are not sustainable.”
4. Only when super savings rise to $1,050,000 can a couple receive more retirement income than holding $400,000 in savings
According to the Save Our Super paper, a home-owning couple with $400,000 can receive a substantial part Age Pension (94% of full Age Pension) and a super pension drawdown of $20,000 a year, delivering a total income of $52,395. This level of income is not achieved when holding between $400,000 and $1,000,000 in assets. Once a couple accumulate $1,050,000 in savings they will receive no Age Pension, but their assets will enable them to secure an annual income of $52,500 a year – slightly above what they can achieve with $400,000 and 94% of the full Age Pension.
5. Actuarial value of a full Age Pension for a couple is more than $1 million
Although the paper does not explore this value in detail, the value of a guaranteed income stream will depend on the assumed rate of investment return that can be generated on a given set of assets, and the prospect of a person’s life expectancy. It is fairly safe to say however that that the value of a full or substantial part Age Pension rises in a low-return environment, and in a country where the average life expectancy is increasing.
6. Due to July 2017 super changes, the $650,000 savings trap makes it more sensible to run down assets
Australian couples with super savings of between $400,000 and $1,050,000 are trapped in a world where they receive less total income than those with significantly fewer savings. Such couples are now also grappling with much lower super contributions limits, making it difficult to generate a higher income than what they could achieve by owning less assets. According to the paper, to move from the retirement and income savings trap spanning savings of $400,000 to $1,050,000, it would take just under 22 years under the pre-2017 rules, but under the July 2017 super rules, moving across this massive savings trap will take 20% longer, or 26 years.
The large number of retired Australians in this situation are effectively encouraged to spend the excess on holidays, renovations or other activities that will reduce their assets and increase their income, which means they will move to a full Age Pension sooner . The paper makes the strong point that it is this demographic of Australia that we need to be accumulating such savings and reducing reliance on the Age Pension.
7. No official modelling for the 2017 Age Pension and super rules
Unlike the 2007 system, the government relaxed the Age Pension assets test taper rate, to reduce disincentives to save more, and they simplified the tax treatment of super benefit payments. These changes were subject to extensive long-term modelling. According to the Save Our Super paper, disturbingly the federal government did no official modelling of the radical January 2017 and July 2017 changes. No modelling was conducted to take into account the “sufficiently long, 40-year horizon necessary to clarify whether the new system improves retirement living standards and fiscal sustainability (or as we argue) will very likely worsen them” [Section 1. Overview].
Quoting from Section 6 of the Save Our Super paper: “…It was as if Simplified Superannuation [2007 changes] had been airbrushed from history, and its arguments, evidence, long-term modelling and research could be simply contradicted by asserting the need for a ‘rebalancing’ or a ‘reset’, to ‘clean up the superannuation mess’.
8. Reversing a system after only a decade without grandfathering
Reversing a retirement system after only a decade in place, without grandfathering for those Australians who relied on those super and Age Pension rules in good faith (see SuperGuide article Guest contributor: Super changes – why grandfathering the rules must be considered) creates distrust for the government and penalised current retirees. The authors of the paper believe the government’s reversal of its own policies after only 10 years, seriously damages confidence in superannuation as a savings vehicle, but also in the Age Pension as a safety net for those less able to save. The authors believe that future governments will be forced to reverse the 2017 changes to fix the budget.
9. 2017 Age Pension and super changes reflect hunger for government revenue within 4-year forward estimates
The authors of the Save Our Super paper point out that the Federal Budget had not been pushed into deficit by retirement income policy that was set 10 years earlier (which was shown to be sustainable and has maintained stability over that 10-year period), but the deficit has been created by “discretionary fiscal expansion in the global financial crisis not yet reversed, and weak revenue.[Section 5, How was Simplified Superannuation working?]
10. Small change in percentage of self-funded retirees became a concern
Under 2007 changes, although the predicted increase in self-funded retirees over 40 years was very small, the predicted conversion of full Age Pensioners to part Age Pensioners was significant. The percentage of full Age Pensioners would halve, and the comparative percentage of part Age Pensioners would double. The authors believe this significant transition from relying fully on the Age Pension towards a part Age Pension has not been fully appreciated.
11. Harsher Age Pension asset test will not make the system fairer, as proponents claim
According to the paper, supporters of the harsher 2017 Age Pension assets test suggest that the 2007 assets test (in place until 31 December 2016) was unfair because no one who owns a home and has $1 million in super or other assets should receive a part Age Pension. The authors consider this argument unrealistic, because of the harsh cut-off rates associated with the steeper taper rate, and one-dimensional because it only considers one concept of fairness. The authors argue that it is not fair that “people who forgo consumption and save more to increase their living standards in retirement and reduce their reliance on the Age Pension should instead get less retirement income. [Section 6]”
The authors argue that balancing these two ideas of fairness (redistribution from rich to poor, and rewarding rather than punishing saving) takes research and long-term modelling to create a workable system that reduces reliance on the Age Pension, while encouraging higher savings.
12. Strong incentives for 40-60 year age group to spend rather than save
What becomes clear from the detail of the Save Our Super paper, is that the 2017 changes to the Age Pension and superannuation rules will not solve Australia’s budgetary issues, but will instead defer the problem to the next generation of Australian retirees and their children. The authors argue that those Australians aged 40 to 60 years, who are in their peak saving period, will have strong incentives to spend now and save less in super.
“The authors also suggest that younger savers will watch the “shambles”, and “coast on their super guarantee compulsory super minimum savings and either spend… or save outside of superannuation…”
13. Long-term Federal Budget concerns
The authors believe the government’s short-term gain to revenue (although the author’s claim this gain is imagined) is likely to be reduced in the short run, and reversed in the long run. Australian retirees will adjust to the savings trap (referred earlier), and the gradual progression from full to part Age Pension as expected under the 2007 changes, will slow or halt, as a result of the 2017 changes.
For more information…
For more information on Save Our Super’s paper, see the following SuperGuide articles:
- Guest contributor: Retirement income and savings trap caused by Coalition’s 2017 superannuation and Age Pension changes
- Treasurer Morrison’s ‘Retirementgate’ encourages Aussies to spend and take Age Pension
For more information about the July 2017 super changes, and the January 2017 Age Pension changes, see the following SuperGuide articles:
- Age Pension: 300,000 Australians lost entitlements on 1 January 2017
- Age Pension assets test rules (March 2019 to September 2019)
- Latest superannuation rules: 2018/2019 guide
- Retirement phase: A super guide to the $1.6 million transfer balance cap
- 2018/2019 guide to non-concessional contributions (after-tax super contributions)
- 2018/2019 guide to concessional contributions (before-tax super contributions)