Dear Under-50 Investor

Dear Under-50 Investor,

Superannuation will be no good for you if you are under 50 today, so invest the absolute minimum amount into super.

That means, no salary sacrificing, no co-contributions, no non-concessional contributions. Ignore the calls to save tax and boost your super you will be soon contributing 12% of your salary anyway. This is not advice but a challenge to others, much more qualified than I, to dispute it and explain why I am totally wrong. By the way, as a fund manager of course, I am financially delighted to be completely wrong on this one!



What I am saying is risky – I may be labeled a ‘generationist’. Note my tongue is firmly in my cheek during the writing of this entire rant (and that’s partly because I have only ever invested the bare minimum into super). More seriously however, I am also swimming against a veritable tsunami. There are so many on the teat of this topic that one risks offending with a ‘less is more’ stance.

What I am not saying is that you shouldn’t invest. You must invest, irrespective of your age. What I am questioning is the wisdom of investing through a structure that may not be as tax effective, nor may your funds be as accessible, in the future as it appears today.

Since about 1995 (when I was 24 years old) and my accountants at the time suggested I put more money into super, I have staunchly told anyone my age who would listen that they’d be mad to put extra funds into super. I have always thought ‘you’ll never see it’. The reasoning was simple enough; Super was set up by baby boomers, for baby boomers. And since I am not a boomer, the favourable tax environment enjoyed by the boomers, I believed, would be gradually eroded such that it wont be any advantage when it comes around to my turn. ‘No thanks’ was always the response I gave my accountants when they suggested I’d be wise to put additional funds into super.

A superannuation storm has now been stirred up by the Labour party and many investors, who have been maximizing their contributions, are screaming blue murder.

Like an episode of some Socialists Unite sitcom the outcome of my prediction is a benefit for the greater good but not for the people to whom this missive is directed.

As you read on you will observe a shift in policy towards to super. Individually, the seem like minor modifications. But taken chronologically, there’s a trend in place that may mean investing within the super structure is becoming less and less attractive for the young.

Now please don’t regale me with tables showing how Joe Citizen can save tax by stashing away a little extra into super or how a person on a low income will be better off thanks to the governments co-contribution scheme. What I referring to is a change, over many years, to the very rates of difference between investing inside and outside of super and an erosion in the benefits that exist today.

As the aggregate amount invested gets bigger, and as baby boomers get older, the temptation to tap into the giant pool simply becomes too great for the government to resist. In the 2013-14 financial year the total tax effectiveness on superannuation will be just over $33 billion. There will be many minor storms along the way. The current war appears to be about taxing withdrawals from accounts with very high balances. Over time however I expect it is inevitable (thanks also to poor economic and fiscal management – see my post here on The Balance of Payments and my meeting with Andrew Robb) there will be a gradual erosion of the attractiveness of super for younger people.

In the 1991 Budget, Treasurer John Kerin announced that from 1 July 1992 , under a new system to be known as the Superannuation Guarantee (SG), employers would be required to make superannuation contributions on behalf of their employees. When the Keating Labor government introduced the system in 1992 (The National Wage Case established guidelines to require new industry superannuation schemes to conform to Commonwealth operational standards) it was part of a reform that sought to address the inevitable climactic change in the government’s finances that would be brought about by a generational avalanche. In 1993, the World Bank endorsed Australia’s three pillar system for the provision of retirement income as world’s best practice.

There are however two points to note. Compulsory Super was introduced not because of some altruism on the part of the government of the day but because of the cost that would be imposed on governments of the future as baby boomers aged and required increasing medical assistance and to offset the cost of the pension as the bulge in the population approached and passed the qualifying age.

The second observation is this; it was introduced by baby boomers for baby boomers.

The proposed solution to the inevitable train wreck on government finances was a combination of a safety net (a means-tested Government age pension), a compulsory superannuation contribution by individuals (forced savings) and finally a voluntary version of the same thing.

The trade unions agreed (as they had done in 1986) to forego a national 3% pay increase in return for an equal contribution into superannuation. The 3% was matched by an employer contribution, which would increase over the years to total 12%. Between 1992 and 2002 contributions were progressively increased from 3% to the subsequently capped 9%.

Tellingly, the Howard government was criticised by former labour Prime Minister Paul Keating for not increasing the compulsory rate. Of course there would be more than double the amount of money in the super system today (not withstanding the impact of silly money management practices and GFCs) if the rate was 15% since 1996 instead of 9%.

And this brings me to my next point; the amount of money in the super system. There’s $1.4 trillion approximately and of that about $439 is being self managed. That’s $1.4 trillion. Hmmmmm. If I was a government number cruncher, I would find that $1.4 trillion more than a just tasty morsel. I wonder what would happen to the government’s coffers, if we taxed it just a little more here? Or perhaps we extend the age before people can get it there? And what if we cap the amount they can take out now that all our boomer mates have withdrawn what they need? Or what about taxing payouts? Gosh we could really do something fancy with all that money now that it is so temptingly locked up form people and they keep putting more in!

I think you get the drift. Recently I was at an awards ceremony and a popular expert on investing was giving a lecture on super with a long-winded history of the introduction of the pension.

Here’s the history taken from an interactive schooling website: “Coming into effect on 1 July 1909, the Commonwealth aged pension initially provided £26 ($52) per annum to men and women over the age of 65 years. This figure was just under one quarter of the ‘basic wage’ which was decided in 1907 by Justice Higgins. To be eligible for the pension, an individual had to be able to meet a number of criteria. They had to have resided in the Commonwealth for more than 25 years and to be of ‘good character,’ (despite the latter not being defined). Non-residents, the Indigenous people of Australia, Asians and Indigenous people from the Pacific Islands, New Zealand and Africa were completely excluded from claiming the pension.

To ensure that those who were most in need of the pension received it and also to limit the cost to the government, the 1908 Act also provided that the Commonwealth old-aged pension be means- and asset-tested. An individual who had an income of more than £52 ($104) per year or owned property valued at more then £310 ($620) became ineligible for the pension.

In 1910, around 34 percent of those over 65 were receiving the old-aged pension. The average life expectancy of an Australian was only 55.2 years for men and 55.8 years for women, which meant that not many people lived long enough to receive the pension. Today, the average life expectancy of Australian men is 77.6 years and 83.5 years for women. Since more Australians are living beyond 65 years of age, unprecedented numbers are becoming eligible for the aged pension. In 2004 the number of aged pensioners reached 72 percent.”

Interestingly our investing expert – a boomer himself – focused on the very last point along with a carefully placed reminder that Australians were never meant to qualify for the pension because they would be deceased, on average, a decade or so before they qualified.

Wham! There it is. Get people to start realizing that they were never meant to get the money anyway. Maybe, one day, we’ll hear the argument we’re not meant to qualify for our super until ten years after we’re deceased too. Don’t laugh. If government finances become sufficiently precarious and there aren’t any boomers left to upset, anything is possible.

The train has left the station and the evidence is everywhere. The government wants to get their hands on your super and they don’t want you to get as much of it.

Today the Gillard government is considering ending the tax-free status of super withdrawals. But this is not the first change that seeks to repeal some of the claimed largesse that individuals enjoy through the super of the pension. Way back in 1994 the pension age for women was raised to 65, in 1996 the superannuation surcharge was introduced to tax contributions above a predefined level.

These changes however were followed by a golden era – a period of apparent government generosity. To reduce the financial burden on the government a Pension Bonus scheme was introduced in 1998 and a person could accrue a pension bonus payment by deferring claiming the pension while still working. The maximum age for SG contributions increased from 65 to 70 in 1997 and then to 75 in 2002. The Super Surcharge was reduced from 15% to 12.5% in 2003 and co-contributions were introduced for low income earners. In 2004, the Treasurer released A more flexible and adaptable retirement income system as part of ‘Australia’s Demographic Challenges’ announcement. Amongst other things this report proposed to allow access to a person’s superannuation, in the form of an income stream, before they had left the work force (i.e. transition to retirement pensions) and to scrap the work test for those under age 65. 2004 was also the year that the Superannuation surcharge was reduced again from 12.5% to 10% and in 2005 Treasurer Costello abolished it altogether. In the same year the work test governing contributions made under age 65 ceased to operate.

Then in the budget of 2006 the generosity towards baby boomers really cranked up. In the Budget, Treasurer Costello announced plans to simplify superannuation. “Simpler Super” includes:

– exemption from tax on end benefits for Australians aged 60 or over from I July 2007;

– no tax on a lump sum;

– no tax on a superannuation pension;

– reasonable benefit limits to be abolished; and

– transferring super between funds made easier.

The implementation date was at the peak of the pre-GFC froth, 1 July 2007.

And the generosity continued into September that year when the Social Security assets test threshold was raised from $531,000 to $839,500 for a couple and from $343,750 to $529,250 for an individual. It was estimated that more than 300,000 extra people would be eligible for the age pension.

Next, the taste of blood.

In 2008, Labor’s first Budget contained details of a review of taxation – “Australia’s future tax system”, to be chaired by Dr Ken Henry and the terms of reference included the government’s commitment to preserve tax-free superannuation payments for the over 60s. But in May of that year Minister Sherry announced consultation on a measure (introduced by the Coalition Government) requiring future superannuation contributions and existing balances for temporary residents to be transferred to the ATO. If unclaimed after 5 years, the amounts would be confiscated. A forecast of up to $1 billion in additional revenue annually was predicted.

In December the same year the Act requiring temporary resident’s superannuation benefits to be paid to the ATO, if not claimed within 6 months of departing Australia, commenced operation. In 2009, the Act raising tax rates of Temporary Residents’ superannuation benefits when paid took effect.

In 2009 Minister Sherry announces a review (it later became known as the Cooper Review) followed by the terms of reference into the governance, efficiency, structure and operation of Australia’s superannuation system. In July of the same year the rate at which the government superannuation co- contribution was paid was reduced “temporarily” between 1 July 2009 and 30 June 2014 but would return to $1.50 for every $1 contribution (subject to income test threshold) on 1 July 2014.

In the same year, the limit on concessional contributions (formally known as tax deductible contributions) was reduced from $50 000 p.a. to $25 000 p.a. for 2010 onwards. The Pension Bonus Scheme was completely abolished.

The following year the government responded to the Henry Review and the Superannuation Guarantee rate was proposed to be raised to 12% between 2013–14 and 2019–20, and the Superannuation Guarantee age limit would be increased to 75 from 1 July 2013.

Meanwhile, the government proposed changes to the co-contributions scheme. And surprise, surprise, the government co-contribution rate would be set permanently at $1 for every $1 of personal contributions made by those receiving an adjusted annual income less than $31 920 p.a. So much for the “temporary” change and the promise to return to $1.50 made back in 2009. The qualifying age for the age pension would now also increase by six months every two years until it reaches 67 years of age on 1 January 2024.

In 2011 Superannuation Minister Bill Shorten confirmed that the amendment to abolish the age limit meant that from July 2013, up to 51,000 eligible workers aged 70 and over will receive the superannuation guarantee for the first time.

“Making superannuation contributions compulsory for these mature-age employees will improve the adequacy and equity of the retirement income system, and provide an incentive to older Australians to remain in the workforce for longer”.

It may be subtle to you but to me the shift is well underway. You cannot put $1.4 trillion of long-term equity in front of a government struggling to balance its books and expect them to not be tempted to tinker.

Today’s announcement by Gillard to end the tax-free status of super payouts for those with more than $1 million is another shining example that ‘generationism’ is well and truly underway and the battleground is superannuation.

I believe by the time someone turning 40 today is entitled to extract their super, the tax rates will be higher, the amount they can withdraw will be lower and they may not qualify at all because the age, at which they can qualify, will move. Remaining in the workforce longer will be something that younger people will need to get used to, to fund the profligacy of the generation before.

The government will argue that the greater good – infrastructure, healthcare et al – is best served with a sound balance sheet and so if you all keep contributing more super for longer we collectively will have better roads and cheaper healthcare. So much for funding your own healthcare with the proceeds of your concessionally-taxed super! I believe that in the longer term you will be funding the government’s expenditure by contributing to super. It is simply too big to be ignored.