In the past few months, SuperGuide, with the assistance of advocacy group Save Our Super, has reported on the ridiculous state of affairs now facing existing and future retirees. The January 2017 Age Pension changes, namely the harsh regressive effect of the Age Pension assets test, have made it financially more attractive for middle Australia to spend more, rather than save more for retirement.
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 lifetime super savings between $400,000 and $800,000, according to the Save Our Super paper.
Under the new rules, the most desirable savings targets are $400,000 or $1,050,000, and to accumulate over this $650,000 divide using the post-July 2017 concessional contributions limits would take 26 years.
For a single person who owns his or her home, the practical effect of the 2017 Age Pension changes is that you receive more total retirement income (including Age Pension) with $300,000 in super, than you do with $400,000 or $500,000 or even $600,000 in super. A homeowning single person is hardest hit when they hold $550,000 in super, and at this level of savings they receive less total income (super pension and Age Pension payments), compared with a similar single person holding $300,000 in super.
Founder of Save Our Super, Jack Hammond, and former Treasury official, Terrence O’Brien believe the community can draw five strong conclusions from this damaging policy. I quote Jack and Terry directly:
- Since 1 January 2017, there has been a wide ‘savings trap’ discouraging saving, for all household and home-ownership types.
- The position of that wide trap is practically very damaging, as it falls around the retirement superannuation balances at which middle income earners who could plausibly become self-funded retirees are finishing their savings after a working lifetime. Discouraging their saving creates a retirement strategy of permanent reliance on a part Age Pension at close to the full rate.
- The effective marginal tax rates over the savings trap are around 150%.
- The high effective marginal tax rate not only makes those in the savings trap worse off around the years of retirement; it also means they only get back in additional income over their entire retirement about 65% (in constant dollars) of what they contributed in additional saving. Particularly considering the time preference for consumption today over income decades hence from saving, this is a significant blow against thrift.
- The measures impose an effective average tax rate over the savings trap of about 35% on the income of those over 60 from complying allocated pensions which are tax-free for those below and above the savings trap. That is inequitable.
Assistant Treasurer responds to Retirementgate
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). For Minister Sukkar’s response, see SuperGuide article Assistant Treasurer responds to Retirementgate (aka Age Pension debacle)
For more information about Retirementgate…
Listed below are the series of SuperGuide articles covering Retirementgate:
- Assistant Treasurer responds to Retirementgate (aka Age Pension debacle)
- Retirementgate revisited: Australian couples and singles punished for saving
- Guest contributor: Retirees lose savings due to 2017 Age Pension changes
- Treasurer Morrison’s ‘Retirementgate’ encourages Aussies to spend and take Age Pension
- Retirement income and savings trap: 13 findings from Save Our Super’s paper
- Retirement income and savings trap caused by Coalition’s 2017 superannuation and Age Pension changes