Retirement Income Review - Universal Age Pension

Covid recovery probably opens opportunity for large scale change in retirement policy.

Universal taxable age pension seems like it is being floated in a fairly serious way.

example is this article.

https://www.mercer.com.au/newsroom/mercer-calls-for-universal-age-pension-for-greater-security-of-retirement-income.html

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It could clean up the system no end and facilitate the demise of “Labor’s” superannuation policy.

Universal taxable age pension albeit set below current age pension levels would be the carrot.

The stick could be universal taxation rates – ie elimination of tax subsidies based on age. (eliminates franking leakage but without adopting Labors plan)

Harsh income and asset test (including primary residence) for those that need top up from universal pension level to poverty prevention levels.

Superannuation becomes optional.

Super guarantee rates revert to wage income in hand

Tax subsidies on optional retirement saving incentives could be decreased.

Its easy to see policy that results in both more current tax revenue in governments hands and more current spending money in punters hands. Retirement funding goes back to cross generational model, money saved to date in super system for retirement instead starts to flow for rainy days. It is raining now, early release for covid might be tip of the iceberg in government thinking.

For some individuals super has facilitated independent retirement but the success of the system as a whole is more questionable. Our private housing debt has basically matched the super pool saved, how much net savings for retirement is really going on at a system level?

Thoughts

Will we see major change – is there need for major change?

 

The idea is good but would the superannuation industry worth around 3 trillion dollars allow such huge change? There would be so much opposition.

Cheers,
Oracle.

 

Rather socialistic isn't it?

Not sure on their taxation revenue assessment.

 

I still think the superannuation system would be important. When you look at the average balances for men and women currently approaching retirement age, there really isn't much there. In the above scenario, I think any amounts coming out of super should be taxable in the hands of the recipient. Should superannuation still face a contribution tax and should it continue to be taxed while in super? These are important questions and I'm not sure I have a viewpoint either way.... Perhaps grow tax free and then pay tax on the amounts at your marginal tax rate when you take it out of super?

 

3 Trillion under management, a lot of it by union associated industry funds. Yep a lot of opposition but if there is ever a time to make major changes, don't let a crisis go to waste.

When first seeing these ideas floated I dismissed as exactly that, too socialist for a liberal government. But on a bit more of a think, the liberals are not so much anti-socialist in relation to social safety net but they are for small government. Arguably, making things much simpler and getting government out of mandating compulsory retirement savings and all the complex rule and industry hanger-on's s around it is far less socialist than current system.

All just thought bubbles on my part - No idea what will eventuate but I am expecting some major shake-ups to favour current incumbents political ideology coming in the exit phase of the virus.

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This chart shows household debt and superannuation assets. Data is up to Dec19

Sure super has been good for some individuals, but they probably would have done well with out the incentives for saving. Net savings in system to alleviate future government pension expenditure after paying off household debt - Big Fat Donut. It could be argued system hasn't yet matured, could also be argued system has failed in its intention.

 

The boomers are going nuts over this - in various ways. It is fun to poke commenters on facebook about "paying into a pension scheme levy" and the "I deserve this" attitudes, pointing out that a pension is welfare.

I actually support the idea of a universal aged pension, but accompanied with significant tax reform.

No way it will get in though - first step towards UBI! Quite frankly I think just getting rid of the stigma, admin, and policing of welfare would be a massive gain!

cheers,
Inertia.

 

Maybe this is too simplistic approach and feel free to comment and improve the idea...

What about if there was an universal pension that is tax free if you Do not have any other income? Everyone would get it. The superannuation withdrawals would be on the top of the pension and they would be taxed with the marginal tax rate, just like all other income streams. Superannuation contributions could still be compulsory to guarantee the comfortable retirement.

Is this too simple approach? Easy to administer and saves a lot money in administration. Feel free to criticise and found faults in my thinking.

 

That is what is proposed.

Except the mechanism is to make it taxable. If it is set at less than $18.2k per person over pension age, that amount is under the standard tax free threshold, so would be effectively tax free if you have no other income. Those with other income face standard tax rates on their remaining income.

Removal of current tax subsidies for retirement savings/earnings would be the trade off that pays for it, ie the flat super tax rates of 15% and 0% go.

Lots of perverse incentives from current arrangements eliminated, lots of complexity eliminated. Tax currently foregone because of difference between flat rates and marginal rates is large enough to pay for the universal pension when the government accounts for the after tax expenditure, probably even increases net tax collection. The masses will like it because the current flat rates for retirement favour the wealthy.

 

I am strongly in favour of a Universal Age Pension, with an additional means tested payment for those who need it.

I'm not in favour of scrapping the superannuation system. I think it's critical to force us to build private savings for retirement. The vast majority of Australians need some forced saving for retirement. It's just such a long-term concept that most won't address it, you're always going to prioritise school fees, mortgage payments etc. etc. through your 30s, 40s and 50s. 90% of the population wouldn't think about saving for retirement until it was almost on top of them....you'd end up with the majority on the full means-tested payment, heavily reliant on the Government to survive beyond age 70 if it isn't supplemented with Super.

Universal Pension should sit alongside the current super system. It should be funded by reform of the tax system for over 65s, and from the cost savings which comes with not having to means test everyone.

 

The means test will be the problem.

Old folks who just want to stay in the same house where they raised their families make sympathetic political foils.

 

The key will be making sure that only the needy get access to an additional means-tested payment. The family home must be included, and you should only have say $50k in liquid assets before you qualify. Otherwise we'll end up with the administrative nightmare we currently have.

 

Why does it matter whether the assets are liquid or not? It should be the value of all assets, but then how do you determine value etc etc.

 

Because if you run out of liquid assets, you can't pay the bills!

This is the issue with means-testing in the first place. You have different methodologies for different types of assets. Some are exempt, or partially exempt, which creates loopholes and incentives for retirees to try and game the system. As loopholes are closed, complexity increases.

Hence the solution in my view, is to avoid means-testing for the majority of retirees by paying a flat rate of pension to everyone. You only want testing for those with very little assets outside of their home who really need additional support...and even then, there needs to be some assessment of the home to stop those who may try and retain wealth via that one exempt asset. If your home is valuable and you have no other savings, guess what, you'll need to downsize to afford to fund your retirement! The only way around downsizing, would be a reverse-mortgage or loan of some kind, repayable at death.

This way you'll end up with the majority of retirees who can get by with the Universal Pension plus a little bit of super, and you only need to means test those with basically zero Super/savings and a low-value home (or renting).

Those wealthier retirees will get the Universal Pension, but they'll hand a lot of it back to the ATO in the form of income tax. That way there's no inefficient means-testing or loopholes, they just pay tax via standard rates.

 

Exactly what I thought!

 

Just a side note......we are fortunate in Australia, we have one of the best Aged pensions

Here is the
Top Pension Systems in the World

 

its good to know our old aged pension is up there as one of the best in the world