tag:theconversation.com,2011:/us/topics/retirement-incomes-19937/articlesRetirement incomes – The Conversation2023-12-19T19:02:10Ztag:theconversation.com,2011:article/2200382023-12-19T19:02:10Z2023-12-19T19:02:10ZInterest rates will eventually fall but it’s a bit early for borrowers to break out the champagne<figure><img src="https://images.theconversation.com/files/566491/original/file-20231219-19-b7zt40.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Shutterstock</span> </figcaption></figure><p>Suddenly the talk in <a href="https://www.ft.com/content/0e7c2224-fa5b-45fc-b598-88010a912a97?desktop=true&segmentId=d8d3e364-5197-20eb-17cf-2437841d178a#myft:notification:instant-email:content">global financial markets</a> has spun from “when will interest rates next rise?” to “how soon before they fall?”.</p>
<p>Some commentators are flagging the shift as a “<a href="https://www.youtube.com/watch?v=VJGd7ZC6xXk">pivot party</a>”.</p>
<p>This change has been most prominent in the United States. It was prompted by the Federal Reserve, the US equivalent of the Reserve Bank of Australia, releasing its latest “dot chart”. This shows most members of its policy-setting Federal Open Market Committee expect their interest rate would be lower by the end of 2024.</p>
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<img alt="FOMC participants’ assessments of appropriate monetary policy" src="https://images.theconversation.com/files/566454/original/file-20231219-27-x9107x.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/566454/original/file-20231219-27-x9107x.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=600&fit=crop&dpr=1 600w, https://images.theconversation.com/files/566454/original/file-20231219-27-x9107x.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=600&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/566454/original/file-20231219-27-x9107x.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=600&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/566454/original/file-20231219-27-x9107x.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=754&fit=crop&dpr=1 754w, https://images.theconversation.com/files/566454/original/file-20231219-27-x9107x.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=754&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/566454/original/file-20231219-27-x9107x.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=754&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="attribution"><a class="source" href="https://www.federalreserve.gov/monetarypolicy/fomcprojtabl20231213.htm">US Federal Reserve</a>, <a class="license" href="http://creativecommons.org/licenses/by-sa/4.0/">CC BY-SA</a></span>
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<p>The recent <a href="https://rbareview.gov.au/">review of the Reserve Bank</a> in Australia wanted more transparency. But, after the whacking former Governor Phil Lowe got when he wrongly predicted rates would stay low until “at least” 2024, I doubt his successor Michele Bullock will be keen to publish a similar chart. </p>
<p>Even so, financial markets in Australia are also now implying interest rates will fall over the course of next year.</p>
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<h2>The latest indicators</h2>
<p>The Australian economy has continued to slow according to the latest <a href="https://www.abs.gov.au/statistics/economy/national-accounts/australian-national-accounts-national-income-expenditure-and-product/latest-release">national accounts</a>. Consumer spending did not increase at all in the September quarter, despite an increase in population. Exports contracted. Overall GDP grew by a mere 0.2%.</p>
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<p>The <a href="https://www.abs.gov.au/statistics/labour/employment-and-unemployment/labour-force-australia/latest-release">news from the labour market</a> was mixed. There was a solid rise in employment in November. The hours worked data, however, have been basically flat for the past six months.</p>
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<p>The government maintained fiscal discipline in the <a href="https://theconversation.com/theres-a-glimmer-of-hope-in-the-mid-year-budget-update-but-inflation-is-still-a-big-challenge-219611">mid-year</a> budget update released last week. They saved rather than spent almost all the extra revenue from higher than expected commodity prices.</p>
<p>The <a href="https://www.rba.gov.au/monetary-policy/rba-board-minutes/2023/2023-12-05.html">minutes</a> of the Reserve’s latest meeting on December 5 show the board noted “encouraging signs of progress” in returning inflation to the target.</p>
<p>Subsequent events have suggested inflation will likely continue on its downward trajectory, which means the Reserve has increased interest rates enough.</p>
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<p>Another development since the Reserve last met is an update of the
<a href="https://www.rba.gov.au/monetary-policy/framework/stmt-conduct-mp-8-2023-12-08.html">Statement on the Conduct of Monetary Policy</a> between Treasurer Jim Chalmers and the board. This sets out the common understanding between them about Australia’s monetary policy framework.</p>
<p>Much of this statement carries over the existing framework. The bank’s primary tool is its cash rate target and it is varied to achieve a medium-term inflation target of 2-3%. Employment considerations influence how quickly it is regained when shocks move inflation away from it.</p>
<p>The statement explicitly refers to the midpoint of the target, reflecting a suggestion in the recent <a href="https://rbareview.gov.au/">Reserve Bank review</a>. Some <a href="https://www.afr.com/policy/economy/rba-dual-mandate-tweak-could-mean-higher-rates-for-longer-20231208-p5eq1q#:%7E:text=Treasurer%20Jim%20Chalmers%20has%20axed,rates%20stay%20higher%20for%20longer.">commentators have interpreted</a> this as indicating the bank cannot cut rates as its <a href="https://www.rba.gov.au/publications/smp/2023/nov/pdf/05-economic-outlook.pdf">forecast for inflation</a> only has it reaching the top, not the middle, of the range by the end of 2025.</p>
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Read more:
<a href="https://theconversation.com/the-7-charts-that-show-australians-struggling-as-saving-falls-to-near-zero-218924">The 7 charts that show Australians struggling as saving falls to near zero</a>
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<p>I disagree. The bank has always aimed at the midpoint of the target as the most likely way to ensure inflation averages within it. If the board was happy at its December meeting to have reached 3% by the end of 2025 on its way to achieving 2.5% later, there is no reason for it to change this view in February.</p>
<h2>So what will the Reserve Bank do?</h2>
<p>On balance, the economic news does not suggest the Reserve Bank will feel a need to raise rates in February. But with inflation still high, and plenty of uncertainty, they are unlikely to cut rates any time soon. The bank does not generally make sharp U-turns with the average gap between the last interest rate increase in a cycle and the first cut being ten months.</p>
<p>At its next meeting, on <a href="https://www.rba.gov.au/media-releases/2023/mr-23-18.html">February 5-6</a>, the Reserve board may have a new member, deputy governor <a href="https://theconversation.com/meet-andrew-hauser-the-outsider-from-the-uk-wholl-be-deputy-governor-of-the-rba-217521">Andrew Hauser</a>, and a new adviser, chief economist <a href="https://www.rba.gov.au/media-releases/2023/mr-23-36.html">Sarah Hunter</a>. They share a British background so will be familiar with the Bank of England model, which influenced the <a href="https://www.theguardian.com/commentisfree/2023/apr/21/the-reserve-bank-review-is-not-revolutionary-and-thats-a-good-thing">Reserve Bank review</a>. </p>
<h2>The impact of (eventual) lower interest rates</h2>
<p>The movements in the Reserve Bank’s interest rate matters most to the third of households with a mortgage. Most of these have variable rate loans where the interest rate closely follows that set by the Reserve. An interest rate cut would ease the cost-of-living pressures they have been facing. </p>
<p>A household with the <a href="https://www.abs.gov.au/statistics/economy/finance/lending-indicators/latest-release">average loan size of around A$600,000</a> would have seen their monthly repayments rise by almost $1,700 since early 2022. This would drop by $100 if rates were cut by 0.25%.</p>
<p>While the impact on mortgagees always gets the most attention, interest rates affect other members of the community too.</p>
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Read more:
<a href="https://theconversation.com/will-the-rba-raise-rates-again-unless-prices-surge-over-summer-its-looking-less-likely-219197">Will the RBA raise rates again? Unless prices surge over summer, it's looking less likely</a>
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<p>Lower interest rates mean a lower income to retirees dependent on interest on their savings. They tend to boost the prices of assets such as shares and houses. They encourage borrowing and spending and reduce incentives to save. They tend to lower the exchange rate, making imports more expensive for Australians but our exports cheaper to foreigners. The net impact is generally to lower unemployment.</p>
<p>A lot of people are therefore looking forward to an interest rate cut. But they should not be holding their breath.</p>
<p>Financial markets may be getting prematurely excited. The last thing the Reserve Bank would want is to find themselves having lowered rates too quickly and see inflation turn back up, necessitating the interest rate cut to be reversed. More likely, they will wait for inflation to drop much closer to their target before there is any easing of interest rates.</p><img src="https://counter.theconversation.com/content/220038/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>John Hawkins is a former senior economist at the Reserve Bank and has worked as an economic forecaster at the Bank for International Settlements and the Australian Treasury.</span></em></p>A lot of Australians are hoping there might be an interest rate cut at the next Reserve Bank board meeting but they shouldn’t hold their breath.John Hawkins, Senior Lecturer, Canberra School of Politics, Economics and Society, University of CanberraLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1716712021-12-15T05:46:41Z2021-12-15T05:46:41ZThat reverse mortgage scheme the government is about to re-announce, how does it work?<figure><img src="https://images.theconversation.com/files/437689/original/file-20211215-25-thupuu.png?ixlib=rb-1.1.0&rect=0%2C640%2C3425%2C1790&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>Many Australians have never heard of the <a href="https://www.servicesaustralia.gov.au/pension-loans-scheme">Pension Loans Scheme</a>, and many more assume it’s just for pensioners, which is understandable given its name.</p>
<p>That’s why the government is poised to rename it the Home Equity Access Scheme and make the interest rate it charges more reasonable, in the mid-year budget update on Thursday.</p>
<p>The soon to be renamed scheme is best thought of as a <a href="https://www.investopedia.com/mortgage/reverse-mortgage/">reverse mortgage</a> where instead of paying down a home loan each month, the homeowner borrows more against the home each month, paying off what’s borrowed when the home is eventually sold.</p>
<p>Although reverse mortgages have been provided commercially for some time, the number of providers has shrunk as large banks have <a href="https://download.asic.gov.au/media/4851420/rep-586-published-28-august-2018.pdf">left the field</a> in the face of increased scrutiny and compliance costs.</p>
<p>The government version is misleadingly named the Pension Loans Scheme (PLS), even though it is available to all retirees with homes and not just pensioners. It was introduced by the Hawke government in <a href="https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/FlagPost/2015/February/The_Pension_Loans_Scheme">1985</a>.</p>
<p>The maximum amount that can be made available under the scheme and the age pension combined is <a href="https://www.servicesaustralia.gov.au/how-much-you-can-get-under-pension-loans-scheme?context=22546">150% of the full pension.</a> This means a retiree who is on the pension can get extra fortnightly payments from the scheme to bring their total payment up to 150% of the full pension.</p>
<p>If the retiree is not on the pension they can get the entire amount of 150% of the pension via the PLS.</p>
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Read more:
<a href="https://theconversation.com/is-it-worth-selling-my-house-if-im-going-into-aged-care-161674">Is it worth selling my house if I'm going into aged care?</a>
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<p>The payments stop when the loan balance reaches a <a href="https://www.servicesaustralia.gov.au/maximum-loan-amount-under-pension-loans-scheme?context=22546">ceiling</a> which climbs each year the retiree gets older and climbs with increases in the value of the home.</p>
<p>The ceiling for a 70-year old with a home worth $1,000,000 is $308,000. </p>
<p>The key difference between the PLS and commercial reverse mortgages is that the size of its lump sum payments is limited. Payments under the PLS have no impact on the pension, whereas commercial reverse mortgages can trigger the means test.</p>
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<a href="https://images.theconversation.com/files/437703/original/file-20211215-13-kxrv2s.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/437703/original/file-20211215-13-kxrv2s.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/437703/original/file-20211215-13-kxrv2s.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=645&fit=crop&dpr=1 600w, https://images.theconversation.com/files/437703/original/file-20211215-13-kxrv2s.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=645&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/437703/original/file-20211215-13-kxrv2s.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=645&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/437703/original/file-20211215-13-kxrv2s.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=810&fit=crop&dpr=1 754w, https://images.theconversation.com/files/437703/original/file-20211215-13-kxrv2s.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=810&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/437703/original/file-20211215-13-kxrv2s.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=810&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="attribution"><span class="source">Colin Zhang, Macquarie Business School</span></span>
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<p>As attractive as the PLS might appear, hardly any of the four million or so Australians aged 65 and over have taken it up, perhaps as few as <a href="https://newsroom.unsw.edu.au/news/business-law/budget-changes-make-pension-loans-scheme-more-attractive-senior-homeowners">5,000</a> – one in every 800.</p>
<p>So in this year’s May budget the government announced two changes to make it more attractive.</p>
<p>One was a “<a href="https://cdn.theconversation.com/static_files/files/1902/PLS_2021-22-budget-16_%281%29.pdf">no negative equity guarantee</a>”. Users would never be asked repay more than the value of their property, even if the property fell in value.</p>
<p>The other was the ability to take out up to <a href="https://cdn.theconversation.com/static_files/files/1902/PLS_2021-22-budget-16_%281%29.pdf">two lump sums per year</a> totalling up to 50% of the full pension in addition to fortnightly payments.</p>
<p>Total government payments would remain capped at 150% of the pension.</p>
<h2>New brand, same scheme</h2>
<p>That second change won’t begin until July 1, 2022 and is likely to be re-announced in Thursday’s mid-year budget update. </p>
<p>Also announced in the budget was a decision to raise awareness of the scheme “through improved public messaging and branding” something which is also likely to be re-announced on Thursday along with the new name.</p>
<p>The other change expected on Thursday is a lower interest rate charged on the sums borrowed. In January 2020, the rate was cut from 5.25% to 4.5% in accordance with cuts in other rates. From January next year it should reduce further to <a href="https://www.theaustralian.com.au/nation/politics/scott-morrison-opens-up-mortgage-loan-scheme-to-help-elderly-fund-their-own-retirements/news-story/9f8c56fbba899f6b76c72ce51ceb9331">3.95%</a>. </p>
<h2>Attractive, but not riskless</h2>
<p>There remain risks associated with taking advantage of the scheme.</p>
<p>One is that if you live long enough you are likely to eventually hit the ceiling and be unable to take out any more money, suffering a loss of income.</p>
<p>If you chose to sell your home and move to an aged care service, you need to use a big part of your sale proceedings to pay what’s owed.</p>
<p>Other risks are that neither the interest rate nor home prices are fixed.</p>
<p>Just as the government has cut the rate charged in line with cuts to lower general interest rates, it might well lift it when interest rates climb. And home prices can go down as well as up, meaning that, at worst, all of the value of your home (although no more) can be gobbled up in repayments.</p><img src="https://counter.theconversation.com/content/171671/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Colin Zhang and Ning Wang do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointments.</span></em></p><p class="fine-print"><em><span>This story is part of a Conversation series on financial and economic literacy funded by Ecstra Foundation.</span></em></p>If you are aged 70 with a million dollar home you could get up to $308,000 per year from a little-known scheme with risks.Colin Zhang, Lecturer, Department of Actuarial Studies and Business Analytics, Macquarie UniversityNing Wang, Associate Research Fellow, University of WollongongLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1336912020-03-16T02:26:59Z2020-03-16T02:26:59ZThis coronavirus share market crash is unlike those that have gone before it<figure><img src="https://images.theconversation.com/files/320674/original/file-20200316-18023-1kzbrui.jpg?ixlib=rb-1.1.0&rect=991%2C337%2C1248%2C742&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">ALEXANDROS VLACHOS/EPA</span></span></figcaption></figure><p>Stock markets have crashed, we can be confident of that. History suggests there is no quick recovery from crashes like these, which means lasting consequences for investors.</p>
<p>The World Health Organisation declared the COVID-19 coronavirus a pandemic last Wednesday, wiping US$7 trillion off global equity markets. A day later, now marked down in history as Black Thursday, the Dow Jones index in the US closed down 2,353 points (-10%), the worst single day points decline since Black Monday in 1987. </p>
<p>Staggeringly, the index rebounded sharply the following day. Friday saw the US market closing the roller coaster week up 9.3%. </p>
<p>Shares in the Australian S&P 200 index did the same sort of thing. </p>
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Read more:
<a href="https://theconversation.com/reserve-bank-and-government-prepare-fresh-emergency-measures-as-markets-tumble-133780">Reserve Bank and government prepare fresh emergency measures as markets tumble</a>
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<p>Prices collapsed 8% after opening Friday, then rebounded throughout the day to end up about where they started, before collapsing 9.5% on Monday.</p>
<h2>Not even normal for a crash</h2>
<p>The volatility, velocity and magnitude of these swings is not in the playbook of past global market crises.</p>
<p>Generally, markets have been overvalued, with stocks climbing sharply in recent years despite tepid economic growth in the US and elsewhere and heightened economic and political uncertainty. </p>
<p>If we look at Nobel Prize winner Robert Shiller’s cyclically-adjusted price-to-earnings (CAPE) ratio, a standard equity valuation metric, there have been only two other times in modern history when the US stock market has been more overvalued than today.</p>
<p>They were in 1929 and 2000; ahead of the Great Depression and, more recently the 2000 “<a href="https://en.wikipedia.org/wiki/Dot-com_bubble">Tech Wreck</a>”.</p>
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<p><strong>Shiller total return cyclically-adjusted price-earnings ratio</strong></p>
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<span class="caption">The data and CAPE Ratio used to create this graph were developed by Robert J. Shiller using various public sources. Neither Robert J. Shiller nor any affiliates or consultants, are registered investment advisers and do not guarantee the accuracy or completeness of the CAPE Ratio here, or any data or methodology either included therein or upon which it is based.</span>
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<p>What has been so interesting about the bubble that preceded the coronavirus crash is that there was no identifiable underlying economic or social process driving the market to such dizzying heights. </p>
<p>But there was ultra-easy monetary policy (including <a href="https://theconversation.com/below-zero-is-reverse-how-the-reserve-bank-would-make-quantitative-easing-work-118843">unconventional policies</a>).</p>
<p>The problem we have now is that with rates so close to zero (or even negative in some countries), central banks are powerless to tame the turmoil by conventionally cutting interest rates. </p>
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Read more:
<a href="https://theconversation.com/below-zero-is-reverse-how-the-reserve-bank-would-make-quantitative-easing-work-118843">Below zero is ‘reverse’. How the Reserve Bank would make quantitative easing work</a>
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<p>It is making investors worried about governments’ abilities to respond in time to contain or reduce the severity of human and economic devastation. </p>
<p>We are dealing with a global health crisis the likes of which has not been seen for 100 years. It will keep investor sentiment fragile and prone to sudden shifts. </p>
<p>If the last two weeks is anything to go by, the resulting volatility will test the normal functioning of markets.</p>
<h2>Faster and more jumpy</h2>
<p>There is no formal definition of a market crash, but what we see here has all the hallmarks:</p>
<p>• a 20% decline in equity markets, which defines a bear market, has been achieved in two weeks. </p>
<p>• rates of transacting (velocity) across global markets has been high and a good deal higher than in previous crises. Electronic systems provide a catalyst to embed the panic (uncertainly) into the pricing. We’ve seen huge swings in prices, at increased transaction rates. </p>
<p>In the US, market circuit breakers have been triggered in both falling and rising markets. Black Thursday saw a 15-minute trading hold at the opening to prevent a free fall of stock prices. A day later the New York Stock Exchange’s “limit-up” brake was triggered.</p>
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<strong>
Read more:
<a href="https://theconversation.com/how-will-coronavirus-affect-property-prices-133761">How will coronavirus affect property prices?</a>
</strong>
</em>
</p>
<hr>
<p>Transaction costs have been inflated with the “spread” between buying and selling prices widening significantly compared with pre-crisis levels, and almost twice what it was during the GFC.</p>
<p>Intraday volatility (the swing from high to low within one day) is approaching what was observed during the global financial crisis.</p>
<hr>
<p><strong>US S&P500 Index intraday change from high to low</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/320693/original/file-20200316-18028-1wvh8og.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/320693/original/file-20200316-18028-1wvh8og.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/320693/original/file-20200316-18028-1wvh8og.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=287&fit=crop&dpr=1 600w, https://images.theconversation.com/files/320693/original/file-20200316-18028-1wvh8og.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=287&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/320693/original/file-20200316-18028-1wvh8og.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=287&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/320693/original/file-20200316-18028-1wvh8og.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=360&fit=crop&dpr=1 754w, https://images.theconversation.com/files/320693/original/file-20200316-18028-1wvh8og.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=360&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/320693/original/file-20200316-18028-1wvh8og.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=360&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
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</figure>
<hr>
<p>This is not limited to prices; there is also significant intraday volatility in trading volumes, creating uncertainty in the ability to transact effectively, if at all, in the less traded stocks.</p>
<p>The panic response has been quickly entrenched in the price of stocks, distorting effective resource allocation and the management of risk in markets. </p>
<p>That is another way of saying markets are not working well at the moment.</p>
<p>The panic sell-off has seen markets become highly correlated, with “crisis contagion” spreading to all markets and countries. This can be thought of in much the same vein as the COVID-19 pandemic – contagion results from a shock in one or a group of countries or markets, and spreads to others. </p>
<h2>It’s shutting down markets</h2>
<p>This has real repercussions. New debt issuance has ground to halt around the world.</p>
<p>Even the highest quality government borrowers are finding it hard to sell new securities in this market. Corporations have no chance. This increases the re-financing risk for large corporations, and even banks.</p>
<p>For wage earners, the market crash should be of little consequence. What matters to workers is employment and the number of hours worked. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/were-staring-down-the-barrel-of-a-technical-recession-as-the-coronavirus-enters-a-new-and-dangerous-phase-132752">We're staring down the barrel of a technical recession as the coronavirus enters a new and dangerous phase</a>
</strong>
</em>
</p>
<hr>
<p>The fate of workers, particularly those employed in heavily-exposed industries, will be determined by whether the economy can navigate the crisis without a surge in unemployment and business failures.</p>
<p>Superannuants, on the other hand, will be directly and immediately affected. </p>
<h2>Superannuants at risk and noticing</h2>
<p>Large super funds (super funds with more than four members) held A$912 billion of Australian and international listed shares at the end of 2019, according to Australian Prudential Regulation Authority data. That’s 47% of their total assets of $1.928 billion.</p>
<p>With digital technology, superannuants can get almost real time portfolio valuations. </p>
<p>For those who are invested in the standard growth fund and care to look up the latest numbers, they are down at least 10% in two weeks.</p>
<h2>Retirees might spread contagion</h2>
<p>For self-funded retirees, Australian bank stocks are very popular. An investment of $100,000 of Australian banks stocks at the start of February is now worth about $75,000. And that is after the spectacular rally on Friday.</p>
<p>This greater access to information and the baby boomer retirement bulge means the wealth effects from large falls in share prices will probably be felt more than in the past. </p>
<p>If the crash turns into a sustained bear market, the risk is that this will become one of the key mechanisms by which the economy is driven down.</p><img src="https://counter.theconversation.com/content/133691/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Kylie-Anne Richards does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The coronavirus stock market crash is more jumpy, and harder to rein in, in part because of the role of retirees.Kylie-Anne Richards, Lecturer, Finance Discipline, University of Technology SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1326552020-03-01T19:04:40Z2020-03-01T19:04:40ZForget more compulsory super: here are 5 ways to actually boost retirement incomes<figure><img src="https://images.theconversation.com/files/317730/original/file-20200228-24659-1z33le.jpg?ixlib=rb-1.1.0&rect=0%2C11%2C4000%2C1988&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>This morning the Grattan Institute releases its <a href="https://grattan.edu.au/">submission</a> to the government’s <a href="https://treasury.gov.au/review/retirement-income-review">retirement incomes review</a>, a review called in anticipation of five annual increases in compulsory superannuation contributions, scheduled to begin in July 2021.</p>
<p>Our research shows the super increases aren’t necessary. For most Australians, retirement incomes are <a href="https://theconversation.com/why-we-should-worry-less-about-retirement-and-leave-super-at-9-5-106237">already adequate</a>. Since higher super contributions will come <a href="https://theconversation.com/think-superannuation-comes-from-employers-pockets-it-comes-from-yours-130797">at the expense of wages</a>, the scheduled increases should be abandoned. </p>
<p>But there are big problems the review will need to confront. </p>
<p>Here are <a href="https://grattan.edu.au/">five changes</a> that would tackle them.</p>
<h2>1. Boost rent assistance</h2>
<figure class="align-left ">
<img alt="" src="https://images.theconversation.com/files/317733/original/file-20200228-24685-y74ele.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/317733/original/file-20200228-24685-y74ele.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=600&fit=crop&dpr=1 600w, https://images.theconversation.com/files/317733/original/file-20200228-24685-y74ele.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=600&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/317733/original/file-20200228-24685-y74ele.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=600&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/317733/original/file-20200228-24685-y74ele.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=754&fit=crop&dpr=1 754w, https://images.theconversation.com/files/317733/original/file-20200228-24685-y74ele.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=754&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/317733/original/file-20200228-24685-y74ele.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=754&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<p>While most Australians are comfortable in retirement, the system is failing too many poorer Australians, especially low-income women and retirees who rent. </p>
<p>Senior Australians who rent privately are more likely to suffer financial stress than homeowners or renters in public housing. And it will get worse because young Australians on lower incomes are <a href="https://theconversation.com/three-charts-on-poorer-australians-bearing-the-brunt-of-rising-housing-costs-87003">less likely</a> to own homes than in the past.</p>
<p>The government’s priority should be boosting <a href="https://www.servicesaustralia.gov.au/individuals/services/centrelink/rent-assistance/how-much-you-can-get">rent assistance</a>, which has not kept pace with rent increases. Raising rent assistance by 40%, or roughly A$1,400 a year for singles, would cost just $300 million a year if it applied to pensioners, and another $1 billion a year if extended to other renters. </p>
<p>A common concern is that boosting rent assistance would lead to higher rents. But that’s unlikely: households would not be required to spend any of the extra income on rent, and <a href="https://theconversation.com/rudds-rental-affordability-scheme-was-a-1-billion-gift-to-developers-abbott-was-right-to-axe-it-122854">most would not</a>.</p>
<h2>2. Ease the age pension asset test</h2>
<figure class="align-left ">
<img alt="" src="https://images.theconversation.com/files/317738/original/file-20200228-24664-1yln6g.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/317738/original/file-20200228-24664-1yln6g.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=600&fit=crop&dpr=1 600w, https://images.theconversation.com/files/317738/original/file-20200228-24664-1yln6g.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=600&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/317738/original/file-20200228-24664-1yln6g.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=600&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/317738/original/file-20200228-24664-1yln6g.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=754&fit=crop&dpr=1 754w, https://images.theconversation.com/files/317738/original/file-20200228-24664-1yln6g.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=754&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/317738/original/file-20200228-24664-1yln6g.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=754&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<p>While retirement incomes are adequate for most retirees, the age pension <a href="https://www.servicesaustralia.gov.au/individuals/services/centrelink/age-pension/how-much-you-can-get">assets test</a> excessively penalises people who save more for their retirement. </p>
<p>Before January 1, 2017 retirees with assets above the threshold lost $1.50 of pension per fortnight for every $1,000 of assets above the threshold. In 2017 the Coalition lifted the threshold but also lifted the withdrawal rate to $3 of pension per fortnight for each $1,000 of assets.</p>
<p>The changes resulted in very high effective marginal tax rates on retirement savings, so much so that a typical worker who saves an extra $1000 at age 40 increases their retirement income by only $25 each year, or $658 over 26 years
of retirement, which is a <a href="https://grattan.edu.au/report/money-in-retirement/">negative return</a> on money saved for decades.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/why-pensioners-are-cruising-their-way-around-budget-changes-42544">Why pensioners are cruising their way around budget changes</a>
</strong>
</em>
</p>
<hr>
<p>The age pension withdrawal rate should be cut to $2.25 per fortnight for each $1,000 of assets above the threshold. This would cost the budget about $750 million a year. </p>
<p>For middle and high-income workers, this change would have a bigger impact on retirement incomes per government dollar expended than boosting compulsory super.</p>
<h2>3. Boost Newstart</h2>
<figure class="align-left ">
<img alt="" src="https://images.theconversation.com/files/317734/original/file-20200228-24685-1m16m5p.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/317734/original/file-20200228-24685-1m16m5p.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=600&fit=crop&dpr=1 600w, https://images.theconversation.com/files/317734/original/file-20200228-24685-1m16m5p.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=600&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/317734/original/file-20200228-24685-1m16m5p.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=600&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/317734/original/file-20200228-24685-1m16m5p.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=754&fit=crop&dpr=1 754w, https://images.theconversation.com/files/317734/original/file-20200228-24685-1m16m5p.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=754&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/317734/original/file-20200228-24685-1m16m5p.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=754&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<p><a href="https://www.servicesaustralia.gov.au/individuals/services/centrelink/newstart-allowance">Newstart</a>, together with the disability support pension, provides an important safety net for Australians who are unable to work right through to retirement age.</p>
<p>Yet while the <a href="https://www.servicesaustralia.gov.au/individuals/services/centrelink/age-pension">age pension</a> and <a href="https://www.servicesaustralia.gov.au/individuals/services/centrelink/disability-support-pension">disability support pension</a> are indexed to wages, Newstart is not. It only climbs in line with inflation. It should be increased by $75 a week and then indexed to wages going forward. </p>
<p>This would <a href="https://www.theguardian.com/australia-news/2018/sep/17/push-to-raise-newstart-allowance-by-75-a-week">cost a lot</a> but it would help the <a href="https://theconversation.com/5-charts-on-what-a-newstart-recipient-really-looks-like-125937">growing legions</a> of older Australians, many of them women, who find themselves among the long-term unemployed in the years leading up to retirement, or are forced to retire early. And it would lift many more younger Australians out of poverty. </p>
<h2>4. Include the home in the pension assets test</h2>
<figure class="align-left ">
<img alt="" src="https://images.theconversation.com/files/317739/original/file-20200228-24701-1urtm3l.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/317739/original/file-20200228-24701-1urtm3l.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=600&fit=crop&dpr=1 600w, https://images.theconversation.com/files/317739/original/file-20200228-24701-1urtm3l.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=600&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/317739/original/file-20200228-24701-1urtm3l.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=600&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/317739/original/file-20200228-24701-1urtm3l.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=754&fit=crop&dpr=1 754w, https://images.theconversation.com/files/317739/original/file-20200228-24701-1urtm3l.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=754&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/317739/original/file-20200228-24701-1urtm3l.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=754&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<p><a href="https://www.smh.com.au/national/soaring-cost-of-housing-for-poorest-australians-is-driving-inequality-grattan-institute-20190906-p52ot2.html">Falling rates of home ownership</a> mean we are at risk of creating an underclass of retirees who rent. </p>
<p>And our retirement incomes system makes this worse by favouring homeowners over renters. Once a person is retired, their home is <a href="https://www.servicesaustralia.gov.au/individuals/services/centrelink/age-pension/how-much-you-can-get/assets-test/assets#assetstestlimits">treated differently</a> to their other assets. Which is why <a href="https://www.theaustralian.com.au/nation/politics/elderly-in-1mplus-homes-raking-in-63bn-in-pensions/news-story/30cbe2423577d46f5489ec39b673f8f4">$6 billion</a> in pension payments go to people with homes worth more than $1 million. </p>
<p>It’s time for more of the value of the family home to be included in the pension assets test. Counting more of the home above some threshold (such as $500,000) would be fairer and would save the budget up to $2 billion a year. </p>
<p>No pensioner would be forced to leave their home. Pensioners with valuable homes could continue to stay at home and receive the pension under the Government’s <a href="https://www.servicesaustralia.gov.au/individuals/services/centrelink/pension-loans-scheme">pension loans scheme</a>, which recovers debts only when homes are eventually sold.</p>
<h2>5. Fix super tax breaks</h2>
<figure class="align-left ">
<img alt="" src="https://images.theconversation.com/files/317743/original/file-20200228-24676-1whwfak.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/317743/original/file-20200228-24676-1whwfak.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=600&fit=crop&dpr=1 600w, https://images.theconversation.com/files/317743/original/file-20200228-24676-1whwfak.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=600&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/317743/original/file-20200228-24676-1whwfak.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=600&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/317743/original/file-20200228-24676-1whwfak.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=754&fit=crop&dpr=1 754w, https://images.theconversation.com/files/317743/original/file-20200228-24676-1whwfak.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=754&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/317743/original/file-20200228-24676-1whwfak.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=754&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<p>Superannuation tax breaks <a href="https://treasury.gov.au/sites/default/files/2020-01/complete_tbvs_web.pdf">cost a lot</a> – tens of billions each year in foregone revenue, with half the benefits flowing to the top one fifth of income earners, who already have enough resources to fund their retirements. </p>
<p>And the costs are set to climb further as super balances climb. The cost of the earnings concessions alone is set to climb from $17.4 billion to $20.8 billion over the next four years.</p>
<p>Three reforms would keep them in check.</p>
<ul>
<li><p>Voluntary contributions from pretax income should be limited to $11,000 a year. This would save the budget about $1.7 billion a year.</p></li>
<li><p>Contributions from post-tax income should be limited to $250,000 over a lifetime, or to $50,000 a year. It won’t save the budget much in the short term, but in the longer term it will plug a large hole in the tax system. </p></li>
<li><p>Earnings in retirement – currently untaxed for people with <a href="https://www.ato.gov.au/Individuals/Super/Withdrawing-and-using-your-super/Transfer-balance-cap/">superannuation balances less than $1.6 million</a> – should be taxed at 15%, the same as super earnings before retirement. Doing so would save the budget about $2 billion per year at first, and much more in future.</p></li>
</ul>
<p>These changes to super taxes free up money to help Australians who need help without hurting the retirement prospects of middle Australians. </p>
<p>Australia’s retirement incomes system works well, but there are things that need fixing. </p>
<p>The reforms we propose would make retirement fairer, save taxpayers’ money, and ensure that all Australians can enjoy a comfortable retirement free from poverty. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/think-superannuation-comes-from-employers-pockets-it-comes-from-yours-130797">Think superannuation comes from employers' pockets? It comes from yours</a>
</strong>
</em>
</p>
<hr>
<img src="https://counter.theconversation.com/content/132655/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Grattan Institute began with contributions to its endowment of $15 million from each of the Federal and Victorian Governments, $4 million from BHP Billiton, and $1 million from NAB. In order to safeguard its independence, Grattan Institute’s board controls this endowment. The funds are invested and contribute to funding Grattan Institute's activities. Grattan Institute also receives funding from corporates, foundations, and individuals to support its general activities, as disclosed on its website.</span></em></p><p class="fine-print"><em><span>Jonathan Nolan does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The government’s retirement incomes review should concentrate on boosting rent assistance and Newstart and fixing the pension assets test. These would achieve more than boosting super.Brendan Coates, Program Director, Household Finances, Grattan InstituteJonathan Nolan, Associate, Grattan InstituteLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1311512020-02-25T18:57:51Z2020-02-25T18:57:51ZOlder and poorer: Retirement Income Review can’t ignore the changing role of home<figure><img src="https://images.theconversation.com/files/316795/original/file-20200224-24651-e7femb.jpg?ixlib=rb-1.1.0&rect=353%2C344%2C5254%2C3388&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/worried-senior-old-couple-discuss-about-1338826637">natasaelena/Shutterstock</a></span></figcaption></figure><p>The assumption that retired people have minimal housing costs underpins the settings of our retirement incomes system. But the real state of housing for older Australians today makes it critical for the <a href="https://treasury.gov.au/review/retirement-income-review">Retirement Incomes Review</a> to look at the evidence that now challenges this assumption. </p>
<p>When announcing the <a href="https://treasury.gov.au/review/retirement-income-review/TOR">terms of reference</a>, federal government ministers <a href="http://ministers.treasury.gov.au/ministers/jane-hume-2019/media-releases/review-retirement-income-system">acknowledged</a> the critical role of the home in a good retirement by including it in the third pillar of the system, voluntary saving.</p>
<p>The fact is the soaring costs of land and housing in Australia over the past three decades have effectively destroyed the asset base on which our retirement income system relies.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/316765/original/file-20200224-116128-p7ocmn.gif?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/316765/original/file-20200224-116128-p7ocmn.gif?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/316765/original/file-20200224-116128-p7ocmn.gif?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=502&fit=crop&dpr=1 600w, https://images.theconversation.com/files/316765/original/file-20200224-116128-p7ocmn.gif?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=502&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/316765/original/file-20200224-116128-p7ocmn.gif?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=502&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/316765/original/file-20200224-116128-p7ocmn.gif?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=631&fit=crop&dpr=1 754w, https://images.theconversation.com/files/316765/original/file-20200224-116128-p7ocmn.gif?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=631&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/316765/original/file-20200224-116128-p7ocmn.gif?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=631&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
</figcaption>
</figure>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/fall-in-ageing-australians-home-ownership-rates-looms-as-seismic-shock-for-housing-policy-120651">Fall in ageing Australians' home-ownership rates looms as seismic shock for housing policy</a>
</strong>
</em>
</p>
<hr>
<p>The <a href="https://www.ahuri.edu.au/research/final-reports/319">proportion</a> of home owners aged 55 to 64 years who owe money on a mortgage has more than tripled from 14% in 1990 to 47% in 2015. The rate has doubled among those aged 45 to 54, as has the ratio of mortgage debt to income (from 82% to 169%). This ratio has blown out from 72% to 132% for those in their last decade before the retirement age.</p>
<p>These debts will greatly reduce retirement incomes. The impact will only grow as successive generations take much <a href="https://theconversation.com/were-delaying-major-life-events-and-our-retirement-income-system-hasnt-caught-up-127231">longer to enter the property market</a> and live with higher housing debt much later in life than previous generations.</p>
<p>The numbers of older Australians who have never owned a home, or have <a href="https://theconversation.com/were-delaying-major-life-events-and-our-retirement-income-system-hasnt-caught-up-127231">fallen out of home ownership</a> before retirement, have also exploded. In particular, older women (55-plus) in private rental housing grew in number by an extraordinary 39% between 2006 and 2011. </p>
<p>This trend is directly linked to a 28% rise in homelessness among older Australians over the same period. Women over 55 are the <a href="https://www.agedcareguide.com.au/talking-aged-care/more-older-australians-without-a-a-place-to-call-home">fastest-growing cohort at risk of homelessness</a>.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/316770/original/file-20200224-116109-1ee72t0.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/316770/original/file-20200224-116109-1ee72t0.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/316770/original/file-20200224-116109-1ee72t0.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=202&fit=crop&dpr=1 600w, https://images.theconversation.com/files/316770/original/file-20200224-116109-1ee72t0.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=202&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/316770/original/file-20200224-116109-1ee72t0.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=202&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/316770/original/file-20200224-116109-1ee72t0.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=254&fit=crop&dpr=1 754w, https://images.theconversation.com/files/316770/original/file-20200224-116109-1ee72t0.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=254&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/316770/original/file-20200224-116109-1ee72t0.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=254&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Projected changes in housing tenures of older Australians between 2016 and 2031.</span>
<span class="attribution"><a class="source" href="https://theconversation.com/fall-in-ageing-australians-home-ownership-rates-looms-as-seismic-shock-for-housing-policy-120651">Source: Rachel Ong ViforJ et al, calculations from HILDA Survey and ABS population projections</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<h2>Failing to meet retirees’ needs</h2>
<p>The housing market is clearly failing older people. Any consideration of retirement incomes must grapple urgently with the implications this will have for retirees.</p>
<p>Australian policymakers currently take a segmented approach to housing for older people. </p>
<p>The retirement village model is expensive to enter and to <a href="https://percapita.org.au/wp-content/uploads/2017/08/Retirement-housing-in-Victoria-2502017.pdf">exit</a>. It’s the preferred housing model for <a href="https://www.agedcare101.com.au/retirement-living/types-retirement-living/retirement-villages">just 8%</a> of retirees. </p>
<p>“Down-sized” units often provide unsuitable multi-level accommodation and lack the amenities <a href="https://theconversation.com/eight-simple-changes-to-our-neighbourhoods-can-help-us-age-well-83962">older people need to thrive</a>. As a result, these units often <a href="https://theconversation.com/why-older-australians-dont-downsize-and-the-limits-to-what-the-government-can-do-about-it-76931">fail to attract older buyers</a>. </p>
<p>Stamp duties are another barrier.</p>
<p>As a result, many older people stay in large homes they find increasingly difficult to manage and which would better suit young families.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/half-of-over-55s-are-open-to-downsizing-if-only-they-could-find-homes-that-suit-them-130531">Half of over-55s are open to downsizing – if only they could find homes that suit them</a>
</strong>
</em>
</p>
<hr>
<h2>Home’s greatest value is social</h2>
<p>To fully understand the role of home in providing a comfortable and dignified retirement, the review panel has to go beyond traditional concepts of housing as a financial asset. It must consider the full emotional and social role of home in the lives of older people. Per Capita’s Centre for Applied Policy in Positive Ageing in collaboration with The Australian Centre for Social Innovation is launching the <a href="https://percapita.org.au/our_work/home-for-good/">Home for Good</a> project today.</p>
<p>The real value of the home for older people isn’t financial, <a href="https://www.tacsi.org.au/future-of-home/importance-of-home-as-we-age/">research</a> by <a href="https://www.tacsi.org.au/">The Australian Centre for Social Innovation</a> shows. Its greatest value is as a safe and private space from which to connect with the outside world, express identity and build social relationships.</p>
<p>Recent <a href="https://percapita.org.au/wp-content/uploads/2019/09/Mutual-Appreciation_formFINAL.pdf">research</a> by the <a href="https://percapita.org.au/our_work/centre-for-applied-policy-in-positive-ageing/">Centre for Applied Policy in Positive Ageing</a> at <a href="https://percapita.org.au/about/">Per Capita</a> confirmed older people experience home as a social as well as financial asset. Exploring models of co-housing with older women, we found even women in secure housing, such as home owners or public housing tenants, would move to other housing that offered a sense of belonging within a connected community.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/316794/original/file-20200224-24690-1hck2hj.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/316794/original/file-20200224-24690-1hck2hj.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/316794/original/file-20200224-24690-1hck2hj.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/316794/original/file-20200224-24690-1hck2hj.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/316794/original/file-20200224-24690-1hck2hj.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/316794/original/file-20200224-24690-1hck2hj.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/316794/original/file-20200224-24690-1hck2hj.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/316794/original/file-20200224-24690-1hck2hj.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Housing that offers a sense of community belonging is highly valued.</span>
<span class="attribution"><span class="source">Shutterstock</span></span>
</figcaption>
</figure>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/i-really-have-thought-this-cant-go-on-loneliness-looms-for-rising-numbers-of-older-private-renters-118046">'I really have thought this can’t go on': loneliness looms for rising numbers of older private renters</a>
</strong>
</em>
</p>
<hr>
<p>In the economic narrative that drives policy thinking about housing in Australia, we lose sight of this intrinsic link between home and community. Policymakers are confusing an attachment to the bricks and mortar of the family home with the desire for a socially located space that suits the occupants’ age and abilities and is connected to community.</p>
<p>That older people are not emotionally wedded to the family home, but rather seeking communities of belonging, challenges traditional assumptions about ageing in place.</p>
<h2>Suitable housing choices in short supply</h2>
<p>Australian Housing and Urban Research Institute (<a href="https://www.ahuri.edu.au/about-us/who-we-are-and-what-we-do">AHURI</a>) research has confirmed older Australians are willing to move from the family home to ideal housing. The research found a “<a href="https://www.ahuri.edu.au/research/final-reports/317">housing aspiration gap</a>” between the desires of older Australians for homes in small, regional towns and policy settings that prioritise the family home.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/what-sort-of-housing-do-older-australians-want-and-where-do-they-want-to-live-120987">What sort of housing do older Australians want and where do they want to live?</a>
</strong>
</em>
</p>
<hr>
<p>The research doesn’t explore why traditional neighbourhoods are no longer meeting the demands of older people. However, we do know gentrification and increasing density have remodelled many suburbs. Many older people are vulnerable to isolation as families and neighbours move away and the pace and character of community life change.</p>
<p>Well-travelled and consumer-savvy baby boomers might also be more open to seeking alternatives to staying put. </p>
<p>Whatever the motives, older Australians have a clear need for more diverse housing options.</p>
<p>We need to develop a bolder vision for housing in retirement, to move beyond an economic framing of housing wealth to one that enables us to build connected and vibrant communities that support people to age well.</p>
<p>This demands we rethink models of home ownership, developing financial and legal products that support shared equity and co-ownership, and diversify development models, encouraging the housing choices for which older people are crying out.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/co-housing-works-well-for-older-people-once-they-get-past-the-image-problem-79907">Co-housing works well for older people, once they get past the image problem</a>
</strong>
</em>
</p>
<hr>
<p>As many more retirees remain in rental properties into old age, we must also find ways to increase tenant control and provide secure tenure. We need uniform tenancy laws covering private rental housing across the nation. </p>
<p>And we must actively design neighbourhoods that encourage neighbourliness, combining privacy with informal networks of social and practical support, companionship and care.</p>
<p>Achieving these changes begins with accepting that every Australian has a right to secure housing. Like health care, a secure and stable home is fundamental to quality of life. It should be delivered as a universal basic service.</p>
<p>It will take significant reform before we have a housing system in which Australians of all ages and abilities live in thriving, connected and safe neighbourhoods. </p>
<p>This shift from housing as a commodity to home as a community will take time, investment and, most importantly, imagination, but the potential for Australia to build a world-standard housing system for retirees is there for the taking.</p>
<hr>
<p><em>Per Capita’s Centre for Applied Policy in Positive Ageing is launching its Home for Good project in collaboration with The Australian Centre for Social Innovation today. Read more about the project <a href="http://bit.ly/home-for-good">here</a>.</em></p>
<p><em>This article was co-authored by Kerry Jones, Director: Systems Initiatives, at <a href="https://www.tacsi.org.au/about/">The Australian Centre for Social Innovation</a>. The centre is generously supported by the Wicking Trust.</em></p><img src="https://counter.theconversation.com/content/131151/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Emma Dawson is the Executive Director of Per Capita. Per Capita’s Centre for Applied Policy in Positive Ageing receives funding from the Wicking Trust. </span></em></p><p class="fine-print"><em><span>Myfan Jordan is the Director of Social Innovation at Per Capita’s Centre for Applied Policy in Positive Ageing (CAPPA). The centre receives funding from the Wicking Trust.</span></em></p>More older Australians are carrying housing debt later in life, or not owning homes at all, but lack suitable alternatives to the family home. The result is lower incomes in retirement.Emma Dawson, Honorary Fellow, School of Social and Political Sciences, The University of MelbourneMyfan Jordan, Associate, Health Ageing Research Group (HARG), La Trobe UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1301932020-01-30T19:03:45Z2020-01-30T19:03:45ZThe uncomfortable truth about super: there’s no ‘one-size-fits-all’ contribution<figure><img src="https://images.theconversation.com/files/312749/original/file-20200130-41485-s0n1hj.jpg?ixlib=rb-1.1.0&rect=29%2C53%2C3964%2C2604&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">People come in different shapes and sizes, which can make a one-size-fits-all retirement scheme uncomfortable.
</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>Among the topics being investigated by the government’s <a href="https://treasury.gov.au/review/retirement-income-review">retirement incomes review</a> is whether compulsory super contributions should be lifted from 9.5% to 12%.</p>
<p>Our research has identified two uncomfortable truths. One is that there is no “one-size fits all” correct contribution. The other is that 9.5% will be enough for most people, unless the aim is to replace the age pension.</p>
<p>It queries the need to lift the contribution rate to 12%, and also the idea of having uniform compulsory contributions.</p>
<h2>What our study did</h2>
<p>We used what is known as a <a href="https://www.dictionary.com/browse/stochastic">stochastic life-cycle model</a> to calculate the optimal level of super contributions for Australians at nine different income levels (ranging from A$30,000 to $150,000), applying existing tax, super and pension rules. </p>
<p>While necessarily limited, it is an advance on previous modelling that does not balance the loss of pre-retirement spending power against the income subsequently gained post-retirement. Household status, gender, assets outside of super and home ownership status also matter a lot, but are not directly modelled.</p>
<p>For each income group, we considered different income objectives for retirement including the Australian Association of Superannuation Funds of Australia’s “<a href="https://www.superannuation.asn.au/resources/retirement-standard">comfortable</a>” and “<a href="https://www.superannuation.asn.au/resources/retirement-standard">modest</a>” standards. We examined different retirement ages, life expectancies, super returns and effective employer contributions.</p>
<h2>How much you need</h2>
<p>The model produced a <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3517590">wide range of estimates</a>. </p>
<p>Depending on income and other assumptions, the right amount of super contributions can be anywhere between about 3% up to 20%, although the higher levels typically assume away the age pension. </p>
<p>This table presents selected findings.</p>
<hr>
<p><strong>Some optimal super contributions by income level and objectives</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/312781/original/file-20200130-41481-iho6v3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/312781/original/file-20200130-41481-iho6v3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/312781/original/file-20200130-41481-iho6v3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=364&fit=crop&dpr=1 600w, https://images.theconversation.com/files/312781/original/file-20200130-41481-iho6v3.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=364&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/312781/original/file-20200130-41481-iho6v3.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=364&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/312781/original/file-20200130-41481-iho6v3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=458&fit=crop&dpr=1 754w, https://images.theconversation.com/files/312781/original/file-20200130-41481-iho6v3.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=458&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/312781/original/file-20200130-41481-iho6v3.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=458&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3517590">Source: The 'Right’ Level for the Superannuation Guarantee: A Straightforward Issue by No Means, Khemka and Warren, 2020</a></span>
</figcaption>
</figure>
<hr>
<h2>Two conditions could justify a higher contribution for all</h2>
<p>One condition that would justify a higher superannuation contribution would be a policy objective of replacing the age pension as far as possible. Our modelling reveals that even compulsory contributions of 12% might not even be enough to achieve this objective. </p>
<p>The second is where super is used as a sort-of self-insurance mechanism in case things don’t go as planned. This could be because someone retires earlier than expected, lives longer than expected or gets lower than expected returns.</p>
<p>Early retirement poses the biggest threat because it stops income before the pension becomes available, forcing retirees to use savings. The career breaks common among women have similar effects, although they have the chance to catch up on contributions later and may receive some income support during the break.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/productivity-commission-finds-super-a-bad-deal-and-yes-it-comes-out-of-wages-109638">Productivity Commission finds super a bad deal. And yes, it comes out of wages</a>
</strong>
</em>
</p>
<hr>
<p>The problem with saving more “just in case” is that it can result in over-saving if the feared risks don’t eventuate, unnecessarily forcing down pre-retirement living standards.</p>
<p>There are other ways to addressing these risks, including through social security and various forms of insurance. The pension is one such mechanism, annuities are another. We would prefer to see policy makers explore insurance against risk rather than forcing everyone to save more.</p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/265468/original/file-20190324-36267-olwp2z.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/265468/original/file-20190324-36267-olwp2z.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/265468/original/file-20190324-36267-olwp2z.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=962&fit=crop&dpr=1 600w, https://images.theconversation.com/files/265468/original/file-20190324-36267-olwp2z.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=962&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/265468/original/file-20190324-36267-olwp2z.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=962&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/265468/original/file-20190324-36267-olwp2z.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1210&fit=crop&dpr=1 754w, https://images.theconversation.com/files/265468/original/file-20190324-36267-olwp2z.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1210&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/265468/original/file-20190324-36267-olwp2z.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1210&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="https://www.ato.gov.au/rates/key-superannuation-rates-and-thresholds/?anchor=Superguaranteepercentage">Source: Australian Tax Office</a></span>
</figcaption>
</figure>
<p>The key point is that a “one-size-fits-all” contribution is a very blunt instrument, and an asymmetrical one. </p>
<p>Employees can currently do nothing about an compulsory contribution rate that is set too high for them, but can add more if it is set too low. </p>
<p>A higher compulsory contribution could help some if it was genuinely additional to wage increases and was paid for by employers (as is legally the case) rather than coming out of take-home pay via lower wage rises (as is often practically the case). </p>
<p>We have no strong opinion on where the extra contributions would come from, but we note that the evidence is far from straightforward that employers will necessarily bear the cost. </p>
<p>The retirement income review might try to find out. It might also like to consider our work, which calls into question the whole idea of a single contribution rate. </p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/5-questions-about-superannuation-the-governments-new-inquiry-will-need-to-ask-124400">5 questions about superannuation the government's new inquiry will need to ask</a>
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<img src="https://counter.theconversation.com/content/130193/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>No single super contribution rate suits everyone, and there’s only a clear case for an increase if there’s no age pension.Gaurav Khemka, Senior Lecturer in Actuarial Studies, Australian National UniversityGeoff Warren, Associate Professor, College of Business and Economics, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1255002019-10-22T18:57:25Z2019-10-22T18:57:25ZPostcode by postcode: a clever way to include homes in the age pension assets test<figure><img src="https://images.theconversation.com/files/298078/original/file-20191022-28120-1rarinh.jpg?ixlib=rb-1.1.0&rect=1496%2C150%2C1335%2C792&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Under the Institute of Actuaries proposal, only retirees with more valuable than normal homes would face an assets test, and only on that part of the value that was higher than normal.</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>Here’s the boldest idea the government’s <a href="https://theconversation.com/5-questions-about-superannuation-the-governments-new-inquiry-will-need-to-ask-124400">inquiry into retirement incomes</a> should consider but might not: no longer exempting all of the value of each retiree’s home from the pension assets test.</p>
<p>The test would merely exempt part of the value of retirees’ homes. The change would free-up funds to support other retirees who are struggling because they have to pay rent.</p>
<p>It’s an idea with an impressive lineage.</p>
<p>The <a href="http://taxreview.treasury.gov.au/content/Content.aspx?doc=html/pubs_reports.htm">Henry Tax Review</a> suggested exempting only the first A$1.2 million. The bit above $1.2 million would be regarded as an asset and subject to the test.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/298025/original/file-20191022-56220-7y2uln.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/298025/original/file-20191022-56220-7y2uln.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/298025/original/file-20191022-56220-7y2uln.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=283&fit=crop&dpr=1 600w, https://images.theconversation.com/files/298025/original/file-20191022-56220-7y2uln.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=283&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/298025/original/file-20191022-56220-7y2uln.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=283&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/298025/original/file-20191022-56220-7y2uln.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=355&fit=crop&dpr=1 754w, https://images.theconversation.com/files/298025/original/file-20191022-56220-7y2uln.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=355&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/298025/original/file-20191022-56220-7y2uln.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=355&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="attribution"><a class="source" href="http://taxreview.treasury.gov.au/content/Content.aspx?doc=html/pubs_reports.htm">Henry Tax Review</a></span>
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<p>The review said it would hit only 10,000 retirees. The $1.2 million figure was in 2009 dollars, meaning that if the change came in today the review would want it to cut in at a higher dollar figure.</p>
<p>The <a href="https://grattan.edu.au/news/theres-no-silver-bullet-when-it-comes-to-housing-affordability/">Grattan Institute</a> suggests a lower cut in: $500,000. The first $500,000 of each mortgaged home would remain exempt from the pension assets test, the part above $500,000 would be regarded as an asset. Grattan says it would save the budget $1 to $2 billion a year. </p>
<p>The <a href="https://www.abc.net.au/news/2017-02-03/family-home-should-be-included-in-pension-asset-test-acci-says/8237206">Australian Chamber of Commerce and Industry</a> agrees, as does the <a href="https://actuaries.asn.au/Library/Miscellaneous/2019/RetirementIncomesGreenPaperFinal.pdf">Actuaries Institute</a>. </p>
<h2>The idea scares homeowners</h2>
<p>Who could object? </p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/298085/original/file-20191022-28088-1yzxl73.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/298085/original/file-20191022-28088-1yzxl73.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/298085/original/file-20191022-28088-1yzxl73.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=900&fit=crop&dpr=1 600w, https://images.theconversation.com/files/298085/original/file-20191022-28088-1yzxl73.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=900&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/298085/original/file-20191022-28088-1yzxl73.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=900&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/298085/original/file-20191022-28088-1yzxl73.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1131&fit=crop&dpr=1 754w, https://images.theconversation.com/files/298085/original/file-20191022-28088-1yzxl73.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1131&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/298085/original/file-20191022-28088-1yzxl73.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1131&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">Labor treasury spokesman Jim Chalmers.</span>
<span class="attribution"><span class="source">Glenn Hunt/AAP</span></span>
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<p>The Combined Pensioners and Superannuants Association says asset testing the family home would be “<a href="https://www.abc.net.au/news/2017-02-03/no-homes-in-assets-test-say-pensioners/8238828">massively unfair</a>”, targeting the vulnerable.</p>
<p>But people with high-value mortgage-free homes aren’t normally thought of as vulnerable. </p>
<p>Labor’s treasury spokesman Jim Chalmers says it would push more retirees “<a href="https://www.aph.gov.au/Parliamentary_Business/Hansard/Hansard_Display?bid=chamber/hansardr/e79ccb2b-a20c-483b-95e8-ca89001fbbd2/&sid=0011">off the pension, out of their homes, or both</a>”.</p>
<p>He is right about the former, but wrong to think the retirees who suffered a cut in their pension or lost their pension would be badly off. </p>
<p>The worst off retirees, as recognised by a <a href="https://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Economics/Economic_security_for_women_in_retirement/Report">Senate Committee</a>, are those without homes making do with grossly inadequate rental assistance.</p>
<p>Right now it is possible for a single person owning a $1.3 million mortgage-free home and $260,000 of other assets to get the full age pension.</p>
<p>Assuming that person draws down on those other assets at the rate of 5% per year, he or she can spend $37,000 per year and pay no rent.</p>
<h2>Yet homeowners do well</h2>
<p>A non home owner with $785,000, or half the assets, would be denied the pension. </p>
<p>Like the much-richer homeowner, that person would be able to draw an income of about $37,000 per year, but half it will have to go on rent.</p>
<p>It’s hardly fair. </p>
<p>It encourages retirees with homes to stash more and more of their assets into them in order to get the pension (and pass something valuable on to their children). Retirees with lesser assets miss out and have to rent.</p>
<p>But fairness is in the eye of the beholder.</p>
<p>The problem is that a ceiling on exemption from the assets test that seems fair in one part of Australia might not seem fair in another where home prices and perhaps the cost of living is higher.</p>
<h2>Our suggestion could be sold as fair</h2>
<p>In order to make more equal treatment seem fair to all retirees with homes I and fellow actuary Colin Grenfell have <a href="https://actuaries.asn.au/Library/Miscellaneous/2019/RetirementIncomesGreenPaperFinal.pdf">worked up an option</a> that would use the median (typical) price for each postcode as the cut off point for exemption from the assets test.</p>
<p>It would happen postcode by postcode, updated every year using Council valuations and as the median prices changed.</p>
<p>Only the owners of homes who values were atypical for the area would be affected, and only that part of the value of their home that was atypical would be included in the assets test.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/retiree-home-ownership-is-about-to-plummet-soon-little-more-than-half-will-own-where-they-live-115255">Retiree home ownership is about to plummet. Soon little more than half will own where they live</a>
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<p>Its key selling point is that it wouldn’t threaten homeowners with values at and below the average for their area. </p>
<p>The funds freed could increase the overall pension, but would probably be better applied to lifting rent assistance.</p>
<p>It’s important to treat retirees in the same financial circumstances the same, regardless of whether they own a mortgage-free home, and <a href="https://theconversation.com/fall-in-ageing-australians-home-ownership-rates-looms-as-seismic-shock-for-housing-policy-120651">fewer and fewer</a> retirees are owning mortgage-free homes. </p>
<p>It would have the added benefit of reducing the pressure on our parents and grandparents to own houses with bedrooms on the first floor that are never opened, not until they die and their houses are sold.</p>
<hr>
<p><iframe id="tc-infographic-442" class="tc-infographic" height="400px" src="https://cdn.theconversation.com/infographics/442/b13f990b71f79604eae099ea08d8c2e19c173bb9/site/index.html" width="100%" style="border: none" frameborder="0"></iframe></p>
<hr><img src="https://counter.theconversation.com/content/125500/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Anthony Asher is a member of the Actuaries Institute and was one of the authors of the Green Paper mentioned.</span></em></p>Retires who don’t own their homes do awfully out of the pension. Here’s a way to rebalance it.Anthony Asher, Associate Professor, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1249742019-10-17T19:07:19Z2019-10-17T19:07:19ZVital signs. Our compulsory super system is broken. We ought to axe it, or completely reform it<figure><img src="https://images.theconversation.com/files/297351/original/file-20191016-98632-1fq9ayt.jpg?ixlib=rb-1.1.0&rect=1371%2C401%2C2101%2C1305&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">We're taking money from people, letting it fall through the cracks, and spending no less than we were on pensions.</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>The just-announced <a href="https://theconversation.com/government-retirement-incomes-inquiry-puts-superannuation-in-the-frame-124373">inquiry</a> into Australia’s retirement income system ought to be anything but run-of-the-mill.</p>
<p>Taking place 25 years after the introduction of compulsory superannuation, it provides an opportunity to either fix a broken system, or discard it as failed experiment.</p>
<p>Incremental reform won’t work.</p>
<h2>There’s a budget problem</h2>
<p>The first and most fundamental problem with compulsory super lies in fiscal arithmetic. </p>
<p>After a quarter of a century of compulsory super, some 70% of the aged population still rely on either a full or part age pension, which is an awful lot for a system whose stated aim is to <a href="https://theconversation.com/5-questions-about-superannuation-the-governments-new-inquiry-will-need-to-ask-124400">substitute or supplement the age pension</a>.</p>
<p>Modelling by actuarial firm <a href="https://www.ricewarner.com/the-age-pension-in-the-21st-century/">Rice Warner</a> predicts that it will still be 57% by 2038.</p>
<p>That’s right. After almost half a century of compulsory super – an entire working life – more than half the aged population will still be collecting the age pension.</p>
<p>It’s progress, of a sort.</p>
<p>By then then age pension will take up 2.5% of Australia’s economic output, down from the present 2.7%. </p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/productivity-commission-finds-super-a-bad-deal-and-yes-it-comes-out-of-wages-109638">Productivity Commission finds super a bad deal. And yes, it comes out of wages</a>
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<p>It will still account for one in every ten dollars spent by the government. That’s more than defence, twice as much as Medicare, and twice as much as the Commonwealth spends on schools.</p>
<p>In return, the government forgoes an enormous amount of revenue on superannuation tax concessions. </p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/265468/original/file-20190324-36267-olwp2z.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/265468/original/file-20190324-36267-olwp2z.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/265468/original/file-20190324-36267-olwp2z.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=962&fit=crop&dpr=1 600w, https://images.theconversation.com/files/265468/original/file-20190324-36267-olwp2z.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=962&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/265468/original/file-20190324-36267-olwp2z.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=962&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/265468/original/file-20190324-36267-olwp2z.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1210&fit=crop&dpr=1 754w, https://images.theconversation.com/files/265468/original/file-20190324-36267-olwp2z.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1210&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/265468/original/file-20190324-36267-olwp2z.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1210&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="attribution"><a class="source" href="https://www.ato.gov.au/rates/key-superannuation-rates-and-thresholds/?anchor=Superguaranteepercentage">Source: Australian Tax Office</a></span>
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<p>Its practice of taxing income paid as super contributions at 15% rather than the taxpayer’s marginal rate will cost the budget <a href="https://www.budget.gov.au/2019-20/content/bp1/index.htm">A$19 billion</a> this financial year according to the Treasury, climbing to $23.3 billion in 2022-23. </p>
<p>Its practice of taxing super fund earnings at 15% (or less) rather than the marginal tax rate will cost the budget $20 billion this financial year, $23.6 billion in 2022-23.</p>
<p>We are forcing workers to <a href="https://theconversation.com/productivity-commission-finds-super-a-bad-deal-and-yes-it-comes-out-of-wages-109638">divert</a> up to 9.5% of their salary into super (soon to be 12% unless that legislation is withdrawn) and losing enough tax revenue to fund scores of government programs or to cut general tax rates, in return for little change in what we spend on the pension.</p>
<h2>There’s a returns problem</h2>
<p>The second problem is what happens to the money. Not only are there quite a lot of poorly performing funds – something that has been widely discussed in the leadup to the inquiry – but fees charged are incredibly high.</p>
<p>The Productivity Commission finds that average fees are <a href="https://www.pc.gov.au/inquiries/completed/superannuation/assessment/report/superannuation-assessment.pdf">1.1%</a> of annual balances. More than 4 million of us pay more than 1.5%.</p>
<p>It mightn’t sound like much, but it’s a fair proportion of the average annual return of 3.5 percentage points above inflation. </p>
<p>In New Zealand, where the government selects the default schemes on criteria that include price, the average annual fee is <a href="https://www.mbie.govt.nz/assets/f214ed384d/questions-and-answers-kiwisaver-default-scheme-providers.pdf">0.55%</a>. In Chile, which tenders exclusively on the basis of price, the average fee is <a href="https://grattan.edu.au/report/super-sting-how-to-stop-australians-paying-too-much-for-superannuation/">0.47%</a>.</p>
<p>Many of the funds justify their fees on the basis of their superior skill at picking stocks, which, as Nobel Prize winners Eugene Fama and Richard Thaler <a href="https://www.theaustralian.com.au/business/wealth/super-system-far-too-complex-expensive/news-story/6cfe6d0e6585b2252694abb001e6bf5c">have discovered</a>, is almost always a bad idea.</p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/super-fees-vary-wildly-and-it-will-hurt-your-retirement-income-42876">Super fees vary wildly, and it will hurt your retirement income</a>
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<p>Even when they do less stock picking over time, upping the proportion of safer assets such as cash and bonds as their clients age, they continue to charge the fees they justify on the basis of the work of picking stocks.</p>
<p>Equally bad is the lack of transparency about what they charge. Those of us who are able to switch (and there are still some who can’t) find it hard to find out what we are paying.</p>
<p>Try it for yourself. I am, by many measures, a pretty sophisticated consumer of financial products, but it took me a ludicrous amount of time to find out what was being taken out of my account.</p>
<h2>And there are ways out</h2>
<p>Here’s what I’d use as two guiding principles. </p>
<ul>
<li><p>The aged pension ought to provide a baseline dignified minimum for those who haven’t been able to provide for their retirement</p></li>
<li><p>Saving through the super ought to be tax-free on the way in, tax-free on fund earnings, and taxed at the marginal rate (including the 50% capital gains tax discount) on the way out</p></li>
</ul>
<p>In order to cut fees and lift returns there ought to be a default offering that invests in a broad range of Australian equities indexes and costs no more than 0.15% to 0.20% per year – maximum. </p>
<p>It would be natural to have a sliding scale of allocation from 100% equities at (say) age 25 to 0% equities (and all cash plus bonds) at age 65. Again, these would be defaults that people could opt out of.</p>
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<em>
<strong>
Read more:
<a href="https://theconversation.com/5-questions-about-superannuation-the-governments-new-inquiry-will-need-to-ask-124400">5 questions about superannuation the government's new inquiry will need to ask</a>
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<p>The tax advantage given to super would be the timing: at retirement versus as money goes in and it earns income. It would need to be justified by the savings that would accrue to the budget from getting these people off the aged pension.</p>
<p>Whether these numbers would stack up is an empirical question that would require careful analysis. </p>
<p>But it is important to remember that the rate of the pension, the retirement age, and the various tax rates and contribution caps are all within the government’s control. </p>
<p>It would have a lot of wriggle room to make the arithmetic work.</p>
<h2>We should fix it, or axe it</h2>
<p>If we are going to keep sequestering between 9.5% and 12% of people’s pay, we need a good reason.</p>
<p>It could be to provide them with a decent deal in retirement, or it could be to provide a good deal for the taxpayer.</p>
<p>The current system is questionable on both counts.</p>
<p>It would be vastly preferable to get to a system where only a relatively small number of people retired on to the government pension, and the rest saved enough for their retirement not to need to, through a series of incentives and nudges along with some compulsion.</p>
<p>It could be world-class. The system we have isn’t. And tinkering with it won’t help. We need a retirement income revolution.</p><img src="https://counter.theconversation.com/content/124974/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard Holden does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The inquiry will find we force workers to sacrifice income, pay tens of billions in super tax concessions, and still pay out one in every ten dollars of government earnings on pensions.Richard Holden, Professor of Economics, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1244002019-09-29T19:55:28Z2019-09-29T19:55:28Z5 questions about superannuation the government’s new inquiry will need to ask<figure><img src="https://images.theconversation.com/files/294662/original/file-20190929-185403-eebiwx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Superannuation has a smaller role in the retirement incomes system than is often suggested. </span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>The government’s new <a href="http://ministers.treasury.gov.au/ministers/josh-frydenberg-2018/media-releases/review-retirement-income-system">retirement incomes review</a> will need to work quickly.</p>
<p>On Friday Treasurer Josh Frydenberg said he expected a final report by June, just seven months after the issues paper he wants it to deliver by November.</p>
<p>The deadline is tight for a reason. In recommending the inquiry in its report on the (in)effeciency of Australia’s superannuation system this year, the Productivity Commission said it should be completed “<a href="https://theconversation.com/frydenberg-should-call-a-no-holds-barred-inquiry-into-superannuation-now-because-labor-wont-114079">in advance of any increase in the superannuation guarantee rate</a>”.</p>
<p>In other words, in advance of the next leglislated increase in compulsory superannuation contributions, which is on July 1, 2021.</p>
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<em>
<strong>
Read more:
<a href="https://theconversation.com/government-retirement-incomes-inquiry-puts-superannuation-in-the-frame-124373">Government retirement incomes inquiry puts superannuation in the frame</a>
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<p>The next increase (actually, the next five increases) will hurt.</p>
<p>The last two, on July 1 2013 and July 1 2014, took place when wage growth was stronger. In 2013 wages growth was 3% per year.</p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/265468/original/file-20190324-36267-olwp2z.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/265468/original/file-20190324-36267-olwp2z.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/265468/original/file-20190324-36267-olwp2z.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=962&fit=crop&dpr=1 600w, https://images.theconversation.com/files/265468/original/file-20190324-36267-olwp2z.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=962&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/265468/original/file-20190324-36267-olwp2z.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=962&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/265468/original/file-20190324-36267-olwp2z.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1210&fit=crop&dpr=1 754w, https://images.theconversation.com/files/265468/original/file-20190324-36267-olwp2z.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1210&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/265468/original/file-20190324-36267-olwp2z.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1210&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption"></span>
<span class="attribution"><a class="source" href="https://www.ato.gov.au/rates/key-superannuation-rates-and-thresholds/?anchor=Superguaranteepercentage">Source: Australian Tax Office</a></span>
</figcaption>
</figure>
<p>And they were small – an extra 0.25 per cent of salary each.</p>
<p>The next five, to be imposed annually from July 1 2021, are twice the size: <a href="https://www.ato.gov.au/rates/key-superannuation-rates-and-thresholds/?anchor=Superguaranteepercentage">0.5% of salary each</a>.</p>
<p>If taken out of wage growth, they’ve the potential to cut it from its present usually low 2.3% per annum to something with a “1” in front of it, pushing it below the rate of inflation, for five consecutive years.</p>
<p>If we were going to do that (even if we thought the economy and wage growth could afford it) it would be a good idea to have a good reason why. After all, compulsory superannuation is the compulsory locking away of income that could otherwise be spent or used to pay down debt or saved through another vehicle, regardless of the wishes of the person whose income it is.</p>
<h2>Question 1. What’s it for?</h2>
<p>Fortunately, the new inquiry doesn’t need to do much work on this one.</p>
<p>For most of its life compulsory super hasn’t had an agreed purpose. At times it has been justified as a means of restraining wage growth, at times as means of restraining government spending on the pension, at times as means of boosting national savings.</p>
<p>In 2014, more than 20 years after compulsory super began, the Murray Financial System Review asked the government to <a href="http://fsi.gov.au/publications/final-report/executive-summary/#recommendations">set a clear objective for it</a>, and two years later the government came up with one, enshrined in a bill entitled the <a href="https://www.aph.gov.au/Parliamentary_Business/Bills_Legislation/Bills_Search_Results/Result?bId=r5762">Superannuation (Objective) Bill 2016</a>.</p>
<p>The bill lapsed, but the objective at its centre lives on as the best description we’ve come up with yet of what compulsory super is for:</p>
<blockquote>
<p>to provide income in retirement to substitute or supplement the age pension</p>
</blockquote>
<p>Which raises the question of how much we need. For compulsory super, the answer is probably none. People who want more than the pension and their other savings can save more through voluntary super. People who don’t want more (or can’t afford to save more) shouldn’t.</p>
<h2>Question 2. How much do people need?</h2>
<p>Assuming for the moment that how much people need in retirement is relevant for determining how much compulsory super they need, the inquiry will need to examine what people need to live on in retirement.</p>
<p>The “<a href="https://www.superannuation.asn.au/resources/retirement-standard">standards</a>” prepared by the Association of Superannuation Funds of Australia are loose. The more generous of the two allows for overseas travel every two or so years, A$163 per couple per fortnight on dining out, $81 on alcohol “or equivalent spent
with charity or church”.</p>
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Read more:
<a href="https://theconversation.com/why-we-should-worry-less-about-retirement-and-leave-super-at-9-5-106237">Why we should worry less about retirement - and leave super at 9.5%</a>
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<p>It isn’t a reasonable guide to how much people need to live on, and certainly isn’t a reasonable guide for how much the government should intervene to make sure they have to live on. They are standards it doesn’t intervene to support while people are working.</p>
<p>And there’s something else. Super isn’t what will fund it. Most retirement living is funded outside of super, either through the age pension, private savings, or the family home (which saves on rent). Most 65 year olds have <a href="https://grattan.edu.au/wp-content/uploads/2018/11/912-Money-in-retirement-re-issue-1.pdf">more saved outside of super than in it</a>, and a lot more than that saved in the family home.</p>
<p>It’s a slight of hand to say that retirees need a certain proportion of their final wage to live on and then to say that that’s how much super should provide.</p>
<h2>Question 3: Does it come out of wages?</h2>
<p>The best guess is that, although paid by employers in addition to wages, compulsory super comes out of what would otherwise have been their wage bill.</p>
<p><a href="http://treasury.gov.au/sites/default/files/2019-09/foi_2534_document_set_for_release_re.pdf">Treasury</a> puts it this way:</p>
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<p>Though compulsory superannuation guarantee contributions are paid by employers, wage setting generally takes into account all labour costs. As such, it is widely accepted that employees bear the cost of higher superannuation guarantees in the form of lower take home pay.</p>
</blockquote>
<p>The inquiry will probably make its own determination. If it finds that extra contributions <a href="https://theconversation.com/productivity-commission-finds-super-a-bad-deal-and-yes-it-comes-out-of-wages-109638">do indeed come out of what would have been pay rises</a>, it will have to consider the tradeoff between lower pay rises (and they are already very low) and the compulsory provision of more superannuation in retirement.</p>
<h2>Question 4: Does it boost private saving?</h2>
<p>It’d be tempting to think that the compulsory nature of compulsory superannuation meant that each extra dollar funnelled into it increased retirement savings by an extra dollar. But it doesn’t, in part because wealthy Australians who are already saving a lot have the option of offsetting it by saving less in other ways.</p>
<p>For them, the increase in saving isn’t compulsory.</p>
<p>For financially stretched Australians unable to afford to save (or for Australians at times in times life when they can’t afford to save) the compulsion is real, and unwelcome.</p>
<p>The inquiry will have to make its own assessment, updating <a href="https://www.rba.gov.au/publications/rdp/2007/pdf/rdp2007-08.pdf">Reserve Bank research</a> which found in 2007 that each extra dollar in compulsory accounts added between 70 and 90 cents to household wealth.</p>
<h2>Question 5: Does it boost national saving?</h2>
<p>Boosting private saving (at the expense of people who are unable to escape) is one thing. Boosting national savings (private and government) is another. The tax concessions the government hands out to support superannuation are expensive. The concession on contributions alone is set to cost $19 billion this year and $23 billion in 2022-23, notwithstanding some tightening up. It predominately benefits high earners, the kind of people who don’t need assistance to save.</p>
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Read more:
<a href="https://theconversation.com/boosting-super-will-cost-the-budget-more-than-it-saves-on-age-pensions-119002">Boosting super will cost the budget more than it saves on age pensions</a>
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<p>On balance it is likely that the system does little for national savings, cutting government savings by as much as it boosts private savings. But because the question hasn’t been asked, not since the Fitzgerald report on national saving in 1993 shortly after compulsory super was introduced, we don’t know.</p>
<p>It’ll be up to the inquiry to bring us up to date.</p><img src="https://counter.theconversation.com/content/124400/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Peter Martin does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>One of the questions is how much we need in retirement. Another is whether we need 12% compulsory super to get there.Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1235972019-09-16T07:14:28Z2019-09-16T07:14:28ZPolitics with Michelle Grattan: Jim Chalmers on the need to change economic course<p>Shadow Treasurer Jim Chalmers says it’s time to change Australia’s economic course “in a responsible and affordable way which doesn’t jeopardise the surplus”.</p>
<p>Chalmers predicts the budget outcome for last financial year, forecast to be a deficit at budget time, could possibly show a surplus, because of high iron ore prices and other factors including an underspend on the NDIS.</p>
<p>He argues the government can have both a more stimulatory policy and a surplus going forward, given the various boosts to the budget’s bottom line. “I don’t think the government has come to a fork in the road where it’s a choice between a surplus or doing something responsible to stimulate the economy.</p>
<p>"As it stands right now it’s possible to do both and we think the government should do both”.</p>
<p>The government should boost Newstart, Chalmers tells Michelle Grattan, although he wouldn’t oppose it first holding “a short sharp review” to examine interactions with other payments.</p>
<p>On Labor’s way ahead, now being debated within the party, Chalmers says “we’d be mad not to learn the lessons” of the election result.</p>
<p>With some of the opposition’s most controversial election policies in his portfolio, notably on franking credits and negative gearing, Chalmers is already consulting widely.</p>
<p>There’s agreement on two things, he says. “Nobody expects us to finalise our policies three years before the next election […] and nobody expects us to take an absolutely identical set of policies to the 2022 election”.</p>
<h2>Transcript (edited for clarity)</h2>
<p><strong>Michelle Grattan:</strong> Amid the toing and froing of political combat and issues coming and going, for the average person in the street, as the phrase goes, it’s a case of “the economy, stupid”. The government has been talking for months about the storm clouds hanging over the international economy. The Reserve Bank has been urging it to do more of the heavy lifting to get growth improving. The June quarter growth figures released recently were bad but the government doesn’t want to jeopardise it’s projected surplus by engaging in any premature spending. The opposition insists that its fundamental attack front against the government is over economic management, not the day-to-day other issues. And it claims the government is failing at that management. Here with us today to unpack Labor’s criticisms and to outline its prescriptions is Shadow Treasurer Jim Chalmers. </p>
<p>Jim Chalmers, let’s cut to the chase. Precisely what is the Government not doing that it should be doing?</p>
<p><strong>Jim Chalmers:</strong> First and foremost Michelle, they don’t have a plan to deal with an economy which is growing at its slowest pace for 10 years now and all of the associated parts of that: record household debt, stagnant wages, declining productivity, declining living standards, the lowest business investment since the early 90s recession. What we’re calling for the government to do is to bring forward a plan. We’ve made some constructive suggestions about what that plan might entail. They could bring forward part of stage two of their tax cuts; they could review and responsibly increase Newstart, they could bring forward some infrastructure investment; they could come up with a proper energy policy which has been a drag on growth over the last sixteen iterations of that energy policy; and they should also come up with an incentive for business investment. We took to the election a policy for accelerated depreciation for business investment. We call on the government to come up with a similar policy. If they do and if it’s good we’ll support it.</p>
<p><strong>MG:</strong> What’s wrong with the government’s argument that it should wait until after the September quarter - and those figures are released in November - to see the full impact of monetary policy and to see the effect of the tax cuts? Why inject stimulus - which is what you’ve been talking about - at this point?</p>
<p><strong>JC:</strong> The government’s always got an excuse to do nothing, not to have a plan, not to deal with these issues which have been around for a substantial amount of time now. They want to pretend that it’s just about the June quarter, or it’s just about the September quarter, but when it comes to stagnant wages or weak business investment or declining productivity these challenges have been around for a long time and their excuse is always either it’s somebody else’s fault or things will fix itself. But crossing your fingers and hoping for things to turn up is not an economic policy and it’s not an economic plan. We hope that the economy does pick up, all sides of the parliament want the economy to pick up, but all of the policy settings that the government has had so far have been a recipe for the slowest growth in a decade and so we think that they should change course. Now in calling for that we’re not saying it’s the same as 10 years ago. We’re not saying the government should throw the kitchen sink at this economic weakness. We’re just calling on them, like many businesses, and like the Reserve Bank governor, to say that the economy has been weak for some time now, it’s time to change course in a responsible and affordable way which doesn’t jeopardise the surplus and if they do that then they give this country an opportunity or a chance or some incentive or impetus to turn around what has been a pretty troubling combination of economic conditions.</p>
<p><strong>MG:</strong> The government will soon announce the budget outcome for last financial year. Do you think it will show the budget is back in balance thanks to high iron ore prices? That is, that the budget’s in better shape than projected at budget time?</p>
<p><strong>JC:</strong> The budget should be in much, much better shape than it was expected to be.</p>
<p><strong>MG:</strong> So it will be in balance, you think?</p>
<p><strong>JC:</strong> I think it’ll be close, either just short or even possibly just over…</p>
<p><strong>MG:</strong> Surplus?</p>
<p><strong>JC:</strong> I think that’s a possibility because we have been getting extraordinarily high prices for our iron ore for example, our broader resources have been going well, the dollar at 67 or 68 US cents. All of those things, they boost business profits and that boosts the budget bottom line. I think the budget will have recovered substantially. We’ve still got net debt more than double what the government inherited but I think there will be a big improvement. The other thing that people haven’t focussed on - and that’s right you focus on iron ore, resource prices, and there’s also the dollar - but we’ve got in that financial year something like a $AU3.4 billion underspend in the NDIS. So when the government gets up and gives themselves a big round of applause for the budget being in a stronger position remember two things. One, a lot of it’s been good luck rather than good design when it comes to minerals prices, but also balancing the budget is likely to have come at the expense of Australians with a disability and those big underspends in the NDIS have got the government much closer to budget balance than they would otherwise be. The point that we’ve made repeatedly is that it is good to have surpluses. We want to make sure that they are not built on the back of selling Australians with a disability short.</p>
<p><strong>MG:</strong> Now just to clarify on the NDIS money, I thought I heard the other day the government saying that that money was going to be put back into the NDIS. Is that not right?</p>
<p><strong>JC:</strong> Well we’re talking about an underspend in the year that’s finished… </p>
<p><strong>MG:</strong> Yes, I know your timing point, but the money is not being lost to the scheme entirely, is that correct?</p>
<p><strong>JC:</strong> I doubt that will be the case. You know, not to be over the top about it, I don’t think this government has Australians with disabilities interests’ at heart. They got sprung with these big underspends which are propping up the budget. Labor, in pointing to them, has made it an issue that the government would prefer people weren’t talking about.</p>
<p><strong>MG:</strong> Now if you were in the treasurer’s chair now, would you be continuing to push for a surplus in this financial year or would you be open to abandoning that if necessary to better manage the economy?</p>
<p><strong>JC:</strong> I don’t think the government has to choose. A treasurer of either political persuasion - if you look at the conditions in front of us, you look at the strengthening of the budget for all those reasons we just mentioned around resource prices, the low dollar, profits are high, that’s all boosting the budget bottom line - I don’t think the government has come to a fork in the road where it’s a choice between a surplus or doing something responsible to stimulate the economy. I think as it stands right now it’s possible to do both and we think the government should do both.</p>
<p><strong>MG:</strong> Now you did mention a whole range of things that would put some stimulus in, but if and when stimulus has to come, what are your preferred forms of stimulus? Should there be some sort of cash splash, or a ramping up of infrastructure, or both? And in terms of infrastructure, are there enough projects that are shovel ready to be brought forward?</p>
<p><strong>JC:</strong> Well there’s lots in that question, Michelle. I think I’d start answering that question by saying that the stimulus that is in the system, whether it be stage one of the tax cuts, the interest rate cuts, changes to lending regulations, all of those things will help, but I think increasingly the smart economic commentators are saying that that won’t help enough and so we’ll need to look at what else we might be able to do. In presenting a handful of steps that the government should take and in playing that constructive role we’re just saying to the government, pick up any or all of these suggestions. The stage one of the tax cuts is already effectively a cheque because it comes as a refund. We think if you increase Newstart, 100% of that would be spent in the economy so that would be advantageous. There’s tax cuts which don’t come in until 2022 which could be brought forward. Infrastructure, obviously we agree with the governor of the Reserve Bank that there is substantial opportunity to bring forward some of that infrastructure investment which is already planned, and some of that will be shovel-ready - not all of it, but some of it. And also the incentives for business investment. So there’s so many things the government should be contemplating but because they want to play silly political games here in Canberra, because they want to pick fights and shift the blame and point the finger, these are all excuses for not coming up with a plan. I think a lot of people out there who are struggling, no matter how hard they work they just can’t get ahead, the price for childcare, and energy, and private health insurance and all these sorts of things are going up, and they look at what’s happening in Canberra from their government now in its third term, now in its seventh year, still with absolutely no plan to turn the economy around.</p>
<p><strong>MG:</strong> Now just on this question of Newstart. In the election you promised a review, and one reason why you said a review is necessary rather than an immediate increase was that one should look at the effect of an increase in relation to other welfare payments and so on. Now you say, increase it immediately. Are you just using this as a macroeconomic measure, or why otherwise change? Why not say we’ll review it and look at its impact in terms of other measures as well?</p>
<p><strong>JC:</strong> In lots of ways an increase in Newstart has the potential to tick a couple of boxes. Good for the economy because it will be spent in our shops. Good for people from a social justice point of view, there hasn’t been an increase for a long time now - a real increase anyway in Newstart. Also because if you want people to be job ready, and ready to go to interviews and to dust themselves off and get themselves back in the labour market, then you need to make sure that they’ve got an adequate standard of living to do that. So I think it ticks a range of boxes…</p>
<p><strong>MG:</strong> But all this applied when you said, let’s have a review.</p>
<p><strong>JC:</strong> Yea and you’re right to say that we took to the election a review. Obviously we weren’t going to review it with an eye to cutting the payment. Obviously we have said for some time now, not just this term, that Newstart’s inadequate. $40 a day is not enough. We think that with the resources of government we could have done a good job reviewing it, responsibly increasing it. That’s what we’re calling for the government to do now. There’s nothing preventing them from doing a short sharp review followed by a responsible increase. They should do that. Members of their own party are calling for them to do that. John Howard, the Business Council, you know a whole bunch of people who haven’t traditionally argued for an increase in Newstart are now doing so.</p>
<p><strong>MG:</strong> So you would support a short sharp review before they actually did something?</p>
<p><strong>JC:</strong> Yes I would do that but not a review that kicks the can far down the road, but something which gets the interactions right and understands all of the issues. We know what most of the issues are now. The debate has advanced a fair way since the election. I think that is an accurate observation that you made. The government should review Newstart, responsibly increase it. If they did that sooner rather than later that would give an increase in Newstart the opportunity to help the economy which is floundering.</p>
<p><strong>MG:</strong> Now consumer spending is very weak and the measures that we’ve been talking about would obviously go some way to encouraging more spending, but do you think consumers are also having a mind change? They’re feeling insecure, they’re hearing all this negative talk about the economy, and they’re saying, I’d better save any extra money I get?</p>
<p><strong>JC:</strong> You’re right that consumption’s remarkably weak. Consumption is most of the economy. You’re right that people have changed their behaviour. The retail sector is extraordinarily weak, even in that September quarter that the government keeps hanging their hopes on. So there is a big problem there. There’s an issue around confidence too, and we acknowledge that. And the change in behaviour is, you know, if you look at the National Australia Bank analysis that they put out they said that a big chunk of the tax cuts are being saved or used to retire debt - household debt’s at record highs - 190% of people’s income. Yes I think there has been a change in behaviour, but that doesn’t mean that you pretend away all of the challenges in our economy. The reason we raise these issues is because we want the government to come up with a plan to deal with them.</p>
<p><strong>MG:</strong> Are you worried at all that in scoring points against the government in saying it’s managing things badly, you are in fact at some risk of damaging the economy, damaging confidence?</p>
<p><strong>JC:</strong> I completely reject it, because the alternative as I just said is to pretend that there are no challenges in the economy. The government might want to pretend that everything is hunky dory in the economy. I think that does Australians a disservice because it’s an excuse to do nothing about it. I think Australians are smart when it comes to their money, when it comes to the broader economy, they don’t get the credit they deserve. They see the Reserve Bank cut the cash rate to one per cent which is a third of what it was during the worst of the Global Financial Crisis and they know something’s going on here. They see the ‘for lease’ signs in the supermarket. They see all of these things in their own lives. They see in their own pay packets that wages haven’t kept up with some of those costs that I mentioned before. They are not stupid and the government treats them as stupid when they try and pretend that just because the opposition says, hey maybe you should have a plan for the fact the economy’s growing at its lowest rate in 10 years, they want to say that’s talking the economy down. I just couldn’t disagree with that more.</p>
<p><strong>MG:</strong> So on the wages front, you went to the election with a raft of policies including topping up childcare workers’ wages from government funds. Is that still an option for Labor and what do you think, apart from that that should be done about wages?</p>
<p><strong>JC:</strong> Well all of our policies are up for a review as you know Michelle, and we’ll take our time to go through. We took a heap of policy to the last election. Some of it was controversial, and we’ll consult on the set of policies we take to the next election. They won’t be identical in every way to what we took to the last election. I think that’s obvious and it self-evident. When it comes to early childhood educators, I think they’re doing one of the most important jobs you can do in the community and they’re among the worst paid. The idea that people who look after our kids can be paid that little, I think a lot of Australians are concerned about that. More broadly on wages, we had ideas around the minimum wage, around cracking down on dodgy visas, cracking down on dodgy labour hire, and most importantly restoring penalty rates. All of these sorts of issues. We can attack stagnant wages in a range of ways. The government doesn’t seem to want to pick up and run with any of those ways.</p>
<p><strong>MG:</strong> Now 10 days ago or so, ALP president Wayne Swan said that at the election Labor had, and I quote “an agenda to be proud of, not resile from” after a narrow loss, but a week ago your frontbench colleague Mark Butler said and I quote again “our policy and campaign review must be ruthless and unsparing”. Which is closer to your view?</p>
<p><strong>JC:</strong> Well first of all when it comes to the review, both Wayne Swan and Mark Butler have an identical view that we need to have a proper look at what went wrong in the election, and clearly when we had an outcome like that we didn’t get everything right. If we got everything right we wouldn’t be in opposition, we’d be in government. So I think they both understand that we need to have a robust look at what went wrong and what we can learn from it. My own view is that we’d be mad not to listen to the message that was sent to us on election night. We’d be mad not to learn the lessons of that election outcome. We’ve all got a contribution to make to that review. That’s what Wayne was doing, it’s what Mark was doing and that’s what I’ve been doing in my way. My contribution is to consult widely particularly on our tax policies to make sure that we get those right. My objective is to go to the 2022 election with a better set of policies than 2019. Policies which deal with some of the same issues but can be broadly supported. I think if we do that, we give ourselves every chance of learning the lessons and doing better next time.</p>
<p><strong>MG:</strong> Now of course, 2 of the most controversial of Labor’s policies on franking credits and negative gearing fall squarely in your area. I know you won’t pre-empt a review of them and can’t do that but just tell us about this consultation process. How are you going about it, or will you go about it? Are you going to hold roundtables? Seek submissions? What are you doing?</p>
<p><strong>JC:</strong> What I’ve been doing so far is I’ve consulted with a pretty big number of colleagues in our team to see what their feedback has been like on the ground. I’ve done a 2800 kilometre road trip with Senator Chisholm throughout regional Queensland to pick up views in what was a really important state - what will always be an important state not just electorally, but I think economically. I’ve done a lot of consultation with the broader community. I’ve spent time with all of the peak groups, business peak groups but others as well, community organisations, to get their views. So I’ve been consulting widely. I’ve resisted making it, you know, a really formal process with an end date because I want to take the time to get it right. People have been very good and forthcoming with their views. People aren’t unanimous about it. I think one thing everyone agrees on which is that nobody expects 2 things: nobody expects us to finalise our policies 3 years before the next election, 3 months after the last one; and nobody expects us to take an absolutely identical set of policies to the 2022 election that we took to 2019. When you start from that basis what you’re left with is my job, which is to come up with the best tax and economy policies that we can. Policies which can be broadly supported, repair the budget in a fair way, and get the place growing again.</p>
<p><strong>MG:</strong> Even though you’ve got no formal timetable, would you expect the policy announcements in these major areas to be in the last year before the election?</p>
<p><strong>JC:</strong> Not necessarily…</p>
<p><strong>MG:</strong> It could be earlier?</p>
<p><strong>JC:</strong> It hasn’t been determined and I think it’s true to say that when you look at volatility in the economy, when you look at global uncertainty, when you look at all of these things together, obviously it would make sense not to finalise everything at the very beginning of the term. We need to preserve the ability to come up with the best set of policies which suit the times. I think the guidance and the leadership from Anthony Albanese on this has been spot on. We will hasten slowly to get things right. There’s no point rushing to some kind of arbitrary timetable and then leaving yourself without the flexibility later in the term to come up with the absolute best set of policies. So I’m guided by that, I think that’s exactly the right guidance and leadership.</p>
<p><strong>MG:</strong> The government’s been very sharp in the last little while about big business’ activism on various issues, social responsibility issues, climate, I guess what you could roughly call moral type issues too. What do you think about business being more active in these areas?</p>
<p><strong>JC:</strong> Well it’s a matter for them Michelle and the reason I’m sort of chuckling about that question, I mean the government desperately wants people to think the economy is growing slowly because businesses are talking about social issues not because the government doesn’t have a plan to deal with the economy. They’ve got form here, and I think this question is a really neat encapsulation of their entire political strategy, which is to say, how do we pick fights and point the finger and shift the blame? How do we create controversy elsewhere to distract from the government’s failures on the economy? Scott Morrison bragged about that not so long ago on a Saturday at a Liberal Party convention, I think in Sydney. He said he likes to spend his time setting tests for the Labor Party. If only we had a prime minister and a government which liked to spend their time fixing an ailing economy and not sitting around making all this kind of, playing all these sorts of silly political games. I see this issue with business leaders talking about marriage equality or whatever they like to talk about, that’s a matter for them. It’s not the reason why the economy is slowing. Scott Morrison needs to take responsibility for that.</p>
<p><strong>MG:</strong> The government’s planning an inquiry into retirement incomes and central to that is presumably the role of superannuation within the system. Is Labor totally wedded to the current timetable for increases in the compulsory super contributions or is that policy one that’s also up for review? And would you be prepared to reconsider it in light of whatever the inquiry finds?</p>
<p><strong>JC:</strong> Look we’re very keen to see the trajectory of the Super Guarantee increases maintained. We are very worried that this retirement incomes review will be used as a stalking horse for what’s being pushed by some of the crazies in the Liberal Party which is to make superannuation voluntary, or to have more cuts to superannuation. We think the answer to people having inadequate retirement incomes isn’t to cut their retirement incomes by attacking super so we’re very worried about that. We’ve also had government backbenchers say that the review should conclude that the family home should be included in the assets test. There’s a whole range of issues here where we don’t want to see people go backwards. Superannuation is a proud Labor creation. You were here in this building when Labor created it, compulsory super, and you’ve seen its trajectory. It’s very important to us and we can’t see it diminished.</p>
<p><strong>MG:</strong> So that is not up for review, that move to the 12% is set in stone in your policy?</p>
<p><strong>JC:</strong> Clearly we think that superannuation should go 12% on at least the current trajectory that it’s on now. We’re very concerned. What always happens in the Liberal Party is one of the crazies gets up and puts a view. All of a sudden that becomes government policy because in this Liberal Party and with this treasurer, the tail wags the treasurer, and so we want to defend superannuation from these kind of attacks. We want people to retire with dignified secure incomes. The way to achieve that isn’t to cut super again, or to make superannuation voluntary.</p>
<p><strong>MG:</strong> We’re seeing tensions between the US and China grow progressively and Australia’s economic interests are likely to suffer. How do we minimise this or inoculate ourselves? We obviously can’t affect the big picture much - how do we deal with it?</p>
<p><strong>JC:</strong> Well I think you’re right to point to, there is some global uncertainty. Obviously China-US trade tensions, China-Hong Kong, Brexit, the Straits of Hormuz, more recently attacks on Saudi oil infrastructure. These things are all concerning, but at least for the time being our challenges are primarily homegrown. We need to make sure that we can deal with our domestic economic challenges. Slowing growth, stagnant wages, declining productivity, very low business investment, all of those things that I’ve run through earlier on in the interview. Not having a plan to deal with those domestic challenges leaves us more exposed, unnecessarily exposed, dangerously exposed, to some of this volatility in the global economy. So a reason to deal with domestic challenges which have grown up and magnified over the last six years into the third term of this government, if we deal with those domestic challenges we give ourselves a better chance of riding out and withstanding what are concerning international developments.</p>
<p><strong>MG:</strong> Just finally, shadow treasurer is a big job with a lot ahead of you. I just wonder who your mentors - we spoke before about what Wayne Swan was saying, you once worked for him when he was treasurer. Do you still keep in touch with him closely, and who else do you take advice and guidance from?</p>
<p><strong>JC:</strong> Yes, I take advice from a broad range of people. One of the benefits of working in economic policy now for, well really a decade and a half, is I’ve got a network of people I can call on. Clearly I talk to Wayne Swan. I also spend a lot of time with Paul Keating and I’m very grateful for that engagement. So there’s at least 2 former Labor treasurers there. I speak to business leaders, I speak to a whole range of people, because my view is that there’s no one person in this building who knows it all. You need to be proactive in seeking out views and that’s what I do. I speak to Wayne, I speak to Paul, I speak to a whole range of people and I think that gives me the best opportunity to assess these conditions as they are right now and to play a constructive role in suggesting where the government’s plan could include some of the things that we’ve talked about.</p>
<h2>New to podcasts?</h2>
<p>Podcasts are often best enjoyed using a podcast app. All iPhones come with the Apple Podcasts app already installed, or you may want to listen and subscribe on another app such as Pocket Casts (click <a href="http://pca.st/BVa3#t=3m34s">here</a> to listen to Politics with Michelle Grattan on Pocket Casts).</p>
<p>You can also hear it on Stitcher, Spotify or any of the apps below. Just pick a service from one of those listed below and click on the icon to find Politics with Michelle Grattan.</p>
<p><a href="https://itunes.apple.com/au/podcast/politics-with-michelle-grattan/id703425900?mt=2"><img src="https://images.theconversation.com/files/233721/original/file-20180827-75984-1gfuvlr.png" alt="Listen on Apple Podcasts" width="268" height="68"></a> <a href="https://www.google.com/podcasts?feed=aHR0cHM6Ly90aGVjb252ZXJzYXRpb24uY29tL2F1L3BvZGNhc3RzL3BvbGl0aWNzLXdpdGgtbWljaGVsbGUtZ3JhdHRhbi5yc3M"><img src="https://images.theconversation.com/files/233720/original/file-20180827-75978-3mdxcf.png" alt="" width="268" height="68"></a></p>
<p><a href="https://www.stitcher.com/podcast/the-conversation-4/politics-with-michelle-grattan"><img src="https://images.theconversation.com/files/233716/original/file-20180827-75981-pdp50i.png" alt="Stitcher" width="300" height="88"></a> <a href="https://tunein.com/podcasts/News--Politics-Podcasts/Politics-with-Michelle-Grattan-p227852/"><img src="https://images.theconversation.com/files/233723/original/file-20180827-75984-f0y2gb.png" alt="Listen on TuneIn" width="318" height="125"></a></p>
<p><a href="https://radiopublic.com/politics-with-michelle-grattan-WRElBZ"><img class="alignnone size-medium wp-image-152" src="https://images.theconversation.com/files/233717/original/file-20180827-75990-86y5tg.png?ixlib=rb-1.1.0&q=45&auto=format&w=268&fit=clip" alt="Listen on RadioPublic" width="268" height="87"></a> <a href="https://open.spotify.com/show/5NkaSQoUERalaLBQAqUOcC"><img src="https://images.theconversation.com/files/237984/original/file-20180925-149976-1ks72uy.png?ixlib=rb-1.1.0&q=45&auto=format&w=268&fit=clip" width="268" height="82"></a> </p>
<h2>Additional audio</h2>
<p><a href="http://freemusicarchive.org/music/Lee_Rosevere/The_Big_Loop_-_FML_original_podcast_score/Lee_Rosevere_-_The_Big_Loop_-_FML_original_podcast_score_-_10_A_List_of_Ways_to_Die">A List of Ways to Die</a>, Lee Rosevere, from Free Music Archive.</p>
<p><strong>Image:</strong></p>
<p>AAP/ Joel Carrett</p><img src="https://counter.theconversation.com/content/123597/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Michelle Grattan does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>In this podcast, Shadow Treasurer Jim Chalmers argues the government can have both a more stimulatory policy and a surplus going forward.Michelle Grattan, Professorial Fellow, University of CanberraLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1229402019-09-05T06:57:39Z2019-09-05T06:57:39ZPolitics with Michelle Grattan: Treasurer Josh Frydenberg on a slowing economy<p>This week’s June quarter national accounts showed weakness in business investment and consumer spending, reflecting an all-round lack of confidence. Still, Treasurer Josh Frydenberg remains optimistic about the economy. </p>
<p>In this episode of Politics with Michelle Grattan, Frydenberg talks about the government’s discussions with the Reserve Bank on a new agreement covering the inflation target, saying: </p>
<blockquote>
<p>If you look at the last 20 quarters, 17 of those were outside the [2-3%] band and today inflation is at 1.6%.[…]You want to have a target which can be met, which is met, and is not merely just aspirational.</p>
</blockquote>
<p>He also promises to announce the proposed inquiry into retirement incomes before year’s end. </p>
<h2>Transcript (edited for clarity)</h2>
<p><strong>Michelle Grattan:</strong> The Australian economy is still growing but only slowly, according to this week’s June quarter national accounts. These show weaknesses in business investment and consumer spending, reflecting an all round lack of confidence. The government says the tax cuts, which have been flowing to people in recent weeks will boost the economy in the September quarter, as will the interest rate cuts that we’ve seen recently. But the future remains uncertain with the international economic situation weak and volatile. To talk about these issues, we have with us the treasurer Josh Frydenberg. </p>
<p>Josh Frydenberg, you’ve been urging companies to invest, but what do you say to the cautious CEO who says, “I’m responsible to my shareholders and I want to wait and see how things pan out?” </p>
<p><strong>Josh Frydenberg:</strong> Well, I was warmly heartened by the response that my comments got on the speech on productivity, Michelle. There was the CEOs of Seek, and Wesfarmers, and UBS and Macquarie Bank, and the chairman of CSL among others who all made the point that this debate, this discussion about investment by companies, is a good one to have. Particularly given that over the last 12 months we’ve seen A$29 billion worth of special dividends and share buybacks, which is a 140% increase on the average over the preceding four years. Companies do have to act, of course, in the best interests of shareholders but the best interests of shareholders can be served by investing for growth for a medium and long term strategy to build the business, to open new markets, and to get the best possible plant and equipment. That was my point particularly as productivity drives higher wages, drives economic growth, and we have seen some challenges in productivity and particularly on the investment side. </p>
<p><strong>Michelle Grattan:</strong> Now, while this week’s national accounts show some growth, it is below what’s required to meet the budget’s projections. You’ve indicated the government is looking at a business investment allowance but not until the next budget. Is there anything needed from the government in the shorter term to help realise the budget forecasts? </p>
<p><strong>Josh Frydenberg:</strong> Well, Michelle, in terms of the year average numbers, the growth that we announced yesterday was slightly below the budget forecast in terms of real GDP growth but above the budget forecast for nominal GDP growth. And that’s important to understand, that distinction, because it’s the nominal numbers that drive the government’s revenues and determine the budget outcomes. The June quarter did not take into account the significant tax cuts that passed the parliament and now more than A$14 billion has flowed through to household budgets. And it doesn’t take into account fully the 50 basis point interest rate cut. So let’s wait and see what happens in the September quarter and in subsequent quarters as a result of those measures. But the prime minister has written to state premiers about infrastructure projects that could potentially be brought forward. We have a ten year A$100 billion pipeline of infrastructure spending but where appropriate, where we won’t have capacity constraints, where we can work in partnership with the states, we will look at that infrastructure pipeline. </p>
<p><strong>Michelle Grattan:</strong> So you’re confident at this point that the September quarter - including the impact of those tax cuts - will be stronger than the June one? </p>
<p><strong>Josh Frydenberg:</strong> Well, let’s wait and see what that number is. I obviously don’t have a crystal ball but what I do know is that the tax cuts were not captured in the June quarter, they will be captured in the September quarter. And the full flow through impact of the interest rate cuts weren’t captured in the June quarter but they will be captured in the September quarter and subsequent quarter. So let’s wait and see how that plays out. But certainly the numbers that we saw yesterday, 0.5% for the quarter shows that the Australian economy continues to grow. We’ve had 28 consecutive years of economic growth - a record that hasn’t been matched by any other developed nation. And while Germany and Sweden and Singapore and the United Kingdom and others experienced negative growth in the June quarter, the Australian economy, in contrast, continues to grow. </p>
<p><strong>Michelle Grattan:</strong> You’ve indicated you’ll soon finalise the new agreement between the government and the Reserve Bank. These agreements cover the inflation target range which is currently 2-3% annually. But there’s some confusion, I think, about what you are seeking to do here. Could you explain in simple terms what you want to do with this new agreement?</p>
<p><strong>Josh Frydenberg:</strong> Well, this is the subject of a discussion that’s currently underway between treasury and the Reserve Bank. The target, which formally came into being in 1996, of a 2-3% inflation target has actually served Australia well. During that time we’ve pretty much been in the middle of that band. But if you look at the last 20 quarters, 17 of those were outside that band and today inflation’s at 1.6%. Now, inflation is important because it helps set expectations and those expectations in business flow through to wages, for example. And so you want to have a target which can be met, which is met, and is not merely just aspirational. So we’re having a discussion about what improvements could be made to that target. It’s a discussion that we’re having with a view to signing a document between myself and the governor in due course. </p>
<p><strong>Michelle Grattan:</strong> So it’s about the content, the actual target, and about the bank explaining itself better in relation to achieving or not achieving that target. Is that right? It’s got two legs here? </p>
<p><strong>Josh Frydenberg:</strong> Well, the 2-3%, I think, has served Australia well. And so I do support the governor in the maintenance of such a target. But there are some other changes that we are contemplating that we’re discussing with the governor. I won’t go into details about those as yet because it’s an ongoing discussion but it is an agreement that I think that has served Australia well since the year it’s been in place. </p>
<p><strong>Michelle Grattan:</strong> So might this new agreement require the bank to be more aggressive - that is, less tardy - in adjusting rates?</p>
<p><strong>Josh Frydenberg:</strong> Look, I’m not going to go into further detail about that because it’s an ongoing conversation, other than to say 2-3% has served Australia well. But as you know, we’re 1.6% and below that as we have been for the majority of the time in the last 20 quarters. </p>
<p><strong>Michelle Grattan:</strong> Would you anticipate any further cut in interest rates before the end of this calendar year? </p>
<p><strong>Josh Frydenberg:</strong> Well, as you know, the timing and the nature of monetary policy is one for the independent Reserve Bank and I respect their responsibility for monetary policy as the government’s responsible for fiscal policy, and so they’ll make their decisions based on their best judgement at the time. </p>
<p><strong>Michelle Grattan:</strong> Now, the government puts a lot of emphasis – to put it mildly - on achieving the projected surplus. But can putting so much stress on trying to get a surplus lead to a distortion in the proper balance between fiscal and monetary policy in managing the economy? </p>
<p><strong>Josh Frydenberg:</strong> Well, I think that they need to, and they should, and they are working together to strengthen the Australian economy. As the governor himself said, the tax cuts and the infrastructure spending is going to have an impact out there on economic activity. And, of course, household budgets. And we will see the full impact of those in the September quarter and subsequent quarters. But the point is interest rates have come down around the world. Australia is not unique in that regard, as the governor pointed out in one of his speeches. Three-quarters of developed economies have an inflation rate that’s under 2% and about a third of them have an inflation rate that’s under 1%. So this concept of having relatively low inflation, relatively low unemployment - which at around 5% was previously thought of as full employment – that’s no longer the case. And also having low interest rates is a new paradigm for central banks, and they’re working through that. </p>
<p><strong>Michelle Grattan:</strong> You mentioned before the prime minister writing to the states about infrastructure. Do you think the states are doing enough to support economic growth? </p>
<p><strong>Josh Frydenberg:</strong> Well, they’re certainly investing in infrastructure. I mean no two states are the same, both in terms of need and spending patterns. But we work closely with the states and, as you know, we’ve taken as a government decisions which have been on the drawing board for half a century, whether it’s a second airport for Sydney, whether it’s the Snowy 2.0 project, or whether it’s an airport rail link in Melbourne. These are all projects that have been talked about for a long time, speculated upon, but governments haven’t actually put the money up to have them built and in the Commonwealth’s case that’s what we’re doing. </p>
<p><strong>Michelle Grattan:</strong> So you don’t think that the fact that there are political differences between the federal government and some state governments - the Labor governments - is inhibiting the relationship when it comes to good economic policy? </p>
<p><strong>Josh Frydenberg:</strong> Well there’s no doubt there are some differences on priority projects, for example in Victoria we’ve made no secret that there’s $A4 billion waiting for the East West Link to be built. That’s an important project that will reduce congestion in parts of Melbourne, get people to work early, get them home sooner and safer too. Now it’s inexplicable that the Andrews government continues to reject that particular project and indeed that they spent more than a billion dollars of taxpayers money not to build that road. That’s where they have a job of explaining it to the Victorian people. But you know there are other projects. And the prime minister was with Daniel Andrews just a couple of days ago talking about working together on the Monash project. So we are working in lots of different areas with the state governments, Labor and Liberal state governments, on infrastructure projects.</p>
<p><strong>Michelle Grattan:</strong> Another front in your portfolio, you flagged soon after the election that there’d be an inquiry into retirement incomes. Are you still planning to go ahead with this? And when can we expect to see it formally unveiled? </p>
<p><strong>Josh Frydenberg:</strong> Well, work is underway on that and I’ve been in extensive discussions with Treasury, and the goal is to have that announced before the end of the year.</p>
<p><strong>Michelle Grattan:</strong> As long as that? </p>
<p><strong>Josh Frydenberg:</strong> Well, I’m just giving myself a bit of runway.</p>
<p><strong>Michelle Grattan:</strong> And will it be a comprehensive inquiry or will you carve out certain areas? Or exempt certain areas, I should say. </p>
<p><strong>Josh Frydenberg:</strong> What we want to better understand is the impact of the policy parameters that we have on public savings, on private savings. We have an ageing population for example, Michelle, and that’s going to provide challenges to our fiscal sustainability. As well as we have a compulsory super rate and that’s seen superannuation hit $A2.8 trillion today and will grow substantially over time. So as I’ve said publicly before, we want to see the impact on the public and private savings of the policies that we currently have in place.</p>
<p><strong>Michelle Grattan:</strong> When the Productivity Commission recommended that inquiry, it did put superannuation front and centre in terms of saying it should be done before the next increases started, going to 12%. The government claims that it is committed to those increases, to moving to 12% and yet people don’t really seem to believe that commitment. A lot of your backbenchers say it shouldn’t be carried out. Is that commitment still alive?</p>
<p><strong>Josh Frydenberg:</strong> Well, as the prime minister and I have made clear both in the parliament and outside the parliament, the issue is, what is the impact on public and private savings of an ageing population, and of a compulsory super system. And understanding that is important for policymakers. But we’re not reopening that that issue in relation to what is a legislated increase to 12%.</p>
<p><strong>Michelle Grattan:</strong> And so the inquiry won’t reopen that issue? </p>
<p><strong>Josh Frydenberg:</strong> The inquiry is going to be looking at the public and private savings. I’ll have more to say about that in due course. But as for the legislated increase to 12%, well the prime minister and I’ve answered that. </p>
<p><strong>Michelle Grattan:</strong> Now, just a couple of quick things to finish up. You looked very happy when you were asked on Wednesday about the budget outcome. Are we justified in thinking that the bottom line will be very close to balance, if not in balance?</p>
<p><strong>Josh Frydenberg:</strong> Well, I’m not at liberty to share that with you right now, Michelle. But obviously, you know, we’ve had the continued growth of the Australian economy, we’ve had relatively higher terms of trade. We estimated a deficit of just over $A4 billion for the 18-19 year and what you can be sure of is it will be better than that when we release it. </p>
<p><strong>Michelle Grattan:</strong> And just finally, when people look into their own personal crystal balls for 2020, should they be optimistic about their own financial circumstances, and Australia’s economic circumstances more generally? We know that you keep talking about the headwinds and they seem to become increasingly strong from abroad. But what is the outlook for ordinary individuals, wage earners for the next 12 months?</p>
<p><strong>Josh Frydenberg:</strong> Well, you wouldn’t want to be in any other economy other than Australia, in terms of meeting these challenging domestic and international headwinds. And they’re real and they’re present and when it comes to the global economy, we’ve seen the IMF and the OECD both downgrade their economic outlook. And we know it plays out in terms of investment decisions that are deferred, capital inflows that have slowed and also the growth in the volume of trade also reducing. That’s the impact of the uncertainty at the global level. In terms of the domestic economy, the impact of the drought and the flood is very significant and yesterday’s national accounts showed that farm GDP has come down by more than 8% through the year and that’s got a human cost as well as an economic cost. At the same time, and this is the positive side to the economy, we’ve seen very strong employment growth 2.6% which is more than three times what we inherited which was 0.7% and more than double the OECD average of 1.1%. And the fact that we’ve created more than 1.4 million new jobs - eight out of ten new jobs being full time over the last 12 months - and with workforce participation at a record high, that is a very positive story. Compensation of employees, which is the euphemism for the wages and salary bill for the economy, was up 5% in the numbers that we released yesterday. We’ve maintained our triple A credit rating. As you say, the budget is going to be coming back to surplus for the first time in more than a decade. And the tax cuts have passed the parliament, most significant in more than two decades. So the fundamentals of the Australian economy is strong. There are challenges. There’s certainly no complacency and we’re working hard to ensure that the economy continues to grow. Jobs are created and that lower taxes are there for all Australian workers. </p>
<p><strong>Michelle Grattan:</strong> Thanks, Josh Frydenberg, for talking with us in what is a busy economic week. That’s all for today’s Conversation podcast. </p>
<h2>New to podcasts?</h2>
<p>Podcasts are often best enjoyed using a podcast app. All iPhones come with the Apple Podcasts app already installed, or you may want to listen and subscribe on another app such as Pocket Casts (click <a href="http://pca.st/BVa3#t=3m34s">here</a> to listen to Politics with Michelle Grattan on Pocket Casts).</p>
<p>You can also hear it on Stitcher, Spotify or any of the apps below. Just pick a service from one of those listed below and click on the icon to find Politics with Michelle Grattan.</p>
<p><a href="https://itunes.apple.com/au/podcast/politics-with-michelle-grattan/id703425900?mt=2"><img src="https://images.theconversation.com/files/233721/original/file-20180827-75984-1gfuvlr.png" alt="Listen on Apple Podcasts" width="268" height="68"></a> <a href="https://www.google.com/podcasts?feed=aHR0cHM6Ly90aGVjb252ZXJzYXRpb24uY29tL2F1L3BvZGNhc3RzL3BvbGl0aWNzLXdpdGgtbWljaGVsbGUtZ3JhdHRhbi5yc3M"><img src="https://images.theconversation.com/files/233720/original/file-20180827-75978-3mdxcf.png" alt="" width="268" height="68"></a></p>
<p><a href="https://www.stitcher.com/podcast/the-conversation-4/politics-with-michelle-grattan"><img src="https://images.theconversation.com/files/233716/original/file-20180827-75981-pdp50i.png" alt="Stitcher" width="300" height="88"></a> <a href="https://tunein.com/podcasts/News--Politics-Podcasts/Politics-with-Michelle-Grattan-p227852/"><img src="https://images.theconversation.com/files/233723/original/file-20180827-75984-f0y2gb.png" alt="Listen on TuneIn" width="318" height="125"></a></p>
<p><a href="https://radiopublic.com/politics-with-michelle-grattan-WRElBZ"><img class="alignnone size-medium wp-image-152" src="https://images.theconversation.com/files/233717/original/file-20180827-75990-86y5tg.png?ixlib=rb-1.1.0&q=45&auto=format&w=268&fit=clip" alt="Listen on RadioPublic" width="268" height="87"></a> <a href="https://open.spotify.com/show/5NkaSQoUERalaLBQAqUOcC"><img src="https://images.theconversation.com/files/237984/original/file-20180925-149976-1ks72uy.png?ixlib=rb-1.1.0&q=45&auto=format&w=268&fit=clip" width="268" height="82"></a> </p>
<h2>Additional audio</h2>
<p><a href="http://freemusicarchive.org/music/Lee_Rosevere/The_Big_Loop_-_FML_original_podcast_score/Lee_Rosevere_-_The_Big_Loop_-_FML_original_podcast_score_-_10_A_List_of_Ways_to_Die">A List of Ways to Die</a>, Lee Rosevere, from Free Music Archive.</p>
<p><strong>Image:</strong></p>
<p>AAP/ James Ross</p><img src="https://counter.theconversation.com/content/122940/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Michelle Grattan does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>This week's June quarter national accounts showed the weakest economic growth since the GFC, but Treasurer Josh Frydenberg remains optimistic.Michelle Grattan, Professorial Fellow, University of CanberraLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1206512019-08-26T19:59:26Z2019-08-26T19:59:26ZFall in ageing Australians’ home-ownership rates looms as seismic shock for housing policy<figure><img src="https://images.theconversation.com/files/289355/original/file-20190826-170922-16hpfo2.jpg?ixlib=rb-1.1.0&rect=46%2C0%2C5184%2C3422&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Increasing numbers of older Australians face a harder time paying the bills when they retire because they'll still be paying off a mortgage or renting a home.</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/senior-couple-reading-documents-calculating-bills-1321860905?src=L888Uc72jzoK79JpT5xT7A-1-9">Art_Photo/Shutterstock</a></span></figcaption></figure><p>Outright home ownership has long been regarded as a supporting pillar of Australian retirement incomes policies. A <a href="https://www.ahuri.edu.au/research/final-reports/319">report</a> released today by the Australian Housing and Urban Research Institute (<a href="https://www.ahuri.edu.au/about-us/who-we-are-and-what-we-do">AHURI</a>) raises concerns that rising mortgage debt and falling home ownership rates in later life are undermining the role of home ownership in supporting retirees’ financial wellbeing.</p>
<p>Achieving outright home ownership is similar to the accumulation of pension income entitlements that come on stream in later life. This is because the outright owner does not have to meet rents. That reduces the need for a large income stream to pay for shelter as well as the <a href="https://link.springer.com/article/10.1007/s10901-010-9187-4">chances of low-income older Australians falling into poverty</a>. </p>
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Read more:
<a href="https://theconversation.com/why-secure-and-affordable-housing-is-an-increasing-worry-for-age-pensioners-69350">Why secure and affordable housing is an increasing worry for age pensioners</a>
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<h2>Numbers of mortgagors and private renters soar</h2>
<p>According to data from the Australian Bureau of Statistics (ABS) <a href="https://www.abs.gov.au/ausstats/abs@.nsf/mf/6540.0">Survey of Income and Housing</a>, home-ownership rates among Australians aged 55-64 years dropped from 86% to 81% between 2001 and 2016. We are also seeing a major shift in older Australians’ readiness to shoulder mortgage debt in later life.</p>
<p>Mortgage burdens have spiked in the 55-64 age group. In 2001 roughly 80% were mortgage-free. Fifteen years later this had plummeted to only 56%. </p>
<p>Indebtedness is even growing among owners aged 65 and over. In 2001 nearly 96% were mortgage-free. By 2016 this proportion had fallen below 90%.</p>
<p>These trends are expected to continue. That means, as the population ages, a growing number of older Australians will still be paying off mortgages, or trying to meet rents from fixed incomes. </p>
<p>The table below shows how the housing tenures of older Australians are projected to change between 2016 and 2031 based on ABS population forecasts and modelling estimates. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/289341/original/file-20190826-170951-1r3k0le.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/289341/original/file-20190826-170951-1r3k0le.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/289341/original/file-20190826-170951-1r3k0le.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=207&fit=crop&dpr=1 600w, https://images.theconversation.com/files/289341/original/file-20190826-170951-1r3k0le.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=207&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/289341/original/file-20190826-170951-1r3k0le.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=207&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/289341/original/file-20190826-170951-1r3k0le.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=260&fit=crop&dpr=1 754w, https://images.theconversation.com/files/289341/original/file-20190826-170951-1r3k0le.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=260&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/289341/original/file-20190826-170951-1r3k0le.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=260&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Projected changes in housing tenures of older Australians between 2016 and 2031.</span>
<span class="attribution"><span class="source">Authors’ calculations from HILDA Survey and ABS population projections</span>, <span class="license">Author provided</span></span>
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<p>We expect the number of outright owners aged 55-64 to plunge by 42%, from more than 1.2 million to 708,000. The number of 65-plus outright owners is predicted to rise by 41%, but this lags behind the 52% population growth in this age group. </p>
<p>On the other hand, the numbers of older mortgagors and private renters are projected to soar. Among 55-to-64-year-olds, mortgagor numbers jump from under 1 million to over 1.6 million, a 71% increase. The number of private renters rises by 54% from 369,000 to 567,000. </p>
<p>Beyond what was the age pension threshold of 65 years, mortgagors and private renters are expected to roughly double in number.</p>
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<em>
<strong>
Read more:
<a href="https://theconversation.com/more-of-us-are-retiring-with-mortgage-debts-the-implications-are-huge-115134">More of us are retiring with mortgage debts. The implications are huge</a>
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<h2>What are the budget impacts?</h2>
<p>The combined impact of these changes in tenure and demographics is expected to increase Commonwealth Rent Assistance (CRA) eligibility among seniors. </p>
<p>On its own, demographic change is forecast to lift the number of CRA recipients, and the real cost of providing CRA, by around 35%. </p>
<p>Add the projected increases in the private rental share of the housing stock and the number of CRA recipients is estimated to rise by 60%, from 414,000 to 664,000, between 2016 and 2031. </p>
<p>The real cost to the federal budget of rent assistance payments to older Australians is forecast to blow out from $972 million to $1.55 billion a year.</p>
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<a href="https://images.theconversation.com/files/289342/original/file-20190826-170918-10qw0cc.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/289342/original/file-20190826-170918-10qw0cc.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/289342/original/file-20190826-170918-10qw0cc.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=105&fit=crop&dpr=1 600w, https://images.theconversation.com/files/289342/original/file-20190826-170918-10qw0cc.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=105&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/289342/original/file-20190826-170918-10qw0cc.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=105&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/289342/original/file-20190826-170918-10qw0cc.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=132&fit=crop&dpr=1 754w, https://images.theconversation.com/files/289342/original/file-20190826-170918-10qw0cc.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=132&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/289342/original/file-20190826-170918-10qw0cc.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=132&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">Actual 2016 and projected 2031 tenure shares and population counts among Australians aged 55+ years.</span>
<span class="attribution"><span class="source">Authors’ calculations from HILDA Survey and ABS population projections</span>, <span class="license">Author provided</span></span>
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<p>We can also expect to see public housing waiting lists grow if these tenure changes and demographics eventuate. Their combined impact through to 2031 is expected to swell the number of older persons eligible for public housing from 247,000 to 441,000 – a 79% increase.</p>
<h2>What are the impacts on poverty?</h2>
<p>On an income-only basis we estimate 1.25 million seniors were in poverty in 2016. On taking their housing costs into account, that number falls to 802,000. </p>
<p>But the role of home ownership in preventing poverty is challenged if our projected declines in home ownership rates and increases in debt eventuate. The table below shows the projected increase in the after-housing-cost poverty count from 802,000 in 2016 to 1.15 million in 2031. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/289347/original/file-20190826-170927-xyszg6.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/289347/original/file-20190826-170927-xyszg6.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/289347/original/file-20190826-170927-xyszg6.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=114&fit=crop&dpr=1 600w, https://images.theconversation.com/files/289347/original/file-20190826-170927-xyszg6.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=114&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/289347/original/file-20190826-170927-xyszg6.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=114&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/289347/original/file-20190826-170927-xyszg6.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=143&fit=crop&dpr=1 754w, https://images.theconversation.com/files/289347/original/file-20190826-170927-xyszg6.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=143&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/289347/original/file-20190826-170927-xyszg6.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=143&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Actual 2016 and projected 2031 poverty counts on a before- and after-housing-cost basis among Australians aged 55+ years.</span>
<span class="attribution"><span class="source">Authors’ calculations from HILDA Survey and ABS population projections</span>, <span class="license">Author provided</span></span>
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<h2>Policy challenges on multiple fronts</h2>
<p>The demand for public housing will grow. If all else remains unchanged in the housing system and economy, seniors on public housing wait lists will increase by over 75%. That’s more than twice the 35% increase in the population of seniors between 2016 and 2031. </p>
<p>Community housing organisations would also come under increasing pressure.</p>
<p>As the number of senior private rental tenants grows, governments will need to reform tenancy regulations in ways that enable housing retrofits to meet mobility needs and allow for ageing in place. Tenure insecurity in the rental sector could hinder planning for aged support services. </p>
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Read more:
<a href="https://theconversation.com/life-as-an-older-renter-and-what-it-tells-us-about-the-urgent-need-for-tenancy-reform-103842">Life as an older renter, and what it tells us about the urgent need for tenancy reform</a>
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<p>We may also see a more fundamental transformation of Australia’s housing system and lifestyles in old age. High real house price growth relative to incomes remains a <a href="https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/pubs/BriefingBook45p/HousingAffordability">barrier to first home ownership</a> despite low interest rates. Furthermore, the mandatory <a href="https://www.superguide.com.au/superannuation-topics/superannuation-guarantee-sg">superannuation guarantee</a> likely displaces some saving in other assets, including housing. </p>
<p>There is therefore a growing prospect of delayed entry into home ownership and of people carrying more debt in later life. Longer working lives and the use of superannuation benefits to pay down mortgages both look increasingly likely.</p><img src="https://counter.theconversation.com/content/120651/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The research report in this article is funded by the Australian Housing and Urban Research Institute under grant number 81189.
Rachel Ong ViforJ receives funding from AHURI and the ARC.</span></em></p><p class="fine-print"><em><span>Gavin Wood receives funding from the Australian Research Council and the Australian Housing and Urban Research Institute. </span></em></p><p class="fine-print"><em><span>Melek Cigdem-Bayram receives funding from the Australian Housing and Urban Research Institute. </span></em></p><p class="fine-print"><em><span>Silvia Salazar receives funding from AHURI. </span></em></p>People over 65 who still have a mortgage or are renting are projected to double in number by 2031. The trend is likely to hit government budgets and leave more retirees in poverty.Rachel Ong ViforJ, Professor of Economics, School of Economics, Finance and Property, Curtin UniversityGavin Wood, Emeritus Professor of Housing and Housing Studies, RMIT UniversityMelek Cigdem-Bayram, Research Fellow, RMIT UniversitySilvia Salazar, Research fellow, Curtin UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1209792019-07-28T20:17:43Z2019-07-28T20:17:43ZVoluntary super: a good way to increase women’s dependence on men<figure><img src="https://images.theconversation.com/files/285933/original/file-20190728-43149-m09x3j.jpg?ixlib=rb-1.1.0&rect=0%2C248%2C3692%2C1699&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Having more money now means less money, and more dependence, later.</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>Making super contributions voluntary for people earning less than A$50,000 a year, as proposed by Liberal Senator <a href="https://www.smh.com.au/politics/federal/make-super-voluntary-for-low-income-earners-new-liberal-senator-says-20190724-p52aer.html">Andrew Bragg</a>, would be a backward step for women. </p>
<p>It would predominantly be used by women, because more women earn less than A$50,000 than men. In 2016-17, <a href="https://data.gov.au/dataset/ds-dga-540e3eac-f2df-48d1-9bc0-fbe8dfec641f/distribution/dist-dga-8553eb2d-9de5-4a57-ad9d-6e52933287b2/details?q=Tax%20Statistics">306,008</a> women earned less than A$50,000, compared with 216,749 men.</p>
<p>Many would find it a help. An extra 9.5% of salary (an extra 12% if compulsory superannuation contributions <a href="https://theconversation.com/frydenberg-should-call-a-no-holds-barred-inquiry-into-superannuation-now-because-labor-wont-114079">climb as planned</a>) would be exceedingly useful.</p>
<p>And most women have much less super than most men. In 2017, the median super balance for women aged 60-64 was <a href="https://www.superannuation.asn.au/ArticleDocuments/359/1710_Superannuation_account_balances_by_age_and_gender.pdf.aspx">A$36,000</a>. For men it was A$110,000. </p>
<p>This is partly because women are much more likely than men to take time out of work or to work part-time to care for children and other family members, and partly because of the persistent gender pay gap.</p>
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<strong>
Read more:
<a href="https://theconversation.com/will-the-real-gender-pay-gap-please-stand-up-64588">Will the real gender pay gap please stand up?</a>
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<p>The gender pay gap means that women contribute less to superannuation, and as a result are much more likely than men to experience <a href="https://www.humanrights.gov.au/our-work/sex-discrimination/publications/accumulating-poverty-womens-experiences-inequality-over">poverty and hardship</a> in retirement and will have to rely on the pension anyway, regardless of super.</p>
<h2>So why not let women take the money?</h2>
<p>Senator Bragg says his proposal could lift disposable incomes for low earners, and save the government <a href="https://bit.ly/2SFgnDa">A$1.8 billion</a> in the first year alone, because earnings taken in cash are taxed more highly than earnings paid into super - although these people are least able to afford the extra tax.</p>
<p>But it could also change the dynamics within relationships.</p>
<p>Compared with <a href="https://www.oecd.org/gender/data/how-do-partners-in-couple-families-share-paid-work.htm">other developed countries</a>, Australia has a high proportion of “1.5 earner” families, made up of a man working full-time (often earning much more than A$50,000) and a woman working part-time (often earning less). </p>
<p>They would be tempted to regard the lower earner’s superannuation account as unnecessary and take the money upfront, using only the higher earners account for retirement. </p>
<p>The inevitable outcome would be a reversal of the <a href="https://www.superannuation.asn.au/ArticleDocuments/359/1907-Better-Retirement-Outcomes-a-snapshot-of-account-balances-in-Australia.pdf.aspx">recent narrowing</a> of the superannuation gap, with women increasingly dependant on their husbands (or a good divorce lawyer) for security in retirement. </p>
<h2>Why not make super meaningful?</h2>
<p>There are alternatives that would reduce the gender gap in retirement incomes. The <a href="https://www.aph.gov.au/parliamentary_business/committees/senate/economics/economic_security_for_women_in_retirement/Report">2016 Senate inquiry</a> into economic security for women in retirement recommended government contributions during parental leave and removing the exemption for employers of low income earners earning less than A$450 per month. </p>
<p>And in 2010 the <a href="http://taxreview.treasury.gov.au/content/finalreport.aspx?doc=html/publications/papers/final_report_part_1/chapter_12.htm">Henry Tax Review</a> recommended a flat tax concession for super contributions, instead of the present one that widens the gap between low and high earners.</p>
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Read more:
<a href="https://theconversation.com/we-wont-fix-female-super-until-we-fix-female-pay-but-labors-ideas-are-a-start-103529">We won't fix female super until we fix female pay, but Labor's ideas are a start</a>
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<p>Although successive governments have made changes to the superannuation system, none has adopted the recommended flat tax concession. Nor have they shown much concern for workers earning less than A$50,000. </p>
<p>Earlier this month, Senator Bragg’s party pushed through parliament legalisation that <a href="https://www.ato.gov.au/Individuals/Income-and-deductions/Offsets-and-rebates/Low-and-middle-income-earners/">excludes</a> workers <a href="https://theconversation.com/what-just-happened-to-our-tax-heres-an-explanation-youll-understand-114913">earning less than A$48,000</a> from the full budget tax offset.</p>
<p>Workers earning less than A$50,000 find it difficult to make ends meet. It is true that the super system (and the new tax offset) treats them badly. But allowing them to opt out of super would make them even more reliant on either the pension or better-off partners.</p>
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Read more:
<a href="https://theconversation.com/frydenberg-should-call-a-no-holds-barred-inquiry-into-superannuation-now-because-labor-wont-114079">Frydenberg should call a no-holds-barred inquiry into superannuation, now, because Labor won't</a>
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<img src="https://counter.theconversation.com/content/120979/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Helen Hodgson receives funding from the ARC. Helen is a member of the Social Policy Committee and a Director of the National Foundation for Australian Women (NFAW), and is on the Tax and Superannuation Advisory Panel of ACOSS. Helen was a Member of the WA Legislative Council in WA from 1997 to 2001, elected as an Australian Democrat. She is not a current member of any political party. She is a Registered Tax Agent and a member of the SMSF Association; and holds a superannuation account with an industry fund. </span></em></p><p class="fine-print"><em><span>Myra Hamilton receives funding from the Australian Research Council and a current research grant from CPA. She is an academic member of the Carers NSW Carer Respite Alliance and is on the Board of COTANSW.</span></em></p>Making super voluntary for low earners, as proposed by a Liberal senator would leave more women vulnerable in old age.Helen Hodgson, Professor, Curtin Law School and Curtin Business School, Curtin UniversityMyra Hamilton, Senior Research Fellow in Social Policy, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1205912019-07-22T19:58:14Z2019-07-22T19:58:14ZThere is a problem with retirement incomes, but it isn’t the super guarantee<figure><img src="https://images.theconversation.com/files/285087/original/file-20190722-45503-e8bd4n.jpg?ixlib=rb-1.1.0&rect=0%2C8%2C6000%2C3359&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The problem is that extra savings cut the pension, it isn't the idea of extra savings.</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>There is a case for not proceeding with, or at least further deferring, the legislated increase in employers’ compulsory superannuation contributions <a href="https://theconversation.com/frydenberg-should-call-a-no-holds-barred-inquiry-into-superannuation-now-because-labor-wont-114079">from 9.5% to 12%</a>.</p>
<p>But the Grattan Institute’s latest analysis, published in <a href="https://theconversation.com/super-shock-more-compulsory-super-would-make-middle-australia-poorer-not-richer-120002">The Conversation</a> and elsewhere, does not make this case.</p>
<p>Rather, it demonstrates extremely well a totally different problem with our retirement incomes system, and falsely ties it to our 9.5% so-called “<a href="https://www.ato.gov.au/Business/Super-for-employers/Working-out-if-you-have-to-pay-super/">super guarantee</a>”.</p>
<p>That problem is the pension assets test, tightened in <a href="https://www.amp.com.au/news/2016/october/changes-to-the-age-pension-assets-test">2017</a>. </p>
<h2>The problem is the pension assets test</h2>
<p>For a significant group of middle income earners, Grattan finds that an increase in savings through the super guarantee would <a href="https://www.afr.com/news/policy/tax/there-are-no-good-arguments-for-lifting-the-super-guarantee-20190721-p52999">lead to a reduction in lifetime incomes</a>. </p>
<p>But that is equally true of a voluntary increase in savings, in any form other than increased investment in the family home. </p>
<p>A better designed assets test, preferably through a <a href="https://theconversation.com/deeming-rates-explained-what-is-deeming-how-does-it-cut-pensions-and-why-do-we-have-it-120089">merging</a> of the income and assets tests, would ensure that increased savings boosted at least retirement incomes. It would ensure that we didn’t penalise thrift.</p>
<p>Whether we should attempt to compulsorily increase in savings through the super guarantee is an entirely separate issue.</p>
<p>Grattan is right to point out that any increase in the guarantee would come at the expense of increases in wages. It falsely accuses proponents of an increase of insisting <a href="https://theconversation.com/productivity-commission-finds-super-a-bad-deal-and-yes-it-comes-out-of-wages-109638">this would not be the case</a>.</p>
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Read more:
<a href="https://theconversation.com/productivity-commission-finds-super-a-bad-deal-and-yes-it-comes-out-of-wages-109638">Productivity Commission finds super a bad deal. And yes, it comes out of wages</a>
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<p>Perhaps some proponents of an increase do believe employers would or should bear much of the cost, but that is not consistent with the history of the super guarantee, one of whose strengths has been the sustainability of its funding by not adding to the cost of labour or inflation.</p>
<h2>Those super ‘tax breaks’ scarcely exist</h2>
<p>Another annoying aspect of the Grattan piece is the continued presentation of superannuation tax arrangements as “<a href="https://theconversation.com/20-billion-per-year-thats-how-much-higher-superannuation-could-take-from-wages-116353">tax breaks</a>”. </p>
<p>It is true that a shift in payments from wages to superannuation savings does, at that point in time, reduce tax revenue because of the difference between the contributions tax (generally 15%) and wage earners’ marginal tax rates (for most, at least 30%). </p>
<p>But what is the appropriate tax on savings, particularly savings that cannot be accessed until age 60? </p>
<p>The convention internationally is to exempt from tax entirely contributions and the earnings they generate, but to tax in full the benefits as they are paid out. If we did this, we would be imposing a greater immediate cost on the budget which would presumably be an even greater “tax break”. In reality we would be providing an appropriate tax regime for those looking to spread their lifetime earnings, in the knowledge that tax would be paid at the time they took money out.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/catch-up-super-contributions-a-tax-break-for-rich-old-men-51116">'Catch up' super contributions: a tax break for rich (old men)</a>
</strong>
</em>
</p>
<hr>
<p>Work done a few years ago for the <a href="https://csri.org.au/">Committee for Sustainable Retirement Incomes</a> concluded that, after the Turnbull government’s superannuation tax reforms, our regime of a limited but progressive tax on contributions and earnings and no tax on benefits, produced <a href="https://cfsri.files.wordpress.com/2015/09/csri-sustainability-and-self-provision-position-paper-final.pdf">very similar</a> results to the conventional approach at all income levels, although it is implemented the other way around.</p>
<p>It means that by international standards there isn’t a tax break. </p>
<p>Moreover, as Grattan has demonstrated with its analysis of lifetime incomes, the impact of superannuation on age pensions disadvantages many people precisely because it <a href="https://theconversation.com/myth-busted-boosting-super-would-cost-the-budget-more-than-it-saved-on-age-pensions-119002">saves the budget money</a> in the long term.</p>
<h2>The goal ought to be a comfortable retirement…</h2>
<p>What would really help is if Grattan articulated what it considers to be the objective of the retirement incomes system, and focused its analysis on whether increasing the super guarantee would or would not help to achieve that objective, and at what cost. </p>
<p>The objective surely ought to be that Australians have secure and adequate incomes at and through retirement. “Adequacy” here has two components:</p>
<ul>
<li><p>sufficient to ensure no aged person lives in poverty (the role of the age pension); and</p></li>
<li><p>sufficient to maintain pre-retirement living standards (which the role of superannuation and other savings, with the age pension contributing for people on less than average incomes)</p></li>
</ul>
<p>There are legitimate debates about how to determine “adequacy”, particularly the second component.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/frydenberg-should-call-a-no-holds-barred-inquiry-into-superannuation-now-because-labor-wont-114079">Frydenberg should call a no-holds-barred inquiry into superannuation, now, because Labor won't</a>
</strong>
</em>
</p>
<hr>
<p>Grattan claimed last year not only that the current 9.5% super guarantee would do the trick, but also that most current retirees (who have not accumulated anything like a lifetime of 9.5% of compulsory super savings) already receive adequate retirement incomes. </p>
<p>I remain convinced this is an extreme view, not consistent with international practice or analysis. </p>
<h2>…which might mean contributions of more than 12%</h2>
<p>For those not eligible for an age pension (likely to be at least 40% of retirees into the future), maintaining pre-retirement living standards will require contributions of 15-20% (18% is the OECD average); for those eligible for some age pension, the contribution rate required will be lower but, even at typical earnings, would most likely be more than 12% <a href="https://cfsri.files.wordpress.com/2015/09/csri-adequacy-position-paper-final-20161006.pdf">according to Committee for Sustainable Retirement Incomes analysis</a>.</p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/280165/original/file-20190619-171192-pibzw3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/280165/original/file-20190619-171192-pibzw3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/280165/original/file-20190619-171192-pibzw3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=963&fit=crop&dpr=1 600w, https://images.theconversation.com/files/280165/original/file-20190619-171192-pibzw3.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=963&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/280165/original/file-20190619-171192-pibzw3.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=963&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/280165/original/file-20190619-171192-pibzw3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1210&fit=crop&dpr=1 754w, https://images.theconversation.com/files/280165/original/file-20190619-171192-pibzw3.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1210&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/280165/original/file-20190619-171192-pibzw3.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1210&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="https://www.ato.gov.au/rates/key-superannuation-rates-and-thresholds/?anchor=Superguaranteepercentage">Source: Australian Tax Office</a></span>
</figcaption>
</figure>
<p>Whether such a contribution rate should be compulsory is a legitimate question.</p>
<p>Perhaps the current low rate of wages growth warrants a longer deferral of the next legislated increase (though it will be seven years since the last set of two 0.25% increases when the next increase of 0.5% is due to come into force in 2021, and real wages will have increased by much more than this in the meantime). </p>
<p>Perhaps the burden on some young families of increasing compulsory savings would be more than their circumstances allow (although there are other ways of assisting them). </p>
<p>A concern I have, however, is that Grattan seems to suggest not only that the super guarantee not be increased beyond 9.5% but that we would not then need to encourage most workers to voluntarily save more beyond that, including after their children grow older and become financially independent. </p>
<p>That seems to me short-sighted, and accepts a greater reliance on the age pension in the future than is desirable.</p><img src="https://counter.theconversation.com/content/120591/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Andrew Podger was affiliated with the Committee for Sustainable Retirement Incomes, an independent group of experts, until 2016. </span></em></p>There is a case for not proceeding with, or at least deferring, the legislated increase in employers’ compulsory super contributions, but it isn’t the one the Grattan Institute makes.Andrew Podger, Honorary Professor of Public Policy, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1199952019-07-14T18:46:04Z2019-07-14T18:46:04ZNo longer a one-way street, home ownership is becoming porous<figure><img src="https://images.theconversation.com/files/283869/original/file-20190712-173360-1ra9xza.jpg?ixlib=rb-1.1.0&rect=66%2C138%2C1780%2C418&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">"Churning" out of and back in to home ownership is becoming common. We haven't caught up.</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p><em>The 2019 <a href="https://www.ace2019.org.au/">Australian Conference of Economists</a> is taking place in Melbourne from July 14 to 16.</em></p>
<p><em>During the conference The Conversation is publishing a selection of articles by the authors of papers being delivered at the conference. Others are <a href="https://theconversation.com/au/topics/ace2019-73615">here</a>.</em></p>
<hr>
<p>More than in many countries, in Australia home ownership has traditionally been seen as a journey, with most of us aspiring to <a href="https://www.tandfonline.com/doi/full/10.1080/14616718.2014.984827">own a home</a> and <a href="https://www.ahuri.edu.au/__data/assets/pdf_file/0007/2104/AHURI_Final_Report_No187_Sustaining_home_ownership_in_the_21st_century_emerging_policy_concerns.pdf">pay down a mortgage</a> by the time we retire.</p>
<p>Because it’s been seen as a one-way street, we have tended to worry most about the first big transition: moving from renting to getting a mortgage, assuming that afterwards things will be okay. But things are becoming more complicated.</p>
<p>The charts below are built from microdata from the Bureau of Statistics <a href="https://www.abs.gov.au/AUSSTATS/abs@.nsf/Lookup/6541.0.30.001Main+Features12013-14">survey of income and housing</a>. Each shows the changing housing profiles of Australians in a particular age group between 1990 and 2015. </p>
<p>The bars show – from left to right – the share of Australians who are renting, have large mortgage debt, moderate mortgage debt, low mortgage debt; and have become outright owners, both in 1990 and 2015.</p>
<hr>
<p><strong>Then and now. Home tenure by type, per cent</strong></p>
<p><strong>25 - 34 year olds:</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/283975/original/file-20190714-173360-7fwyjs.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/283975/original/file-20190714-173360-7fwyjs.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/283975/original/file-20190714-173360-7fwyjs.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=188&fit=crop&dpr=1 600w, https://images.theconversation.com/files/283975/original/file-20190714-173360-7fwyjs.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=188&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/283975/original/file-20190714-173360-7fwyjs.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=188&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/283975/original/file-20190714-173360-7fwyjs.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=237&fit=crop&dpr=1 754w, https://images.theconversation.com/files/283975/original/file-20190714-173360-7fwyjs.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=237&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/283975/original/file-20190714-173360-7fwyjs.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=237&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
</figcaption>
</figure>
<p><strong>35 - 54 year olds:</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/283974/original/file-20190714-173360-rfaur1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/283974/original/file-20190714-173360-rfaur1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/283974/original/file-20190714-173360-rfaur1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=188&fit=crop&dpr=1 600w, https://images.theconversation.com/files/283974/original/file-20190714-173360-rfaur1.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=188&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/283974/original/file-20190714-173360-rfaur1.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=188&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/283974/original/file-20190714-173360-rfaur1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=237&fit=crop&dpr=1 754w, https://images.theconversation.com/files/283974/original/file-20190714-173360-rfaur1.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=237&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/283974/original/file-20190714-173360-rfaur1.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=237&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
</figcaption>
</figure>
<p><strong>55 - 64 year olds:</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/283976/original/file-20190714-173355-12ynhbo.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/283976/original/file-20190714-173355-12ynhbo.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/283976/original/file-20190714-173355-12ynhbo.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=188&fit=crop&dpr=1 600w, https://images.theconversation.com/files/283976/original/file-20190714-173355-12ynhbo.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=188&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/283976/original/file-20190714-173355-12ynhbo.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=188&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/283976/original/file-20190714-173355-12ynhbo.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=237&fit=crop&dpr=1 754w, https://images.theconversation.com/files/283976/original/file-20190714-173355-12ynhbo.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=237&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/283976/original/file-20190714-173355-12ynhbo.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=237&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">High debt = mortgage debt-to-income ratio above 200%, middle debt = 100-200%, low debt = below 100%.</span>
<span class="attribution"><a class="source" href="https://www.abs.gov.au/ausstats/abs@.nsf/mf/6553.0">Author's calculations, ABS 6553.0 microdata</a></span>
</figcaption>
</figure>
<hr>
<h2>Less ownership, more churning</h2>
<p>In each age group there is more renting and less ownership than there used to be.</p>
<p>And among owners, there is much less outright ownership and much more high debt than there used to be, exposing more of them to the risk of losing their homes.</p>
<p>Indeed, data from the <a href="https://melbourneinstitute.unimelb.edu.au/hilda">Household, Income and Labour Dynamics</a> survey shows that in the first decade of this century alone, nearly 2 million people left home ownership and returned to renting. </p>
<p>These “leavers” represent one fifth of all home owners in the decade. </p>
<p>But this wasn’t a one-way street either. Of those who lost their home, nearly two-thirds regained home ownership later in the decade. Astonishingly, 7% of these “churners” moved in and out of home ownership <a href="https://www.ahuri.edu.au/__data/assets/pdf_file/0011/2072/AHURI_Final_Report_No216_The-edges-of-home-ownership.pdf">more than once</a>.</p>
<h2>Who’s leaving, who’s churning?</h2>
<p>The edges of home ownership are becoming permeable, in an especially Australian way. Leavers and churners are more common in Australia <a href="https://www.ahuri.edu.au/__data/assets/pdf_file/0011/2072/AHURI_Final_Report_No216_The-edges-of-home-ownership.pdf">than in Britain</a>, a country which on the surface has a similar high home ownership rate and a well-developed mortgage market.</p>
<p>Leavers appear to be characterised by <a href="https://www.tandfonline.com/doi/abs/10.1080/14616718.2015.1115225">mortgage stress, divorce or relationship breakdown and poor health</a>. They have better chances of regaining ownership if they were able to extract relatively large amounts of <a href="https://www.ahuri.edu.au/__data/assets/pdf_file/0011/2072/AHURI_Final_Report_No216_The-edges-of-home-ownership.pdf">home equity</a> before they leave. </p>
<p>Those who are able to find <a href="https://www.ahuri.edu.au/__data/assets/pdf_file/0011/2072/AHURI_Final_Report_No216_The-edges-of-home-ownership.pdf">rent-free housing</a>, say from parents, find it easier to save for a deposit to get them back into home ownership. </p>
<p>Some are able to directly access the “<a href="https://www.tandfonline.com/doi/abs/10.1080/19491247.2017.1278580?journalCode=reuj20">bank of mum and dad</a>”. It is a leg up only available to those with <a href="https://theconversation.com/not-everyone-wins-from-the-bank-of-mum-and-dad-73842">wealthy and willing parents</a>, accentuating the socio-economic divide between owners and renters.</p>
<h2>What will have to change?</h2>
<p>There are at least three important implications.</p>
<p>First, debt-free home ownership in old age can no longer be regarded as the norm; instead, <a href="https://theconversation.com/more-people-are-retiring-with-high-mortgage-debts-the-implications-are-huge-115134">mortgage stress in old age</a> will become more common as churners take on more debt later in order to regain home ownership. </p>
<p>This raises complex questions around how ageing mortgage holders will manage retirement strategies, superannuation payouts and spending to cope with <a href="https://www.ahuri.edu.au/research/research-in-progress/ahuri-research-projects/mortgage-stress-and-precarious-homeownership-implications-for-older-australians">mortgages that aren’t extinguished</a>.</p>
<p>Second, <a href="https://www.ceda.com.au/CEDA/media/General/Publication/PDFs/HousingAustraliaFinal_Flipsnack.pdf">lifelong renting</a> will become more common. This means governments will need to prepare for an upsurge in spending on <a href="https://www.ahuri.edu.au/__data/assets/pdf_file/0024/14298/AHURI_Final_Report_No_286_Australian-demographic-trends-and-implications-for-housing-assistance-programsv2.pdf">housing assistance</a> and pressure for legislation to provide greater <a href="https://www.ceda.com.au/CEDA/media/General/Publication/PDFs/HousingAustraliaFinal_Flipsnack.pdf">security of tenure</a> for private renters.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/can-the-private-rental-sector-provide-a-secure-affordable-housing-solution-63880">Can the private rental sector provide a secure, affordable housing solution?</a>
</strong>
</em>
</p>
<hr>
<p>Evidence suggests mortgage indebtedness <a href="https://journals.sagepub.com/doi/abs/10.1177/0308518X16688471">depresses wellbeing</a>. On the other hand, people who have abandoned their mortgage experience a notable rebound in wellbeing, especially if they get <a href="https://journals.sagepub.com/doi/abs/10.1177/0308518X16688471">secure rental tenure</a>.</p>
<p>Finally, governments cannot just focus on programs that help first home buyers, such as the <a href="https://www.liberal.org.au/latest-news/2019/05/12/helping-australians-buy-their-first-home">First Home Loan Deposit Scheme</a> announced during the election. They will need to design programs that help prevent people from dropping out and help former owners get back. </p>
<p>The growing twilight zone between being an owner and being a renter is largely unrecognised in the political imagination. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/more-of-us-are-retiring-with-mortgage-debts-the-implications-are-huge-115134">More of us are retiring with mortgage debts. The implications are huge</a>
</strong>
</em>
</p>
<hr>
<img src="https://counter.theconversation.com/content/119995/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Rachel Ong ViforJ receives funding from the Australian Housing and Urban Research Institute and Australian Research Council. This article draws on her collaborative research with Gavin Wood (RMIT), Susan Smith (Cambridge) and Melek Cigdem-Bayram (RMIT). </span></em></p>Whether you owned a home or not used to be straightforward. The boundaries are becoming permeable.Rachel Ong ViforJ, ARC Future Fellow & Professor of Economics, Curtin UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1203332019-07-14T08:56:35Z2019-07-14T08:56:35ZThey’ve cut deeming rates, but what are they?<figure><img src="https://images.theconversation.com/files/283961/original/file-20190714-173338-zx1zp9.jpg?ixlib=rb-1.1.0&rect=646%2C268%2C2554%2C1224&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Not cutting deeming rates when other rates are falling keeps people off the pension.</span> </figcaption></figure><p>Treasurer Josh Frydenberg has cut the deeming rate for large investments from 3.25% to 3%, and for smaller ones from 1.75% all the way down to 1%, <a href="https://www.abc.net.au/news/2019-07-14/federal-government-announces-600-million-pension-boost/11307454">backdated to the start of July</a>.</p>
<p>But what exactly is a deeming rate, and why does it matter so much to about one million Australians on benefits, among them around about 630,000 age pensioners?</p>
<p>It’s a topic I covered in The Conversation mid last week in an <a href="https://theconversation.com/deeming-rates-explained-what-is-deeming-how-does-it-cut-pensions-and-why-do-we-have-it-120089">explainer</a> that went all the way back to the beginning, or at least the most recent beginning, when treasurer Paul Keating brought deeming rates back to Australia’s benefits system in 1991.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/deeming-rates-explained-what-is-deeming-how-does-it-cut-pensions-and-why-do-we-have-it-120089">Deeming rates explained. What is deeming, how does it cut pensions, and why do we have it?</a>
</strong>
</em>
</p>
<hr>
<p>Before that, applicants for the pension were able to pass income tests by ensuring that their assets didn’t earn much income, a service banks and other institutions were happy to provide for them.</p>
<p>From 1991, on applicants for the age pension (and later other benefits) were “deemed” to have earned from their financial assets amounts set by the government, whatever they actually earned.</p>
<h2>Of late, deeming rates haven’t kept up</h2>
<p>For most of the past two decades both the high deeming rate (which at the moment applies to financial assets in excess of A$51,800 for singles and $86,200 for couples) and also the low deeming rate (for lesser assets) have been below the Reserve Bank’s cash rate, benefiting applicants who could earn more than those low rates while continuing to get benefits.</p>
<hr>
<p><strong>Deeming rates versus RBA cash rate, July 1996 - July 2019, per cent</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/283959/original/file-20190714-173342-lcrcvo.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/283959/original/file-20190714-173342-lcrcvo.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/283959/original/file-20190714-173342-lcrcvo.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=215&fit=crop&dpr=1 600w, https://images.theconversation.com/files/283959/original/file-20190714-173342-lcrcvo.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=215&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/283959/original/file-20190714-173342-lcrcvo.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=215&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/283959/original/file-20190714-173342-lcrcvo.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=270&fit=crop&dpr=1 754w, https://images.theconversation.com/files/283959/original/file-20190714-173342-lcrcvo.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=270&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/283959/original/file-20190714-173342-lcrcvo.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=270&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="http://guides.dss.gov.au/guide-social-security-law/4/4/1/10">Australian government, RBA</a></span>
</figcaption>
</figure>
<hr>
<p>Then, beginning with prime minister Kevin Rudd (who, to be fair to him, in 2009 delivered the <a href="https://www.sbs.com.au/news/interactive-how-australia-s-pension-system-works">biggest ever increase in the pension</a> – $100 a fortnight for singles and $76 for couples) and continuing under his successors Gillard, Abbott, Turnbull and Morrision, the government adjusted the deeming rate more slowly, meaning that as the Reserve Bank’s cash rate fell, both the high and low deeming rates ended up above it.</p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/283965/original/file-20190714-173366-evx51s.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/283965/original/file-20190714-173366-evx51s.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/283965/original/file-20190714-173366-evx51s.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=732&fit=crop&dpr=1 600w, https://images.theconversation.com/files/283965/original/file-20190714-173366-evx51s.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=732&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/283965/original/file-20190714-173366-evx51s.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=732&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/283965/original/file-20190714-173366-evx51s.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=919&fit=crop&dpr=1 754w, https://images.theconversation.com/files/283965/original/file-20190714-173366-evx51s.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=919&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/283965/original/file-20190714-173366-evx51s.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=919&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">The new deeming rates: 3% and 1%</span>
</figcaption>
</figure>
<p>The decisions announced by Frydenberg on Sunday go a long way to putting things right.</p>
<p>The lower deeming rate will once more be close to the cash rate (exactly at the cash rate, for as long as the cash rate stays at 1%). The higher deeming rate will not be, but then it probably shouldn’t be.</p>
<p>The higher rate applies to the return on financial assets (including shares) worth more than $51,800. As Frydenberg pointed out on Sunday, many of those assets return much more, not much less, than the deeming rate:</p>
<blockquote>
<p>It could apply to superannuation returns, and that’s averaging around 5.5%. Or to yields on ASX 200 stocks, which are averaging about 4.5%</p>
</blockquote>
<p>The low deeming rate is on the face of it unfair, because few bank deposits pay 1%. The special retirees accounts offered by ANZ and the Commonwealth pay 0.25%. Many deposit accounts pay nothing.</p>
<p>But the low rate applies to financial assets all the way up to $51,800 ($86,200 for couples), and to all types of assets. Many pension applicants are likely to earn a total return on those assets well above 1%.</p>
<p>Deeming is by design, rough and ready. There will always be complaints, and of late those complaints had force. They are now back broadly where they should be.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/deeming-rates-explained-what-is-deeming-how-does-it-cut-pensions-and-why-do-we-have-it-120089">Deeming rates explained. What is deeming, how does it cut pensions, and why do we have it?</a>
</strong>
</em>
</p>
<hr>
<img src="https://counter.theconversation.com/content/120333/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Peter Martin does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Often misunderstood, deeming rates are back broadly where they should be.Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1200892019-07-10T20:19:29Z2019-07-10T20:19:29ZDeeming rates explained. What is deeming, how does it cut pensions, and why do we have it?<figure><img src="https://images.theconversation.com/files/283483/original/file-20190710-44497-61rmpe.jpg?ixlib=rb-1.1.0&rect=821%2C0%2C2623%2C1632&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Deeming rates began as a way to stop people cheating in order to obtain the pension.</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>Now it’s the Coalition that’s being accused of a “<a href="https://theconversation.com/words-that-matter-whats-a-franking-credit-whats-dividend-imputation-and-whats-retiree-tax-111423">retiree tax</a>”.</p>
<p>As interest rates have come down over the past four years, the rate that retirees are “<a href="https://www.humanservices.gov.au/individuals/topics/deeming/29656">deemed</a>” to have earned for the purpose of the pension income test hasn’t budged, meaning that although retirees have been earning less (in some cases a good deal less), they haven’t been getting more access to the pension.</p>
<p>Depending on how you look at it, it’s either been making a mockery of the idea of an income test, or making the test more restrictive.</p>
<p>So how did it happen? Why is income “deemed” rather than actually measured when determining eligibility for government benefits, and is the system hopelessly compromised?</p>
<p>It’s important to understand what deeming is and where it came from if we are to understand the debate that will ensue when the government completes its <a href="https://thenewdaily.com.au/money/finance-news/2019/07/06/deeming-rates-retirees/">review of the deeming rate</a> in the next few weeks.</p>
<h2>Where did deeming come from?</h2>
<p>Modern day deeming was introduced by former prime minister Paul Keating in his final budget as treasurer in 1990.</p>
<p>As he explained in that <a href="https://bit.ly/2xKKRtz">budget speech</a>: </p>
<blockquote>
<p>many pensioners still disadvantage themselves by holding their savings in accounts that pay little or no interest</p>
</blockquote>
<p>He was being diplomatic. It was widely believed that many retirees deliberately earned low rates on their savings in order to qualify for the pension or get a bigger pension. It cost the government money (while making the banks money) and it cost many of the pensioners money, because they lost more in interest than they gained in pension – although for those that used low earnings to ensure they at least got some pension, the associated benefits cards made it worth it.</p>
<p>From March 1991 cash and deposits were to assumed to be earning at least 10%, whatever they actually earned. If they earned more than 10% they were treated as earning more.</p>
<p>Except for the first A$2000. That was treated as earning only what it did, because many pensioners held small savings in low interest accounts for day to day purchases.</p>
<h2>How has it changed?</h2>
<p>Deeming is different today. It applies to more assets, including gold,<br>
managed investments, superannuation account-based income streams and listed shares; and it is used to assess eligibility for more benefits, including veterans and disability pensions.</p>
<p>And it’s no longer a win-win for the government. If someone earns more than the deeming rate, their income is assessed at only the deeming rate.</p>
<p>In the words of the <a href="https://www.humanservices.gov.au/individuals/services/centrelink/age-pension/how-much-you-can-get/assets-test/assets/deeming">department of human services</a>:</p>
<blockquote>
<p>if your investment return is higher than the deemed rates, the extra amount doesn’t count as your income</p>
</blockquote>
<p>There are two rates: one for the first $51,800 of financial assets (for a couple, the first $86,200) which is currently 1.75%, and the other for those assets in excess of that amount, which is currently 3.25%.</p>
<p>The threshold climbs <a href="http://guides.dss.gov.au/guide-social-security-law/4/4/1/20">in line with the consumer price index</a> each July.</p>
<p>(In its first budget in 2014 the Abbott government tried to <a href="https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/pubs/rp/BudgetReview201415/Indexation">cut the threshold</a> to $30,000 for singles and $50,000 for couples but was thwarted by the Senate.)</p>
<h2>We deem by whim…</h2>
<p>But there’s nothing automatic about setting the rates. It’s up to the government (specifically the <a href="http://guides.dss.gov.au/guide-social-security-law/4/4/1/20">minister for families and social services</a>) to adjust them, or not, as it sees fit.</p>
<p>Both the high and low deeming rate used to be below the Reserve Bank’s cash rate (with the low rate typically 1.5 to 2 percentage points below the high rate), but after the cash rate dived in 2016 they have been left above it, in the case of the low rate, for <a href="http://guides.dss.gov.au/guide-social-security-law/4/4/1/10">the first time ever</a>.</p>
<p>The high deeming rates mean many applicants are being means tested on income they haven’t received.</p>
<hr>
<p><strong>Deeming rates versus RBA cash rate, 1996 - 2019, per cent</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/283959/original/file-20190714-173342-lcrcvo.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/283959/original/file-20190714-173342-lcrcvo.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/283959/original/file-20190714-173342-lcrcvo.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=215&fit=crop&dpr=1 600w, https://images.theconversation.com/files/283959/original/file-20190714-173342-lcrcvo.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=215&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/283959/original/file-20190714-173342-lcrcvo.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=215&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/283959/original/file-20190714-173342-lcrcvo.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=270&fit=crop&dpr=1 754w, https://images.theconversation.com/files/283959/original/file-20190714-173342-lcrcvo.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=270&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/283959/original/file-20190714-173342-lcrcvo.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=270&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="http://guides.dss.gov.au/guide-social-security-law/4/4/1/10">Australian government, RBA</a></span>
</figcaption>
</figure>
<hr>
<h2>…leaving rates curiously out of whack</h2>
<p>Back when the deeming rates were lower relative to deposit rates, each of the big four banks offered “<a href="https://www.canstar.com.au/savings-accounts/what-is-a-deeming-account-and-what-interest-rate-does-it-earn/">deeming accounts</a>” that paid the deeming rates.</p>
<p>Today none of them do. They are not allowed to call accounts deeming accounts unless they pay the deeming rate, so instead they have retitled them “retirement accounts”. </p>
<p>The National Australia Bank’s retirement account (closed to new customers) pays just <a href="https://www.nab.com.au/personal/interest-rates-fees-and-charges/indicator-rates-deposit-products">0.20%</a> for the first $10,000, well below the lowest deeming rate of 1.75%. The ANZ and the Commonwealth pay 0.25%. Westpac pays 0.3%. If you have more than $250,000 on deposit it pays <a href="https://www.westpac.com.au/personal-banking/bank-accounts/transaction/choice/deeming/">1.5%</a> on the part above $250,000, which is still lower than the lowest of the two deeming rates.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/why-pensioners-are-cruising-their-way-around-budget-changes-42544">Why pensioners are cruising their way around budget changes</a>
</strong>
</em>
</p>
<hr>
<p>Labor believes that not cutting deeming rates since 2015 has saved the government more than <a href="https://www.afr.com/news/economy/labor-s-deeming-rate-reduction-to-cost-1b-20190707-p524xt">$1 billion per year</a> in pension payments. It’s a significant portion of the $7.1 billion surplus it has forecast for 2019-20.</p>
<p>That is probably why the government has said it will take its decision about rates to its <a href="https://www.afr.com/news/politics/national/pensioners-face-deeming-delay-until-september-20190708-p5256u">expenditure review committee</a>, in what amounts to an admission that those decisions have as much to do with government finances as they do with treating applicants for pensions fairly.</p>
<h2>There’s actually a case for extending deeming</h2>
<p>As unrealistic as deeming rates have become, there’s a case for extending their use.</p>
<p>At the moment applicants for the pension face two means tests: one for assets and one for income. </p>
<p>Both the <a href="https://bit.ly/2LM3sxI">Henry Tax Review</a> and the Abbott government’s <a href="https://www.ncoa.gov.au/sites/g/files/net4136/f/phase_one_report.pdf">National Commission of Audit</a> recommended replacing them with a “merged means test” of the kind Australia had up until the 1970s. </p>
<p>Instead of an assets test, all assets would be deemed to earn a prudent rate of return; among them cars, holiday homes, investment properties, and high-value family homes. </p>
<p>The Commission put the case this way:</p>
<blockquote>
<p>Exempting the principal residence from the means test is inequitable as it allows for high levels of wealth to be sheltered from means testing. For example, under current rules a single person who owns a $400,000 house and has $750,000 in shares ($1.15 million in total assets) would not be eligible for the pension, while a similar person with a principal residence worth $2 million and $100,000 in shares ($2.1 million in total assets) would be able to claim a pension at the full rate.</p>
</blockquote>
<p>It’s a worthwhile idea whose time might come, but it is unlikely to come while deeming rates are seen to be unfair and capriciously set.</p>
<p>The government has an opportunity to restore confidence in deeming and pensions. The decisions it is about to make will show how important it thinks that is.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/words-that-matter-whats-a-franking-credit-whats-dividend-imputation-and-whats-retiree-tax-111423">Words that matter. What’s a franking credit? What’s dividend imputation? And what's 'retiree tax'?</a>
</strong>
</em>
</p>
<hr>
<img src="https://counter.theconversation.com/content/120089/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Peter Martin does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>It’s a good idea to deem income, but of late we’ve doing it badly.Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1200022019-07-09T20:12:38Z2019-07-09T20:12:38ZSuper shock: more compulsory super would make Middle Australia poorer, not richer<figure><img src="https://images.theconversation.com/files/283246/original/file-20190709-44448-vqy8km.jpg?ixlib=rb-1.1.0&rect=287%2C353%2C3251%2C1359&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Open and shut. Most Australians would be worse off over their lifetimes if compulsory super contributions were lifted.</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>Compulsory superannuation was <a href="http://www.keating.org.au/shop/item/the-story-of-modern-superannuation-31-october-2007">sold</a> to Australians on the basis that it would make us better off. </p>
<p>But as the government prepares for an <a href="https://www.afr.com/news/policy/tax/retirement-incomes-face-review-20190524-p51qsi">independent inquiry</a> into retirement incomes, <a href="https://blog.grattan.edu.au/2019/07/more-compulsory-super-hurts-middle-australia-however-you-look-at-it/">new Grattan Institute research</a> finds that increasing compulsory contributions from 9.5% of wages to 12%, as has been legislated, would leave many Australian workers poorer over their entire lifetimes.</p>
<p>They would sacrifice a significantly increased share of their lifetime wage in exchange for little or no increase in their retirement income. </p>
<p>The typical worker would lose about A$30,000 over her or his lifetime.</p>
<h2>More compulsory super means lower wages</h2>
<p>Superannuation delivers higher incomes in retirement at the expense of lower incomes while working. </p>
<p>Yet the superannuation lobby usually presents <a href="https://www.afr.com/personal-finance/superannuation-and-smsfs/australians-don-t-want-a-dickensian-retirement-20190530-p51sq5">only one side of the pact</a>, urging an increase in compulsory super to get the higher retirement incomes while ignoring the income that workers have to forgo to get them.</p>
<p>Compulsory super contributions are paid by employers. But <a href="https://blog.grattan.edu.au/2019/04/do-superannuation-increases-come-out-of-workers-wages/">they appear</a> to come out of funds the employers would otherwise have spent on wages.</p>
<p>This means increases in compulsory super come at the expense of wage increases – something that was acknowledged when compulsory super was set up (indeed, it was <a href="https://www.abc.net.au/radionational/programs/saturdayextra/unfair-super/3231046">part of the reason it was set up</a>) and has been <a href="https://www.abc.net.au/radionational/programs/saturdayextra/unfair-super/3231046">acknowledged</a> by advocates of higher contributions, including the former opposition leader Bill Shorten).</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/productivity-commission-finds-super-a-bad-deal-and-yes-it-comes-out-of-wages-109638">Productivity Commission finds super a bad deal. And yes, it comes out of wages</a>
</strong>
</em>
</p>
<hr>
<p>Grattan Institute calculations suggest that lifting compulsory super to 12% by 2025 will take up to <a href="https://theconversation.com/20-billion-per-year-thats-how-much-higher-superannuation-could-take-from-wages-116353">A$20 billion a year</a> from workers’ pockets. For most, the trade-off isn’t worth it.</p>
<p>The reality is that most Australians can already look forward to a <a href="https://theconversation.com/why-we-should-worry-less-about-retirement-and-leave-super-at-9-5-106237">better living standard in retirement</a> than they had while working – even if they <a href="https://insidestory.org.au/the-reassuring-truth-about-retirement-incomes/">interrupt their careers</a> to care for children. Workers with interrupted employment histories lose super in retirement, but get larger part-pensions. </p>
<p>The poorest Australians get a clear pay rise when they retire: the age pension is worth more than their after-tax income while working.</p>
<p>Other Grattan Institute research finds retirees are <a href="https://grattan.edu.au/report/money-in-retirement/">more comfortable financially</a> than any other group of Australians and are much less likely to suffer financial stress than working-age Australians.</p>
<h2>It needn’t lead to better retirement</h2>
<p>So what about Middle Australia?</p>
<p>Despite the “<a href="https://www.smh.com.au/money/investing/save-early-and-often-to-harness-the-power-of-compound-interest-20180201-h0rvwq.html">magic</a>” of compound returns, just about all of the extra income from a higher super balance at retirement would be offset by lower pension payments, due to the pension assets test. </p>
<p>It is always possible the pension rules will change, but it isn’t usually regarded as wise to assess proposals on the basis of changes that haven’t happened and aren’t being suggested. </p>
<p>Pension payments themselves would also be lower under a 12% superannuation regime. They are <a href="https://www.dss.gov.au/our-responsibilities/seniors/benefits-payments/pension-rates">benchmarked to wages</a>, which would be lower if employers have to put more into super.</p>
<p>The graph below shows that the big winners from higher compulsory super would be the wealthiest 20% of Australian earners, who would benefit from extra super tax breaks and would be unlikely to receive the age pension anyway. </p>
<p>Higher compulsory super redistributes income from the middle to the top. Middle earners would be no better off.</p>
<hr>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/283240/original/file-20190709-44472-ai5pg0.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/283240/original/file-20190709-44472-ai5pg0.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/283240/original/file-20190709-44472-ai5pg0.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=338&fit=crop&dpr=1 600w, https://images.theconversation.com/files/283240/original/file-20190709-44472-ai5pg0.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=338&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/283240/original/file-20190709-44472-ai5pg0.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=338&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/283240/original/file-20190709-44472-ai5pg0.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=424&fit=crop&dpr=1 754w, https://images.theconversation.com/files/283240/original/file-20190709-44472-ai5pg0.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=424&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/283240/original/file-20190709-44472-ai5pg0.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=424&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
</figcaption>
</figure>
<hr>
<h2>Over a lifetime, it could be a net loss</h2>
<p>As higher compulsory super would leave Middle Australians no better off in retirement, but poorer while working, it follows that it would make them poorer over their entire lives.</p>
<p>How much poorer? We calculate that, after adjusting for inflation, the typical (median) 30-year-old Australian worker earning A$58,000 today would lose about 2.5% of wages each year and get less than a 1% boost to retirement income. </p>
<p>As a result, that person’s lifetime income would be almost 1% lower – about A$30,000 lower. </p>
<p>A post published on the <a href="https://blog.grattan.edu.au/2019/07/more-compulsory-super-hurts-middle-australia-however-you-look-at-it/">Grattan Blog</a> today gives more detail on the method we used to calculate the impact of higher compulsory super on lifetime incomes.</p>
<hr>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/283187/original/file-20190709-51273-1u9ttt7.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/283187/original/file-20190709-51273-1u9ttt7.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/283187/original/file-20190709-51273-1u9ttt7.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=361&fit=crop&dpr=1 600w, https://images.theconversation.com/files/283187/original/file-20190709-51273-1u9ttt7.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=361&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/283187/original/file-20190709-51273-1u9ttt7.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=361&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/283187/original/file-20190709-51273-1u9ttt7.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=454&fit=crop&dpr=1 754w, https://images.theconversation.com/files/283187/original/file-20190709-51273-1u9ttt7.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=454&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/283187/original/file-20190709-51273-1u9ttt7.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=454&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<h2>And it would cost the budget</h2>
<p>Higher compulsory super might be justified if it saved the budget money on the pension – because those savings could be used to compensate middle-income earners via lower taxes or more services. </p>
<p>But in fact, higher super would cost the budget.</p>
<p>Our modelling shows that lifting compulsory super to 12% of wages would cost taxpayers an extra <a href="https://grattan.edu.au/report/money-in-retirement/">A$2 billion to A$2.5 billion</a> per year in super tax breaks, <a href="https://grattan.edu.au/report/super-tax-targeting/">overwhelmingly</a> directed at high-income earners.</p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/boosting-super-will-cost-the-budget-more-than-it-saves-on-age-pensions-119002">Boosting super will cost the budget more than it saves on age pensions</a>
</strong>
</em>
</p>
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<p>Those extra super tax breaks would <a href="https://treasury.gov.au/sites/default/files/2019-03/super_charter_report.pdf">dwarf</a> any budget savings on the age pension until about 2060 – by which time there would be 80 years of budget costs from compulsory super to pay back before the whole exercise saved the government money.</p>
<p>Here’s the bottom line, worth keeping in mind in the lead-up to the independent inquiry: it’s hard to think of a policy less in the interests of working Australians than more compulsory super.</p><img src="https://counter.theconversation.com/content/120002/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Grattan Institute began with contributions to its endowment of $15 million from each of the Federal and Victorian Governments, $4 million from BHP Billiton, and $1 million from NAB. In order to safeguard its independence, Grattan Institute’s board controls this endowment. The funds are invested and contribute to funding Grattan Institute's activities. Grattan Institute also receives funding from corporates, foundations, and individuals to support its general activities, as disclosed on its website. Brendan Coates does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p><p class="fine-print"><em><span>Grattan Institute began with contributions to its endowment of $15 million from each of the Federal and Victorian Governments, $4 million from BHP Billiton, and $1 million from NAB. In order to safeguard its independence, Grattan Institute’s board controls this endowment. The funds are invested and contribute to funding Grattan Institute's activities. Grattan Institute also receives funding from corporates, foundations, and individuals to support its general activities, as disclosed on its website.</span></em></p>New calculations suggest middle earners will earn less over their lives if compulsory super is ramped up from 9.5% of salary to 12% as scheduled.Brendan Coates, Program Director, Household Finances, Grattan InstituteOwain Emslie, Associate, Grattan InstituteLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1190022019-06-19T19:59:06Z2019-06-19T19:59:06ZBoosting super will cost the budget more than it saves on age pensions<figure><img src="https://images.theconversation.com/files/280151/original/file-20190619-52775-14iw1l.jpg?ixlib=rb-1.1.0&rect=152%2C497%2C3696%2C1528&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Compulsory super takes money out of the government's coffers faster than savings on the pension put it back in.</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>It is often <a href="https://www.theaustralian.com.au/nation/super-system-exposed-by-cost-of-tax-concessions/news-story/c2b6ec11b7a91d826b47bfc368f525ed">claimed</a> that Australia’s superannuation system will ease the budgetary burden of an ageing population. It’s certainly <a href="https://thenewdaily.com.au/money/superannuation/2019/05/03/super-increase-cut-incomes/">the impression put about</a> by those pushing for an increase in employers’ compulsory contributions from 9.5% to 12%. </p>
<p>But new estimates suggest that for up to a century that wouldn’t be the case. Indeed, for decades to come, an increase in compulsory super contributions of the kind <a href="https://thenewdaily.com.au/money/superannuation/2019/03/26/superannuation-guarantee-increase-australia/">Labor is committed to</a> and the Coalition <a href="https://www.superguide.com.au/boost-your-superannuation/superannuation-guarantee-rate">has legislated</a> would add to, rather than ease, the burden on taxpayers. </p>
<p>That’s in addition to the <a href="https://theconversation.com/20-billion-per-year-thats-how-much-higher-superannuation-could-take-from-wages-116353">A$20 billion a year</a> such an increase would take from workers’ salaries each year, often <a href="https://grattan.edu.au/news/three-retirement-income-priorities-for-the-returned-morrison-government/">without giving them</a> a better income in retirement.</p>
<h2>Here’s why super is a burden on the budget</h2>
<p>It is evidence that will be crucial to the inquiry into Australia’s retirement system <a href="https://www.afr.com/news/policy/tax/retirement-incomes-face-review-20190524-p51qsi">foreshadowed by Treasurer Josh Frydenberg</a>.</p>
<p>It isn’t that superannuation doesn’t save the government money on pensions, it is that it costs it more in tax breaks than it saves on the pension.</p>
<p>The money employers pay into super accounts doesn’t come from nowhere. Most of it comes from money employers <a href="https://theconversation.com/20-billion-per-year-thats-how-much-higher-superannuation-could-take-from-wages-116353">would have paid out as wages</a>, taxed at the appropriate tax rate. Paid into super accounts, it is generally taxed at only 15%, a concession the Treasury believes will cost <a href="https://treasury.gov.au/publication/p2019-357183">A$17 billion</a> next financial year.</p>
<p>Lifting compulsory super from 9.5% to 12% as is legislated over the five years from 2021 to 2025 will deprive the Treasury of an extra <a href="https://grattan.edu.au/report/money-in-retirement/">A$2 billion to A$2.5 billion</a> per year.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/frydenberg-should-call-a-no-holds-barred-inquiry-into-superannuation-now-because-labor-wont-114079">Frydenberg should call a no-holds-barred inquiry into superannuation, now, because Labor won't</a>
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<p>In 2013 the Treasury estimated that the revenue forgone from tax breaks from compulsory super overall, including after contributions were lifted from 9% to 12% would exceed the budget savings on the pension <a href="https://treasury.gov.au/sites/default/files/2019-03/super_charter_report.pdf">by 0.4% of GDP a year</a>. </p>
<p>Eventually – by 2050 – the net budgetary cost of super tax breaks would be “only” 0.2% of GDP a year. The cost of the tax breaks would continue to exceed the savings on the pension until about 2060, with the resulting debt not paid off in savings on the pension for decades.</p>
<h2>The latest projections are bleaker</h2>
<p>More <a href="https://www.ricewarner.com/wp-content/uploads/2019/01/Insight_-Productivity-Commission-Final-Report-A.pdf">recent modelling</a> from actuarial firm Rice Warner paints an even worse budgetary picture. </p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/280165/original/file-20190619-171192-pibzw3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/280165/original/file-20190619-171192-pibzw3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/280165/original/file-20190619-171192-pibzw3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=963&fit=crop&dpr=1 600w, https://images.theconversation.com/files/280165/original/file-20190619-171192-pibzw3.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=963&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/280165/original/file-20190619-171192-pibzw3.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=963&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/280165/original/file-20190619-171192-pibzw3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1210&fit=crop&dpr=1 754w, https://images.theconversation.com/files/280165/original/file-20190619-171192-pibzw3.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1210&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/280165/original/file-20190619-171192-pibzw3.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1210&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="attribution"><a class="source" href="https://www.ato.gov.au/rates/key-superannuation-rates-and-thresholds/?anchor=Superguaranteepercentage">Source: Australian Tax Office</a></span>
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</figure>
<p>It finds that lifting compulsory super contributions to 12% “will not have much impact on the age pension for many years”, and will save the budget only about 0.1% of GDP in lower age pension spending in the second half of this century.</p>
<p>In contrast, the extra super tax breaks from higher compulsory super will cost an average of 0.22% of GDP “throughout this century”. In other words, the government wouldn’t break even on compulsory super until well into the 22nd century.</p>
<p>And the latest Rice Warner modelling shows that lifting compulsory super contributions even further, to 20%, would <a href="https://www.ricewarner.com/what-is-the-right-level-of-sg/#_ftnref1">barely change the future trajectory of age pension spending</a>.</p>
<p>Age pension spending would fall by just 0.2% of GDP by 2050 and 0.3% by 2100, while the budget cost of the super tax breaks climbed to 0.8% of GDP by 2050 and 0.6% by 2100.</p>
<p>The budget cost of higher compulsory super would be lower if super tax breaks were wound back. But super tax breaks would need to be cut by about A$10 billion a year – out of about <a href="https://grattan.edu.au/wp-content/uploads/2018/11/912-Money-in-retirement.pdf">A$30 billion</a> – before compulsory super would start to save the budget real money. </p>
<p>The Turnbull government’s package of super tax changes in 2016 saved only <a href="https://grattan.edu.au/wp-content/uploads/2016/09/876-A-better-super-system.pdf">A$750 million</a> per year. </p>
<h2>We are indeed spending less on the pension</h2>
<p>Spending on the age pension is slowing, despite the ageing of Australia’s population. Australia spends just 4% of GDP on pension benefits (including disability and other pensions) and is expected to spend just <a href="https://grattan.edu.au/report/commonwealth-orange-book-2019/">3.7%</a> by 2055. The OECD average is 9%.</p>
<p>In the main, this is because of the design of our scheme. Australia’s age pension is more <a href="https://taxpolicy.crawford.anu.edu.au/sites/default/files/uploads/taxstudies_crawford_anu_edu_au/2018-12/combined_pdf_whiteford_trends_in_soc_sec_spending_2017.pdf">tightly means-tested</a> than those elsewhere, and the maximum rate is the same for everyone, rather than set as a proportion of workers’ pre-retirement earnings. </p>
<p>And the income and assets test thresholds are indexed to inflation rather than living standards. If living standards grow 1% faster than inflation, as they have, the real value of the thresholds will fall by a third over a working life, cutting the pension to which Australians are entitled.</p>
<h2>But that’s how it’s designed</h2>
<p>Compulsory super has also played a part. Under the income and assets test, retired Australians with large super savings are often eligible for only a part-pension or no pension. </p>
<p>The Association of Superannuation Funds of Australia estimates that age pension spending is <a href="https://www.theaustralian.com.au/nation/super-system-exposed-by-cost-of-tax-concessions/news-story/c2b6ec11b7a91d826b47bfc368f525ed">A$9 billion lower</a> than it would be without compulsory super. $9 billion is a fraction of the <a href="https://grattan.edu.au/wp-content/uploads/2018/11/912-Money-in-retirement.pdf">A$30 billion </a>cost of super tax breaks. Although there is <a href="https://grattan.edu.au/wp-content/uploads/2017/09/Submission-to-Treasury-TES-consultation-paper-25-September-2017-FINAL.pdf">debate</a> about how to measure the total cost of those concessions, there is no debate that they cost the budget more than they save.</p>
<p>Lifting compulsory super to 12% of wages would cost even more, at a time when the budget isn’t flush with funds. </p>
<p>Whatever other arguments there are for lifting compulsory super contributions, and I <a href="https://theconversation.com/why-we-should-worry-less-about-retirement-and-leave-super-at-9-5-106237">do not think there are many</a>, the argument that it will safeguard the budget against the costs of ageing cannot be among them.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/why-we-should-worry-less-about-retirement-and-leave-super-at-9-5-106237">Why we should worry less about retirement - and leave super at 9.5%</a>
</strong>
</em>
</p>
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<img src="https://counter.theconversation.com/content/119002/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Grattan Institute began with contributions to its endowment of $15 million from each of the Federal and Victorian Governments, $4 million from BHP Billiton, and $1 million from NAB. In order to safeguard its independence, Grattan Institute’s board controls this endowment. The funds are invested and contribute to funding Grattan Institute's activities. Grattan Institute also receives funding from corporates, foundations, and individuals to support its general activities, as disclosed on its website.
Brendan Coates does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>It is widely believed that compulsory super saves the government money on pensions. It does, but nowhere near enough to pay for the accompanying tax concessions. Lifting compulsory contributions will make things worse, for a century.Brendan Coates, Program Director, Economic Policy, Grattan InstituteLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1008442018-08-03T08:56:41Z2018-08-03T08:56:41ZBritain’s great pension robbery – why the ‘defined benefits’ gold standard is a luxury of the past<figure><img src="https://images.theconversation.com/files/230407/original/file-20180802-136655-w7t3p7.jpg?ixlib=rb-1.1.0&rect=8%2C127%2C5652%2C3403&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com">Shutterstock</a></span></figcaption></figure><p>The provision of defined benefit pension schemes has been dwindling almost to extinction in Britain over the past 20 years. It used to be the norm that you’d qualify for a pension that was determined by your final salary on retirement and the number of years of service at the company. But these gold standard schemes are rarely offered to new employees anymore and those with existing ones increasingly find theirs at risk of change. </p>
<p>Let’s be clear: there has not just been one pension “thief”. In my view, there has been a coalition of culprits who through their own greed, selfishness and regulatory incompetence have systematically raided workers’ employer’s defined benefit pension funds. Listed on the charge sheet are a muddled assortment of inept and grasping politicians, some misguided accountants and ultra-cautious actuaries, a complacent Bank of England, a docile pension regulator and, finally, increasingly indifferent and uncaring employers. </p>
<p>An employee’s defined benefit pension became the norm after World War II and private sector pensions peaked in 1967 with <a href="http://www.pensionspolicyinstitute.org.uk/briefing-notes/briefing-note-86---defined-benefits-today-and-tomorrow">more than 8m active members</a>. During an employee’s working life, they (and their employer) paid into a “ring-fenced” and safeguarded pension fund. On retirement, the employee received a guaranteed and often inflation-protected pension for life. Better still, all investment risk of the pension fund solely rested with the employer. Any poor returns or losses from dodgy investments within the pension scheme were down to the employer to make good. </p>
<p>But the pension tide has now drastically turned. LCP, a leading international actuarial firm, <a href="https://www.lcp.uk.com/pensions-benefits/publications/accounting-for-pensions-2018/">recently reported</a> that in 1993 “virtually all” FTSE 100 companies offered traditional final salary schemes to new employees. By 2018 “not a single one does”. </p>
<p>Worse, the abolition of these defined benefit schemes is not even being restricted to new employees. Companies are now coming after existing employees too. LCP points out that less than 50% of these FTSE 100 companies now provide “any form of ongoing defined benefit accrual to any of their [existing] UK employees”.</p>
<h2>Smash and grab</h2>
<figure class="align-right ">
<img alt="" src="https://images.theconversation.com/files/230408/original/file-20180802-136670-1kdhl9h.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/230408/original/file-20180802-136670-1kdhl9h.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=746&fit=crop&dpr=1 600w, https://images.theconversation.com/files/230408/original/file-20180802-136670-1kdhl9h.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=746&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/230408/original/file-20180802-136670-1kdhl9h.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=746&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/230408/original/file-20180802-136670-1kdhl9h.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=937&fit=crop&dpr=1 754w, https://images.theconversation.com/files/230408/original/file-20180802-136670-1kdhl9h.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=937&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/230408/original/file-20180802-136670-1kdhl9h.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=937&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Nigel Lawson.</span>
<span class="attribution"><a class="source" href="https://commons.wikimedia.org/wiki/File:Lord_Nigel_Lawson_(cropped).jpg">Wikimedia</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<p>Politicians from across the political spectrum have played their part in this. In 1988, Margaret Thatcher’s chancellor of the exchequer, Nigel Lawson, <a href="https://www.thetimes.co.uk/article/roots-of-pensions-debacle-traced-to-lawson-act-333ltkp2d3q">imposed a tax</a> on pension fund surpluses in a bid to stop pension schemes taking advantage of excessive tax relief to build up their reserves. This policy change led to many companies taking a “holiday” from contributing to their reserves, in order to avoid this tax. In turn, these pension holidays led to a depletion of rainy day pension fund surpluses.</p>
<p>Initially, this wasn’t a problem. Booming stock markets in the 1990s led to even fatter pension fund surpluses and this proved an irresistible target for the Blairite government that came to power in 1997. The chancellor, Gordon Brown, abolished substantial tax relief on dividends that pension funds received on their investments. </p>
<p>The financial effect of this tax snatch was colossal. It was <a href="https://www.ftadviser.com/2014/05/07/opinion/tony-hazell/savers-could-have-lost-bn-in-brown-s-pensions-raid-WTQAjLW5DSRp9HUxwNZN7K/article.html">estimated</a> that the loss of this tax relief had extracted, in total, over £118 billion of income by 2014. If this lost income had been even conservatively invested, pension funds may have benefited by an additional £230 billion. </p>
<figure class="align-left ">
<img alt="" src="https://images.theconversation.com/files/230409/original/file-20180802-136664-sorz4f.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/230409/original/file-20180802-136664-sorz4f.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=888&fit=crop&dpr=1 600w, https://images.theconversation.com/files/230409/original/file-20180802-136664-sorz4f.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=888&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/230409/original/file-20180802-136664-sorz4f.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=888&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/230409/original/file-20180802-136664-sorz4f.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1115&fit=crop&dpr=1 754w, https://images.theconversation.com/files/230409/original/file-20180802-136664-sorz4f.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1115&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/230409/original/file-20180802-136664-sorz4f.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1115&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Gordon Brown.</span>
<span class="attribution"><a class="source" href="https://commons.wikimedia.org/wiki/File:Gordon_Brown_Davos_2008_crop.jpg">World Economic Forum</a>, <a class="license" href="http://creativecommons.org/licenses/by-sa/4.0/">CC BY-SA</a></span>
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</figure>
<p>Other pension bogeymen include some accountants and actuaries. In the late 1990s, there was a <a href="http://www.theactuary.com/features/2017/05/clued-up-on-db-pension-obligations-and-risks/">major change</a> in both national and international financial reporting standards for company pension schemes – with little thought given to the consequences. For the first time, these new accounting rules (now termed <a href="https://www.iasplus.com/en-gb/standards/ias/ias19">IAS19</a> and <a href="https://www.icaew.com/technical/financial-reporting/new-uk-gaap/frs-102-the-financial-reporting-standard">FRS102</a>) required companies to recognise pension fund deficits in their own balance sheets. This soon resulted in multi-billion-pound financial black holes appearing in many company balance sheets, unsettling both boardrooms and shareholders. </p>
<p>Some believed that this was unnecessary. But, unlike other liabilities, these pension scheme deficits can significantly shrink and even disappear by themselves through investment growth over the decades. Nevertheless, employees received little sympathy from accounting regulators – even though accountants should have been fully aware the reporting changes would likely finally sign the death warrant for defined benefit schemes. </p>
<p>Some actuaries were also involved in the pension heist by often making unduly cautious assumptions in determining pension fund deficits. For example, it is now becoming apparent that actuaries previously overestimated pensioners’ life expectancy. However, <a href="https://www.lcp.uk.com/pensions-benefits/publications/accounting-for-pensions-2018/">as LCP now points out</a>, retired employees are failing to live as long as previously expected – meaning pension provision will now be less costly. </p>
<p>Some actuaries and accountants have also often been excessively conservative and highly risk adverse in valuing pension fund liabilities. These liabilities are largely pensions that are, or will be, paid to employees – often 30-40 years in the future. It is often assumed that pension fund investments will consist only of low risk and low interest rate bonds, rather than other assets such as equities and property with greater growth potential. Indeed, the Bank of England has also helped to keep these bond yields low by its prolonged imposition <a href="https://www.bankofengland.co.uk/boeapps/database/Bank-Rate.asp">of a low interest rate</a>. </p>
<p>The pensions regulator, meanwhile, has often been reticent about protecting the interests of employees and pensioners. It could, and should, have intervened much earlier to insist companies do more to financially assist struggling pension funds. For example, after retailer BHS’s collapse, <a href="http://www.bbc.co.uk/news/business-40421414">MPs suggested</a> that the regulator was asleep on the job in protecting pension fund members. </p>
<p>Finally, many company directors have frequently prioritised the interests of shareholders above members of pension schemes. LCP’s <a href="https://www.lcp.uk.com/pensions-benefits/publications/accounting-for-pensions-2018/">recent figures show</a> that in 2017 FTSE 100 companies paid out £80 billion in dividends to shareholders which “is six times higher than the £13 billion” that they injected into their UK pension schemes. </p>
<h2>Little consolation</h2>
<p>Instead of defined benefit schemes, most employees are now being offered various types of risky defined contribution schemes. This is where, in one form or another, pensions are solely dependent on the performance of the underlying investments.</p>
<p>It’s no consolation to employees, but it’s highly unlikely that defined schemes will ever be returned. By abolishing their defined benefit schemes, companies have removed their responsibilities for pension scheme investment risks, restricted pension black holes in their balance sheets and abolished the need to provide both regular contributions and one-off cash injections into their schemes. </p>
<p>Switching to defined contribution schemes means companies can reduce their pension contributions and pay higher dividends to shareholders. As a further disincentive to returning to defined benefit schemes, LCP <a href="https://www.lcp.uk.com/pensions-benefits/publications/accounting-for-pensions-2018/">warns</a> of more onerous accounting regulation on the horizon that may push defined benefit pension deficits up even more. Meanwhile, companies have largely washed their hands of pensioners’ financial welfare in retirement. Employees and their pensions will increasingly be at the mercy of financial markets.</p><img src="https://counter.theconversation.com/content/100844/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>John Stittle does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Employees and their pensions will increasingly be at the mercy of financial markets thanks to a coalition of culprits.John Stittle, Senior Lecturer in Accounting, University of EssexLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/979882018-06-07T21:01:43Z2018-06-07T21:01:43ZSocial Security’s future is safe<figure><img src="https://images.theconversation.com/files/222277/original/file-20180607-13677-vwp7ev.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Despite alarming news, retirees can still rely on their retirement nest eggs. </span> <span class="attribution"><span class="source">Dan Kosmayer/Shutterstock.com</span></span></figcaption></figure><p>Social Security is the bedrock of Americans’ retirement income security. So you may have been concerned by the news that the federal government <a href="https://www.marketwatch.com/story/new-warnings-about-cuts-to-social-security-and-medicare-are-a-reason-to-worry-2018-06-07">needed to dip</a> into the Social Security’s trust fund to pay for the program this year.</p>
<p>Does that mean Social Security’s future isn’t safe?</p>
<p>As an economist who <a href="https://scholar.google.com/citations?user=xhht0KcAAAAJ&hl=en&oi=ao">has written extensively</a> on retirement and Social Security, I believe the system’s problems are manageable. The only question is whether Congress has the political will to resolve them.</p>
<h2>A manageable problem</h2>
<p>Social Security benefits typically make up the <a href="https://www.ssa.gov/policy/docs/statcomps/income_pop55/2014/sect08.html#table8.a1">largest share of retirees’ incomes</a>, even though the average benefit is actually quite modest. In 2016, 41.2 million retired workers <a href="https://www.ssa.gov/policy/docs/statcomps/supplement/2017/5b.html#table5.b4">received an average monthly benefit</a> of US$1,360.13. </p>
<p>While <a href="https://theconversation.com/why-are-so-many-americans-struggling-to-save-for-retirement-53798">American families count</a> on this program, Social Security faces a long-term financial challenge, as the latest <a href="https://www.ssa.gov/news/press/releases/2018/?utm_source=facebook&utm_medium=social&utm_campaign=oea-blog&utm_content%20field=#6-2018-1">annual trustees report</a> shows. </p>
<p>Basically Social Security works like this: Today’s workers pay for the benefits of retirees via the payroll tax. For most of the past 35 years, workers paid more into the system than retirees received in benefits, creating a surplus that was invested in interest-accruing trust funds.</p>
<p>The <a href="https://www.ssa.gov/news/press/releases/2018/?utm_source=facebook&utm_medium=social&utm_campaign=oea-blog&utm_content%20field=#6-2018-1">trustees report</a> stated that the federal government will have to tap Social Security reserves to pay a small portion of promised benefits in the current fiscal year for the first time since 1982. They also projected Social Security can continue to pay 100 percent of benefits through 2034 by relying in part on the money in the trust funds. </p>
<p>At that point, the trust funds will be depleted, and Congress will need to decide whether to increase revenue, cut benefits or both. Otherwise, Social Security <a href="https://www.ssa.gov/news/press/releases/2018/?utm_source=facebook&utm_medium=social&utm_campaign=oea-blog&utm_content%20field=#6-2018-1">will be able to pay just 79 percent</a> of promised benefits in 2035 and a little less for the foreseeable future.</p>
<p>Social Security’s projected shortfalls over the coming decades are larger than initially estimated because, as <a href="https://www.americanprogress.org/issues/economy/reports/2015/02/10/106373/the-effect-of-rising-inequality-on-social-security/">my research has shown</a>, rising economic inequality has pushed more individual income beyond the reach of its payroll tax, which was capped at $127,200 in 2017. This has meant less revenue and higher costs than projected.</p>
<p>Despite the <a href="https://www.deseretnews.com/article/900020827/disaster-looms-for-social-security-and-no-one-seems-to-care.html">alarmist</a> <a href="http://thehill.com/opinion/finance/391192-as-demagogues-squawk-clock-is-ticking-on-social-security">headlines</a>, however, this is neither the end of the world or the end of Social Security. The trust funds were never intended to be left alone – and indeed <a href="https://www.ssa.gov/OACT/STATS/table4a3.html">have been tapped many times</a> since they started. </p>
<p>In other words, addressing the financial shortfall poses a manageable long-term challenge. For example, increasing the payroll tax by just 2.88 percentage points <a href="https://www.ssa.gov/OACT/TR/2018/II_D_project.html#105057">would cover</a> the expected shortfall over the next 75 years. </p>
<p>The annual shortfall is also equivalent to about 1 percent of U.S. gross domestic product. To put this in perspective, that’s less than the 1.4 percent of GDP the recent <a href="https://www.cbo.gov/system/files/115th-congress-2017-2018/costestimate/53437-wydenltr.pdf">tax cuts are projected to cost</a> in 2019. </p>
<p>Paying for Social Security’s long-term financial shortfall is a matter of policy choices and political will. In my opinion, it is not an insurmountable economic obstacle.</p><img src="https://counter.theconversation.com/content/97988/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Christian Weller has received funding from AARP. Christian Weller is a senior fellow with the Center for American Progress. </span></em></p>Social Security will have to dip into its trust fund to pay benefits this year for the first time since 1982. Should we be worried?Christian Weller, Professor of Public Policy and Public Affairs, UMass BostonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/916642018-03-05T19:21:52Z2018-03-05T19:21:52ZHome ownership foundations are being shaken, and the impacts will be felt far and wide<p>The nature of the centrepiece of the Australian housing system – owner occupation – is quietly <a href="http://onlinelibrary.wiley.com/doi/10.1111/1467-8462.12220/abstract">undergoing a profound transformation</a>. Once taken for granted by the mainstream, home ownership is increasingly precarious. At the margins, which are wide, it is as if a whole new form of tenure has emerged. </p>
<p>Whatever the drivers, significant and lasting shifts are shaking the foundations of home ownership. The effects are far-reaching and could undermine both the financial and wider well-being of all Australian households. </p>
<p>Over the course of 100 years, Australians became accustomed to smooth housing pathways from leaving the parental home to owning their house outright. However, not only did the 2008-09 global financial crisis (GFC) underline the risk of <a href="http://journals.sagepub.com/doi/abs/10.1177/0042098014550955">dropping out</a> along the way, but more recent Australian evidence has shown that the old pathways have been displaced by more uncertain routes that <a href="https://theconversation.com/australians-less-likely-to-survive-home-ownership-than-britons-45363">waver between owning and renting</a>. </p>
<p>The Household, Income and Labour Dynamics in Australia (HILDA) Survey indicates that, during the first decade of the new millennium, <a href="https://www.ahuri.edu.au/research/final-reports/216">1.9 million spells</a> of home ownership ended with a move into renting (one-fifth of all home ownership spells that were ongoing in that period). It also shows that among those who dropped out, nearly two-thirds had returned to owning by 2010. Astonishingly, some 7% “churned” in and out of ownership more than once. Many households no longer either own or rent; they hover between sectors in a “third” way. </p>
<p>The <a href="https://www.ahuri.edu.au/research/final-reports/187">drivers</a> of this transformation include an ongoing imperative to own, vying with the factors that oppose this – rising divorce rates, soaring house prices, growing mortgage debt, insecure employment and other circumstances that make it difficult to meet home ownership’s outlays. </p>
<p>Those who use <a href="https://theconversation.com/your-home-as-an-atm-home-equity-a-risky-welfare-tool-22000">the family home as an “ATM”</a> are at added risk. This relatively new way of juggling mortgage payments, savings and pressing spending needs makes some styles of owner occupation more marginal – as the tendency is to borrow up, rather than pay down, mortgage debts over the life course.</p>
<h2>A retirement incomes system under threat</h2>
<p>Since its inception, the means-tested age pension system has been set at a low fixed amount. Retired Australians could nevertheless get by provided they achieved <a href="https://www.ahuri.edu.au/research/final-reports/187">outright home ownership soon enough</a>. The low housing costs associated with outright ownership in older age were effectively a central plank of Australian social policy.</p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/208828/original/file-20180304-65541-102taz3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/208828/original/file-20180304-65541-102taz3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/208828/original/file-20180304-65541-102taz3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=629&fit=crop&dpr=1 600w, https://images.theconversation.com/files/208828/original/file-20180304-65541-102taz3.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=629&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/208828/original/file-20180304-65541-102taz3.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=629&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/208828/original/file-20180304-65541-102taz3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=791&fit=crop&dpr=1 754w, https://images.theconversation.com/files/208828/original/file-20180304-65541-102taz3.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=791&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/208828/original/file-20180304-65541-102taz3.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=791&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">The retirement incomes system was built on assumptions about home ownership that are increasingly unreliable.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/married-couple-retirement-age-sitting-on-767669734?src=Bw1ze7qqtza4zwgD8hIGcw-5-63">Evgeniy Kalinovskiy/Shutterstock</a></span>
</figcaption>
</figure>
<p>This worked well from the 1950s for nearly half a century. But now growing numbers of <a href="https://www.ahuri.edu.au/research/position-papers/153">people retire with a mortgage debt overhang</a> or as <a href="https://www.ahuri.edu.au/research/final-reports/156">lifetime renters</a> grappling with the costs of insecure private rental tenancies.</p>
<p>Moreover, developments in the Australian housing system could undermine a second retirement incomes pillar – the superannuation guarantee. An important <a href="https://treasury.gov.au/programs-and-initiatives-superannuation/charter-of-superannuation-adequacy/report/part-4/">goal of the superannuation guarantee is financial independence in old age</a>. But if superannuation pay-outs are used to repay mortgage debts on retirement, reliance on age pensions will grow rather than recede.</p>
<h2>A shrinking asset base for welfare</h2>
<p>Home ownership is retreating at a time when income inequalities are the <a href="http://wid.world/country/australia">highest in nearly seven decades</a> and governments are eyeing housing wealth as an <a href="http://www.pc.gov.au/research/completed/housing-decisions-older-australians">asset base for welfare</a>. </p>
<p>Such policy interest is not surprising. Housing wealth dominates the asset portfolios of the majority of Australian households, boosted by soaring house prices. If home owners can be encouraged or even compelled to draw on their housing assets to fund spending needs in retirement, this will ease fiscal pressures in an era of population ageing. </p>
<p>However, the welfare role of home ownership is already important in the earlier stages of life cycles. Financial products are increasingly being used to <a href="http://www.tandfonline.com/doi/abs/10.1080/02673037.2013.7832020">release housing equity</a> in pre-retirement years. This adds to the debt overhang as retirement age approaches. It also increases exposure to credit and investment risks that could undermine stability in housing markets.</p>
<h2>A gender equity issue</h2>
<p>A commonly overlooked angle relates to gender equity. Australian women own less wealth than men, and they also hold more housing-centric asset portfolios. </p>
<p>Estimates from the 2014 HILDA Survey wealth module show that the family home makes up <a href="http://theconversation.com/women-rely-on-the-family-home-to-support-them-in-old-age-76703">nearly half of the total assets owned by single women</a>, compared to 39% for single men. Women are also more likely to <a href="https://www.ahuri.edu.au/research/final-reports/217">sell their family home</a> to pay for financial emergencies. </p>
<p>Hence, women are more exposed to housing market instability associated with precarious home ownership. Single women are especially vulnerable to investment risk when they seek to realise their assets.</p>
<h2>A neglected economic lever</h2>
<p>Housing and mortgage markets played a central role in the GFC. Today, it is widely agreed that resilient housing and mortgage markets are important for overall economic and financial stability. There are also concerns that the post-GFC debt overhang is a drag on economic growth.</p>
<p>However, the policy stance in the wake of the GFC has been “<a href="https://tannerlectures.utah.edu/lecture-library.php#s">business as usual</a>”. There has been very little real innovation in the world of housing finance or mortgage contract design in recent years. This might change if housing were steered from the periphery to a more central place in national economic debates. </p>
<h2>Forward-looking policy response is needed</h2>
<p>Growing numbers of Australians clearly face an uncertain future in a changing housing system. The traditional tenure divide has been displaced by unprecedented fluidity as people juggle with costs, benefits, assets and debts “in between” renting and owning. </p>
<p>This expanding arena is strangely neglected by policy instruments and financial products. Politicians cling to an outdated vision of linear housing careers that does little to meet the needs of “at risk” home owners, locked-out renters, or churners caught between the two. </p>
<p>The hazards of a destabilising home ownership sector are wide-ranging, rippling well beyond the realm of housing. Part of the answer is a new drive for sustainability, based on a housing system for Australia that is more inclusive and less tenure-bound.</p><img src="https://counter.theconversation.com/content/91664/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Rachel Ong has received funding from the Australian Housing and Urban Research Institute (AHURI).</span></em></p><p class="fine-print"><em><span>Gavin Wood receives funding from the Australian Housing and Urban Research Institute. </span></em></p><p class="fine-print"><em><span>Susan Smith has received funding from the ARC, AHURI, RMIT University and Curtin University, as well as British social science funding agencies, principally the ESRC</span></em></p>Increasingly insecure pathways to home ownership are not just a problem for property markets. The fallout is likely to hit retirement incomes, the welfare base, gender equity and the broader economy.Rachel Ong ViforJ, Professor of Economics, School of Economics and Finance, Curtin UniversityGavin Wood, Emeritus Professor of Housing and Housing Studies, RMIT UniversitySusan Smith, Honorary Professor of Geography, University of CambridgeLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/468862015-09-02T02:32:56Z2015-09-02T02:32:56ZOur super system isn’t perfect - but for a failure, look to the US<figure><img src="https://images.theconversation.com/files/93422/original/image-20150831-25771-bkomzx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The compulsory super scheme in Australia is clearly superior to the voluntary 401(k) scheme utilised by the United States.</span> <span class="attribution"><span class="source">Image sourced from www.shutterstock.com</span></span></figcaption></figure><p>Debate swirls around the strengths and weaknesses of Australia’s superannuation system. But there is one aspect where change should not be countenanced: its compulsory nature. </p>
<p>As an American Fulbright scholar studying workplace retirement schemes, I am undertaking a comparative analysis of super with the American 401(k) workplace retirement system. </p>
<p>There are many subtleties and nuances to be discussed concerning which occupational retirement system is better in areas as diverse as member engagement, corporate governance, and the best way for individuals to spend-down their funds in retirement. </p>
<p>One thing, however, is clear: the compulsory super scheme in Australia is clearly
superior to the voluntary 401(k) scheme utilised by the United States. As a result, whereas the American retirement system is in full-out crisis mode, the Australian super scheme is comparatively tranquil and well set up to continue to mature as the overall Australian population ages throughout the 21st century. </p>
<p>To share just a few of the more galling statistics from the world of voluntary American 401(k) retirement plans: 48% of current US workers between the ages of 50 and 64 are on track to being poor when they reach retirement; the aggregate national retirement deficit number is currently estimated to be $4.13 trillion for all US households where the head of the household is between 25 and 64, and, on average, a typical working family in the anteroom of retirement — headed by somebody 55 to 64 years old — has only about $104,000 in retirement savings, according to the US Federal Reserve’s Survey of Consumer Finances. </p>
<p>Most retirement experts agree that people need to replace somewhere between 60%-
70% of income in retirement to live comfortably. Needless to say, the vast majority of Americans are not even close to meeting this standard. </p>
<p>How did the retirement situation become so out-of-whack in the United States? Quite simply, US employers do not have to sponsor workplace retirement schemes, and US employees are not compelled to participate in such schemes even if their employer offers one. The US voluntary workplace retirement system has led to only about 40% of the working population participating in such plans.</p>
<p>There is a common misperception that many people hold in both the US and Australia: the more choice that individuals have in matters of finance, the better. Although I normally subscribe to that maxim, in the world of retirement savings, I do not. </p>
<p>Wealthier individuals, with financial savvy, tend to understand what others do not: that a dollar put away today is equivalent to much more money when that person retires. </p>
<p>We call this the “time value of money.” Unfortunately, most people do not save
voluntarily for retirement, especially in their 20s, 30s, and 40s. This makes sense. </p>
<p>Younger individuals have other pressing concerns to consider: student debt, their
rent/mortgages, childcare expenses, groceries, etc. Retirement is the last thing on their mind and the last thing for which they save. </p>
<p>When you add in the natural tendencies of individuals to procrastinate, avoid complex financial decisions, and overestimate their ability to save for the future, you end up where the United States is today: the average person from age 22-48 has less than $50,000 put away in savings. </p>
<p>Further, compulsory super contributions spur the economy during periods of slow
economic growth. Super funds, as institutional investors, place a large portion of that money back into the Australian economy through the purchase of Australian equities, infrastructure, and bonds. The purchasing power of all working Australians is multiplied by being able to place their money in investment vehicles that are not generally available to low and middle-income workers on an individual basis. </p>
<p>So, given the same amount of money in a lump sum, super funds are significantly better able to save and invest that money in diversified, low-cost ways that translate into better retirement outcomes for more Australians. </p>
<p>Compulsory workplace retirement savings schemes are imperative for any well-
functioning occupational pension scheme. My sincere hope is that the United States chooses to emulate this aspect of the Australian super system.</p><img src="https://counter.theconversation.com/content/46886/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Paul M. Secunda is a law professor at Marquette University Law School in Milwaukee, Wisconsin. This year, he serves as the Chairman of the ERISA Advisory Council of the US Department of Labor, which advises the U.S. federal government on retirement plan pension policy. He is spending six months this year studying the Australian Super Guarantee as a senior Fulbright Scholar and Senior Fellow at Melbourne Law School. All opinions presented here are done so in his individual capacity, and do not represent the views of any of the organisations with which he is affiliated.</span></em></p>When you consider that the average US household will have just $104,000 in retirement savings, Australia’s compulsory super system starts to look like a really good idea.Paul Secunda, Senior Fulbright Scholar in Law (Labour and Super), The University of MelbourneLicensed as Creative Commons – attribution, no derivatives.