Millionaire pension couples are not rich! The pension changes are about middle Australia.
Van Badham reminds us that Bob Brown said the point was not to keep the bastards honest, rather to replace the bastards. In the pension deal, Van Badham says, the Greens have become the bastards.
From National Seniors this is what has been decided:
- From 2017, the assets test threshold for home-owning couples will be lowered from $1.15 million to $823,000. For single home-owners it will drop from $775,000 to $547,000. In addition, the current taper rate will double from $1.50 to $3.
Now a single person owning a home, big or small, and $550,000 of other assets would receive an income of $17,875 pa, using the current upper level DSS deeming rate of 3.25%. If a single person has no cash to invest they will get the full pension of around $22,365.
That’s if all your assets are in cash. According to Van Badham the test includes the valuation of home possessions such as furniture, jewellery, cars, retirement projects like boats, caravans or collections and heirlooms.
Pensioners also receive state concessions on rates, utilities and registrations. Also cheap prescriptions at the pharmacy.
Couples on a full pension receive around $33,717 a year. With no pension and cash of $823,000, earnings at 3.25% amount to $26,747.
I’m not sure you can get fixed interest at 3.25%. With shares I’d reckon at perhaps 4.5%, which would give a couple with $823,000 an income of around $37,000, but of course shares carry risk.
Van Badham says that the Tories:
- do not believe in pensions and state-provided mechanisms of income stability as a universal right, but only as a “safety net” for the very poor. The Greens are facilitating the realisation of that idea and destroying a key pillar of social equity by helping the Liberals further restrict pension entitlements.
Some countries like Britain and Sweden grant all retired workers a basic aged pension of some form. We don’t.
Tory policy is a disincentive for saving. If you do so, then you best blow it on luxuries and overseas trips. One way or another the the incentive is to deplete your savings and pass nothing on to your kids. Van Badham points out:
- one of the crucial economic mechanisms for realising home ownership will be removed from the economy: the mechanism of inheritance.
In return for the Greens support the Government has promised to examine tax concessions within the superannuation system in the next tax review. At the same time they’ve indicated that they would take no notice of the outcomes of the review.
And there was a $15 per week increase to the full pension.
What is needed, in fact, is a review of retirement incomes and end-of-life expenses like aged care. I haven’t investigated the issue fully, but I’m aware of people unlucky enough not to die in the own beds and needing intensive care having to sell their homes to buy their way in.
The Greens have a Factsheet by way of explanation. Some 327,300 will be negatively affected, with 90,000 losing their pension entirely.
The policy has been sold as only affecting the rich. This article, from May 2014, talks about what it means to be rich. People who are on $150,000 to $180,000 a year rarely consider themselves rich. Whether ‘rich’ or not, they are certainly wealthy compared to the median household income which, I think, lies in the region of $70,000. The article says:
- A middle income household is one with $41,236 after tax and levies while a low income household is defined as $24,700 a year.
Clearly the policy is not attacking the rich. The government will save $2.4 billion over four years at the expense of low to middle income oldies.
There is also an assumption that oldies don’t need as much money. That may be so compared with raising kids, but you still have big expenses, like replacing a car, painting a house or fixing the plumbing. We had a sewerage leak near our back stairs. A plumber and $10,000 fixed it!
Personally I’ve had continuing significant medical expenses since I was 60 and spend more than $150 a month in the pharmacy. Oldies often have to buy in services like gardening and cleaning.
Finally, Ben Eltham thinks it’s a good idea, in spite of the fact that:
- As the government’s figures make clear, a pensioner who owns her own home and also has $500,000 in assets will see her annual pension decrease by $8,200 a year.
$500,000 at 3.25% yields $16,250.
‘Millionaire’ couples earn at current deeming rates just $32,500 pa, less than the pension. The effect of inflation would almost halve the value over 20 years.
Eltham has bought into the notion that those losing out are “wealthier”. They are not, Ben, wealth is a different ball park. Jenny Macklin was quite right in calling the changes an attack on middle Australia. $2.4 billion is being extracted from people who are expected to live on something in the region of half medium incomes in the community while the wealthy carry on regardless.
Update: I think that what’s happening here is that if a couple has up to around a million dollars the system will likely strip out all their assets before they shuffle off this mortal coil. At some point above that people can float free and stay clear of the asset-stripping machine. The wealthy have no worries.
Greens here are being consistent with their policy stance. As I understand it they were opposed to the extensions under Howard and this represents a roll back. I have to say that I was stunned when my financial adviser told me I was eligible for a part pension given that I own my own home have CSS superannuation payment and a further small superannuation payment from the lump sum. I shouldn’t really be eligible for a part pension and think something needed to be done.
“People who are on $150,000 to $180,000 a year rarely consider themselves rich. ”
Of course they don’t. The more they have, the more they want. I manage to live quite comfortably on slightly less than half that.
You take an interesting position for a climate change blogger. The consumerism of people on higher incomes is a big contributor to climate change.
Doug, good for you and good on you. There is great variety in situations.
How we are placed in retirement depends on many factors, including where we live, our needs and commitments, and indeed our expectations. But objectively $2.4 billion is being taken out of the pockets of low to middle income earners, while the better off continue untouched.
If we need savings we should be looking to the top 30% in the first place, and that means doing something about taxes and superannuation. The Greens should have held out for a broad inquiry and a commitment to treat the outcomes seriously.
Lee, I think you misunderstand me. I didn’t endorse what the $150,000 to $180,000 earners think of themselves. The point is that they continue scot free while people who really do have to mind their pennies are targeted.
Lee, can I point out that that many of the people targeted in this policy are expected to get by on roughly half what you do.
I’m on an age pension and my wife is still in the workforce.
Our annual family income is approaching $80,000. Our total assets are in the region of $100,000 and my part pension is the princely sum of $56 this fortnight.
Were I receiving a full (single) pension it would almost cover our rent (we live in an area that is considered to be at the lower end of the socio-economic scale). We are far too well off to qualify for social housing. I’m not complaining, because we’re doing fine but excuse me Brian if I don’t shed a tear for “millionaire pension couples”.
I’m with Doug. By removing some Howard pork from the body politic the Greens are being consistent with their policy (remember when we demanded that of governments?).
It’s time to trim the rest – retire negative gearing, remove the superannuation rorts, reindex fuel excise, remove the diesel rebate etc etc. We have a BUDGET EMERGENCY!!!!!!, or has everybody forgotten?
As it stands the Greens agreement will make low income pensioners better off and some middle wealth pensioners worse off while leaving people like me who are too well of to get the pension unaffected.
Having said that the Greens have consistently argued that the super tax concessions that provide a tax haven for the better off should end. (i.e, the overall thrust of Greens policies means that the rich will lose more than the the middle wealth.)
My own take on pensions is:
1. It would actually cost less to offer everyone over 65 the full pension while removing all the other tax concessions for the elderly and super payers that favour the rich. Attractions include simplicity and the removal of the disincentives for part pensioners to do some work or start a microbusiness. (The claw back is 50 cents in the dollar and the centerlink hassle out of this world.)
2. Turn the pension into a loan with the loan being paid back by the estate except where the heir is a parner or sibling or the size of the estate is below a certain limit. (Too many of the “concessions to the elderly” are really “concessions to heirs.”)
There is a link around somewhere showing how the current pensions +tax concession scheme strongly favours the better off.
A million dollars produces an annual income of $32,500, taxable if not in super, and reducing in value each year by the inflation rate. Within the community this is, for a couple, less than half medium income.
Chris Bowen says the pension is sustainable in Australia. The intergenerational report, stripped of all the rhetoric about it, actually showed that. The superannuation system is not.
John the first of your points is interesting, not sure about the second. If pensioners want to work the effective tax rate is 80%.
Our history of saving is too complex to go into here, but in principle we’ve lived modestly and by and large have refrained from spending investment capital. We both work the equivalent of about 3 days a week although above the retirement age.
I’ve tweaked the text of the post to make my point clearer. Nothing I haven’t said in comments.
Brian: The claw back is 50 cents in the dollar not 80. I have changed the comment and put in a link. Keep in mind that the cost of going to work will make this worse, particularly for low wage, part time work.
Should the Greens have held out for changes that weren’t going to come on the superannuation front? It’s a stance on which people will differ.
While I agree that superannuation changes need to be made and should have been made first, what do you do? The changes should remove any rationale by the Government to try again with the sort of changes to pensions they tried in the first budget.
Brian, you’ve addressed some criticisms to me in your article, so I thought I’d try to unpack my reasoning in response.
Eltham has bought into the notion that those losing out are “wealthier”. They are not, Ben, wealth is a different ball park. Jenny Macklin was quite right in calling the changes an attack on middle Australia.
Whatever you think about the wealth of pensioners, it is demonstrably true that those missing out under these new changes are wealthier.
According to my calculations based on the Department of Social Services, only the wealthiest 11% of pensioners will miss out.
This table, posted on Twitter, sets out how many pensioners will miss out. https://twitter.com/beneltham/status/613526927014412288
For home-owning couples, the part-pension will not cut out at a household wealth of $823,000 under the new system.
A household worth of $823,000 is high by any standards. It puts you in the top quintile of home-owning pensioners (remembering the house is not included in the test). According to ABS Survey of Household Wealth figures, it also puts you in the top 24% of ALL Australian households.
You could mount a valid and (I think) very justifiable argument for the universal provision of the pension. However I don’t believe that is what you are suggesting Brian? Perhaps you are. For what it’s worth, I myself oppose the idea that every single retiree in Australia receiving the pension, on purely practical grounds.
No, Ben, I’m not proposing a universal benefit. Like you I think it is just not practical.
It is interesting that $823,000 puts you in the top 24% of all households. My point is, if that’s all you’ve got to generate an income you are not going to be wealthy, or even well off.
Your mastery of the facts and logic is very sound, as usual, but I’m concerned about framing the target group as ‘wealthy’. By the standards of the general community they are not even well off in income terms.
I’ll repeat here an update I put on the post:
I think that what’s happening here is that if a couple has up to around a million dollars the system will likely strip out all their assets before they shuffle off this mortal coil. At some point above that people can float free and stay clear of the asset-stripping machine. The wealthy have no worries.
That’s plain unfair.
Thanks for dropping by and thanks for the additional information.
Ben: A universal old age pension would cost less than the current system plus tax and super lurks that benefit the rich. (The benefits to the rich are actually higher than the pension.)
Sounds very practical to me as long as you have the courage to take on the overdogs.
The system would be even more practical if the pension is part of taxable income and/or the pension came in the form of a loan that would be paid off by the estate.
Hi Brian,
I think you’ve elided the fact that nearly all retirees draw down on their assets over time. Yes $500,000 of assets at a 3.25% real interest rate gives you only $17,875 per annum (though this is definitely a low ball of the real interest rate on super funds). But if you include draw down, say an extra $25k per year on top, (for a total of $42k per year) not only can you live on substantially more than $17k per annum, but in 6 years time when you’ve dropped your assets below $350k you’re actually receiving more pension than under the old system.
I think that many people try to model their retirement income without factoring in draw down and this leads to a dramatic inflation in the asset target for retirement savings (hence the current rhetoric around the need for $1.5 million to retire comfortably). But as it was a choice between the continued subsidisation of those who can pay their own way vs helping out those who are already asset poor, I think it was the right choice.
Regards,
Simon
I think you’re eliding the reality of asset draw down for retirement incomes. You’re correct in that $500k at 3.25% real interest rate will only provide you with ~$17k per annum (though that’s probably a low ball figure). But most retirees will in fact draw down on that $500k initial headline asset portfolio. If you draw down a further $25k per annum on top of the $17k it will put you on the $42k per annum that is the recommended amount by ASFA for comfortable retirement. And then, after 8 years of draw down to get to $300k of assets, you’ve reached the threshold where the new pension asset test pays more than the old.
I can see a line of argument that says it is unfair to require middle class retirees to draw down on their assets, but that is to argue the case for a universal pension. Personally I don’t think it is the job of the Australian tax payer to subsidise the asset holdings of middle class pensioners, particularly so they can pass it down to their children (being a fan of estates taxes myself). And given that in the process of increasing the taper, a huge number of asset poorer pensioners got an INCREASE, I think the Greens made a worthwhile tradeoff.
Apologies I thought my comment had disappeared so I wrote it again! Feel free to delete one of the two.
Simon, first comments are moderated by the software. You should be OK now.
The comments were a bit different, so I’ve left both there.
So wealthier people can pass on assets to their kids, but not so wealthy people get stripped bare.
Not fair!
The tax man gets a slice through capital gains. I’m a direct share investor who bought Commonwealth Bank shares in the float. The tax man will get a goodly slice when I go. I think that’s enough.
I agree that 3.25% is a low-ball figure, but anything more carries risk. As share investor I lost 46% of assets and income during the GFC. It’s one reason I’m still working.
I saw somewhere recently that balanced super funds were doing about 8 to 10% pa over 6 years, from memory. Balanced funds have a degree of safety. I reckon you can take about 5% pa as income, 3% looks after inflation, and a bit to reward risk. That’s fair and sustainable.
If $42k pa is a benchmark for comfortable retirement, then the previous policy with the $775k limit for singles produces a sustainable income of $38,750, with a 5% yield. The previous policy was about right, IMHO!
People draw down on their assets for a variety of reasons, eg because of lumpy expenditure, or because they are having trouble adjusting to reduced expectations. It’s not fun with opportunity ebbing away and no chance of further savings.
I’ve done mowing and gardening for lots of oldies and have seen over 20 of them off the planet. Full pensioners lead spare and frugal lives. Give people who have saved a bit a break!
As I’ve said, the choice was not necessary. The pension was sustainable. $2.4 billion has been taken from people who have on the whole been diligent and acted with foresight, with an expectation that certain provisions would apply. We’ve let them down, with a quite vicious snatch!
My first priorities in balancing the budget would be to tax the wealthier half of the population more, especially in the super sector, and allow bracket creep for a while.
We can argue about negative gearing and imputation credits.
To be honest, I’m quite uncomfortable with how pleased the Greens and their supporters are with their handiwork. There are real people who have been dudded.
I’m happy with those who get $15 pw more, which means more than we might tend to think. I wonder how much that part actually cost, but I think it should have been garnered from those in the community who wouldn’t notice it missing.
“Lee, can I point out that that many of the people targeted in this policy are expected to get by on roughly half what you do.”
Of course you can, Brian. But I’d like to point out that those retirees are allowed far more in assets than I currently have before it affects their pension.
I’m in total agreement with you about hitting the wealthy harder. I’m also in agreement with Simon. Welfare is a safety net for the poor, not for the middle class. The middle class is demonising the poor for being welfare recipients. Let them not be hypocrites.
The true middle class are well enough superannuated to rise above this policy. Teachers, for example, unless they are women with broken service.
I had a good idea last night. Why not strip assets from the rich. A wealth tax for, say, everyone with $2 million or more. Sounds fair to me!
Thinking about this further, the middle class is a broad church. Classroom teachers are middle class, but so are head masters, bank managers, lawyers and accountants.
I don’t have a big sample to go on, but my impression is that classroom teachers do quite well if two have been working and there has been no marriage breakup. Some single teachers I know who seem OK in retirement have benefited from an inheritance.
This new policy bites into the middle class and renders them poor on the way out. Socially it leads to a bifurcation between those affected, and the “I’m OK” group, which, socially, is where most of the Greens sit.
Yeah, make 90%, great idea.
And change the name of our Country to Veneztralia .
The Laffer curve isn’t a thing.
( fmd, …sigh..)
A little light relief:
http://wondermark.com/c1135/
Jumpy, during capitalism’s glory days in the 1950s and 1960s top income tax rates of circa 90% were common in rich countries. The sky didn’t fall in.
As to pensions and other forms of welfare and social provision, like public schooling, I am partial to the argument that you must keep most of the middle class in the system because they are far more articulate and active in pushing their own interests and thus ensuring high standards than our feckless working class and underclass. I very much agree with that proposition. We can already see this with our secondary school system- heated swimming pools and polo ponies for the elites and run down portables with dodgy heating/cooling for the plebs.
Karen
That’s unusually vague for you.
Which countries ?
Zoot
Excellent cartoon, except, if one goes down that road, on death the State shouldn’t get anything for free either.
So destroy ones assets post mortem.
Right ?
Let’s just do away with property rights completely in that case .
Jumpy, google is your friend. I’m growing rather tired of doing most of the thinking for you and your four-lettered buddy. Maybe you guys could attempt a Vulcan mind meld with double twist turn and pike and produce a useful thought of your own once in a while. After all, as Paul Kelly once said, from very tiny little things big things grow 😉
Which Countries prospered under such theft Karen ?
You may have to give us you interpretative definitions of capitalism, glory days, top income tax rates, common and rich countries.
Thanks……
Brian
Just a little question about the SATO ( Senior Australian Tax Offset ).
How much does that ” *subsidy ” cost annually to the budget and do you get it ?
(* I, along with rational people, do not regard Govt tax reduction instruments as a subsidy. Only idiots do. )
The link.
Jumpy, my tax is complicated and I have it done by an accountant. I don’t actually understand it all, but I think I don’t get the SATO.
An ABS man came today and showed me a whole heap of benefit cards. I didn’t recognise any of them, so he went away!
An accountant ?
You know Barnaby is the only accountant in parliament, he understands complicated thing we don’t. 🙂
Given Barnaby’s numeracy, I don’t think I’d get him to do my tax!
Karen: I agree with what you said on your second last comment. This has got to stop.
The Scandinavian countries have been considered high tax high welfare for a long long time. funny thing is that they have been consistent high economic performers for a long time. good health and education may actually be important?
At one stage the UK had a top tax rate of 98% on unearned income
I like the idea of very high taxes on “unearned income”. Part o f what is wrong with Australia is that, if anything, returns on speculative investment are taxed more lightly that money earned by actually doing something. (And we pay people who do the hard, hot dirty work a lot less that those who do mental work in airconditioned comfort.)
John, “speculative” is a pejorative term which should perhaps be restricted to share traders, rather than investors like myself. Share traders do in fact pay full capital gains, whereas for investors it’s usually half.
To be logical, if unearned income is to be taxed more heavily, we should also tax super at the same rate. It is investment in a different box.
Within a capitalist economy capital formation needs to be encouraged, not penalised.
I’m all for higher marginal rates for the better off, perhaps starting with the top 40%. That’s probably around the $80k mark.
Computerised share trading, where shares are bought and sold within seconds should be banned. There should be a minimum holding period, not sure how long.
Similarly, something needs to be done about speculative currency trading.
I guess the crux of our dispute is on the issue of whether the government should be protecting the (non-family home) retirement assets of the middle class from draw down. I would argue no, but I can understand why you might take a different position. Can I ask if you would support the reform if it had been grandfathered? That would remove the shock to those who’ve already planned and saved based on prevailing conditions.
To be honest a lot of this is small fry compared to the savings gains we could get from reforming super concessions (which I know won’t be fixed until a Labor government). With that sort of revenue I would like to see a substantial raise to the $ value of all transfer payments.
Brian:
Why?
Karen, I don’t know whether your question is a set up for another”gotcha” or whether you want to know. I’ll assume you asked in good faith.
To me the share market is for investment. Companies crowd source funding which they use to employ people to do things in the real world. Value is created. With good management everyone wins, except sometimes the planet.
At times, for a variety of reasons, investors sell, which creates a market. Usually something is ‘left on the table’ so again everyone wins.
The Commonwealth Bank floated in 1991 for $5.40 per share. Now it is paying about $4 per share in dividends and the price has increased by about 15 times. Not everyone loves a bank but we all need one. Something of value has been created.
Share trading ignores the fundamental value of the investment and works on price movement. With derivatives money can also be made on the way down. It’s a zero sum game. For the wealth created for the share trader, someone else loses. Nothing of value is created in the real world.
Ironically, most who attempt share trading lose money. From memory it’s about 2% who make money. Something of that order.
With computerised trading, the computer always wins. If it didn’t, they wouldn’t do it. Someone must lose, so logically it’s everyone in the market that is creamed a bit.
Every trade contributes to market sentiment.
Traders are essentially parasitic, and ethically I’d ban the lot.
No Brian, it wasn’t a gotcha. I’m always interested in the reasons people give for wanting to ban things. This Alan Kohler article on the Drum seems to support your case.
It is another good example of how capitalism isn’t a level playing field.
I suppose trading as a profession is kinda parasitic but I wouldn’t ban it. I’m all for banning stuff but there should always be a reason that goes well beyond the “ick” factor.
Karen, thanks for the link. Kohler explains it well.
It looks as though the parasite may eventually kill the host. If the ASX is just a business there is no reason why another exchange can’t be set up that excludes the parasite.
Has anyone worked out the savings over forward estimates if the Public sector Super contribution was down to the same as the Private sector compulsory Super guarantee of 9.5% ?
You know, equity and all that.
Gotta be plenty.
( Not a gotcha question, I’m just thowin it out there )
Simon asked:
No, Simon, I wouldn’t. I think the ‘reform’ does actual harm. If it’s no biggie, why do it?
I agree with you about increasing the $ value of all transfer payments.
Jumpy, I don’t know.