Retirementgate revisited: Australian couples and singles punished for saving

Note: This article discloses the retirement savings ‘sweet spot’ (optimal super balance for securing maximum income when combining super and Age Pension payments) for 4 categories of Australians – homeowning couple, homeowning single person, non-homeowner couple, non-homeowner single person. See summary table, charts and explanatory text later in the article.

In June 2017, we reported on disturbing findings from a paper originally produced for SuperGuide, by advocacy group, Save Our Super. The predominant finding from the paper was, that due to the harsh January 2017 changes to the Age Pension assets test, many Australians would be financially better off accumulating savings only up to a certain level, and then relying more on the Age Pension.

Quoting from our June 2017 SuperGuide article Treasurer Morrison’s ‘Retirementgate’ encourages Aussies to spend and take Age Pension: “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. 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.”

At SuperGuide, we have named this policy debacle as ‘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.)

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.

The long-term effects of this astounding finding from the Save Our Super 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 Save Our Super, such a change in behaviour will 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. Save Our Super believes this uncertainty is a threat to the retirement planning of millions of Australians.

In our three SuperGuide articles (published in June 2017) covering this important paper, we provided an illustration of this issue from the perspective of a retired couple who owned their home. We have had a huge reaction from SuperGuide readers and also from the broader media, including questions about whether there were comparable retirement savings ‘sweet spots’ for single people, and for retirees who do not own their homes.

Thanks to Save Our Super and its use of Sean Corbett’s financial modelling, we can also illustrate the scenarios for single people and non-homeowning retirees. See later in this article for a summary table, charts, and explanatory text disclosing the savings ‘sweet spot’ for 4 categories of retirees.

Age Pension (and super) changes may determine next federal election

I am sure I am not the only one wondering what type of government would introduce a policy that financially penalises Australians for saving for retirement. Ironically, as Save Our Super highlights, the policy that commenced in January 2017 is not a bold new policy experiment: rather, it is a return to a policy that was a tried and proven failure before the 2007 Simplified Superannuation reforms. The government’s action or inaction in correcting this issue will undoubtedly have a significant influence on the next federal election.

An important point to remember is that this measure would not have got through parliament without the support of the Greens. Although the Greens may have environmental credentials, I very much doubt the infamous decision to vote through the harsher Age Pension assets test without sighting long-term modelling will be hailed as one of their finest political moments.

As Save Our Super 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 Save Our Super, such 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, 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.

See the next section for a summary table, charts and explanatory text disclosing the savings ‘sweet spot’ for 4 categories of retirees.

Note: For background information on how this policy debacle, Retirementgate, plays out, see the following SuperGuide articles:

• 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

Retirement savings ‘sweet spot’ for singles and couples

In response to many requests for more information on the financial implications of the harsher Age Pension assets test on current and future retirees, the authors of the original paper, Jack Hammond QC and Terrence (Terry) O’Brien (former Treasury official), with the assistance of Sean Corbett’s modelling, have kindly compiled further analysis for the following four categories of retirees:

• Couple, homeowners
• Couple, non-homeowners
• Single person, homeowner
• Single person, non-homeowner

The explanatory text, table and charts below illustrate the savaging of retirement incomes, and the dismantling of long-term retirement income policy by the current government.

The assumptions used in the table, charts and analysis below appear at the end of the article. Note that Chart 1 (see later in the article) reflects the corresponding retirement balances appearing in Charts 2 to 5. For example, Case 6 ($400,000 super balance) in Chart 1, is the super balance for Case 6 in Charts 2 to 5.

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”.

1. Homeowning couple: $400,000 savings sweet spot

Although analysis for homeowning retired couples has been provided in previous articles, for completeness and for convenience we include a summary of this analysis in this article.

According to Save Our Super, incentives created by the federal government, now encourage Australians to self-limit lifetime retirement savings: a homeowning couple is encouraged to self-limit savings assessable under the Age Pension assets test to $400,000, which will enable the optimum use of the Age Pension. With $400,000 in super, a homeowning 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 harsher Age Pension assets test, regardless of whether a homeowning couple saved $600,000 or $800,000 or even $1 million, they cannot secure more than $52,395 until they have $1,050,000 in super and are relying solely on their super savings. A homeowning couple are hardest hit when they hold $800,000 in super, and at this level of savings they receive less total income (super pension income and Age Pension payments), compared with a similar couple holding only $400,000 in super. See table below.

2. Non-homeowning couple: $650,000 savings sweet spot

According to Save Our Super, incentives created by the federal government, now encourage Australians to self-limit lifetime retirement savings:  a non-homeowning couple is encouraged to self-limit savings assessable under the Age Pension assets test to $650,000, which will enable the optimum use of the Age Pension. With $650,000 in super, a non-homeowning couple can receive 82% of the full Age Pension, delivering a total income of $60,833 (based on September 2016 Age Pension rates). Under the harsher Age Pension assets test, regardless of whether a non-homeowning couple saved $800,000, or $900,000, or even $1 million, they cannot secure more than $60,833 until they have $1,250,000 in super and are relying solely on their super savings. A non- homeowning couple are hardest hit when they hold $1,000,000 in super, and at this level of savings they receive less total income (super pension income and Age Pension payments), compared with a similar couple holding $650,000 in super. See table below.

3. Homeowning single person: $300,000 savings sweet spot

According to Save Our Super, incentives created by the federal government, now encourage Australians to self-limit lifetime retirement savings: a homeowning single person is encouraged to self-limit savings assessable under the Age Pension assets test to $300,000, which will enable the optimum use of the Age Pension. With $300,000 in super, a homeowning single person can receive 83% of the full Age Pension, delivering a total income of $33,958 (based on September 2016 Age Pension rates). Under the new Age Pension rules, regardless of whether a homeowning single person saved $400,000 or $500,000 or even $600,000, they cannot secure more than $33,958 until they have $700,000 in super and are relying solely on their super savings. 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. See table below.

4. Non-homeowning single person: $550,000 savings sweet spot

According to Save Our Super, incentives created by the federal government, now encourage Australians to self-limit lifetime retirement savings: a non- homeowning single person is encouraged to self-limit savings assessable under the Age Pension assets test to $550,000, which will enable the optimum use of the Age Pension. With $550,000 in super, a single person who doesn’t own their home, can receive 66% of the full Age Pension, delivering a total income of $42,549 (based on September 2016 Age Pension rates). Under the new Age Pension rules, regardless of whether a non-homeowning single person saved $400,000 or $500,000 or even $600,000, they cannot secure more than $33,958 until they have $900,000 in super and are relying solely on their super savings. A non-homeowning single person is hardest hit when they hold $750,000 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 $550,000 in super. See table below.

Table: Retirement savings sweet spot for couples and single people

	Maximum Age Pension (rates as at September 2016)	“Sweet spot” (maximum combined income from Age Pension and super drawdown)			“The Pits” (trough in total income)		“Ahead at last” (super balance at which 5% drawdown  overwhelms loss of part Age Pension)	Width of savings trap
		Maximum part pension plus 5% super drawdown	Super balance at sweet spot (to nearest $50,000)	Part pension as proportion of total pension	Total income	Corresponding super balance	Corresponding super balance to super draw down of 5%
Couple, homeowners (Chart 2)	$34,477	$52,395 (Case 6)	$400,000	94%	$41,251 (Case 14)	$800,000	$1,050,000 (Case 19)	$650,000
Couple, not homeowners (Chart 3)	$34,477	$60,833 (Case 11)	$650,000	82%	$51,251 (Case 18)	$1,000,000	$1,250,000 (Case 23)	$600,000
Single, homeowner (Chart 4)	$22,867	$33,958 (Case 4)	$300,000	83%	$27,500 (Case 9)	$550,000	$700,000 (Case 12)	$400,000
Single, not homeowner (Chart 5)	$22,867	$42,549 (Case 9)	$550,000	66%	$37,500 (Case 13)	$750,000	$900,000 (Case 16)	$350,000

Disclaimer: The calculations illustrate the general rules on how the Age Pension income and assets tests apply to different levels of superannuation savings. The table, charts or analysis is not to be construed as advice to any particular retiree. Individuals should seek specialist financial advice on their particular circumstances.

General conclusions (from Save Our Super)

According to Save Our Super, there is a wide ‘savings trap’ in all 4 cases — between $350,000 for a single non-homeowner and up to $650,000 for a couple who own their own home (see Charts 1 to 5 below). In all 4 scenarios, there is an incentive to plan for a retirement strategy based on a substantial part Age Pension, ranging between 66% for a single non-homeowner to 94% for a couple owning their own home. For all 4 scenarios, much greater super saving can generate a significantly smaller total retirement income than the ‘sweet spot’ strategy.

Note: 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.

Save Our Super explains that the savings traps differ for the 4 scenarios due to the fact that individuals eligible for the full Age Pension get the same Age Pension payment regardless of whether they are homeowners or not. Save Our Super says: “Couples eligible for the full Age Pension each receive a lesser pension payment than an individual, also regardless of whether they are homeowners or not. As a couple, they receive more than an individual, but not twice as much. The Age Pension assets test allows more assets to a non-homeowner than to a homeowner before it starts to reduce access to the full Age Pension. It allows the same margin of higher assets (just over $200,000) to both individuals and couples.  (The amount of extra assets it allows the non-homeowner appears less than the value of a typical home for either a single pension or a couple in many urban markets.) The interaction of these two factors — different payments per person for single individuals and each individual in a couple, plus different assets test allowances according to home-ownership status — drive the differences in sweet spots and the width of the savings traps across the four household types.”

Chart 1: 25 illustrative superannuation balances on retirement at age 65

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Chart 2: Retired couple age 65-74, homeowners

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Chart 3: Retired couple age 65-74, not homeowners

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Chart 4: Single retiree age 65-74, homeowner

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Chart 5: Single retiree age 65-74, not homeowner

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Assumptions used in table, chart and analysis

The authors of the table and charts above have drawn up the scenarios using the same assumptions that are used in the Retirementgate articles explaining the implications of the harsher Age Pension assets test for a couple who are homeowners (see list of articles after this section). These assumptions are:

• Age Pension rates are those as at September 2016.
• A persons’ assets-testable savings are treated as being wholly in superannuation (i.e. no ‘personal use’ assets).
• Superannuation drawdown is assumed to be the minimum required: 5% per annum applying for retirees between the ages of 65 and 74.
• The results are reported to the nearest $50,000 in savings: charts above use savings increments/superannuation balances in steps of $50,000, which means the precise ‘sweet spot’ might fall somewhere between such increments.
• The table uses the same terminology as appears in article, (Retirement income and savings trap caused by Coalition’s 2017 superannuation and Age Pension changes).
• The table refers to ‘cases’ which are the numbered examples of superannuation balances in Chart 1, and Charts 2 to 5 illustrate these cases for the 4 scenarios. In Chart 2, Save Our Super refers to the ‘sweet spot’ of maximised part Age Pension plus superannuation drawdown; the pits’ which is the trough of lower income from elimination or near-elimination of the part Age Pension plus higher drawdown from considerably higher superannuation saving; and finally ‘ahead at last’, the point at which drawdown from much higher superannuation savings rises above the combined Age Pension plus superannuation drawdown at the ‘sweet spot’.

For more information on Retirementgate, see the following SuperGuide articles:

• 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

For information on how the Age Pension rules work, see the following SuperGuide articles:

• Latest Age Pension rates (since September 2018)
• Australian Age Pension: Am I eligible and how do I apply?
• Age Pension: 300,000 Australians lost entitlements on 1 January 2017
• Less Age Pension, and paid to fewer Australians since January 2017