Equity in retirement

US President Barack Obama said “let’s do more about retirement”.

Equity in retirement

Last week in his State of the Union Address, US President Barack Obama said “let’s do more about retirement”. His concern is that, while the stock market has doubled over the last five years, this has done little for ordinary Americans and their retirement savings. His solution is a new form of no-risk savings bond. But he also cut to the chase on the subject of retirement equity, challenging Washington lawmakers to push for a more even share of the economic pie for all citizens, stating:

“…if this Congress wants to help, work with me to fix an upside-down tax code that gives big tax breaks to help the wealthy save, but does little to nothing for middle-class Americans.” You can read the full text from President Obama's State of the Union Address at The White House website.  

Obama is, of course, just noticing something which has been happening since the days of Margaret Thatcher and Ronald Reagan – the rich are getting MUCH richer, the poor are considerably worse off and the gulf between the two is widening.

And with ageing populations, this lack of equity is showing up more and more in individual retirement savings accounts. In Australia, for instance, the top one per cent of income earners receive an average of $510,000 in retirement support from the government, all of it through tax concessions, compared to $250,000 for the bottom 10 per cent, almost all of it through the Age Pension. In particular, older women and indigenous people have abysmally low account balances. This imbalance is a legacy from the system before the introduction of the Superannuation Guarantee Charge (SGC), legislated by the Keating Government in 1992. It is a hangover from a time when public servants and (mainly) professional men were offered superannuation by their companies – and the vast bulk of workers were not. This problem was ‘solved’ to an extent with the 1992 SGC. But poor practices in financial advice continued, with high fees and trailing commissions significantly reducing the net savings of ordinary mums and dads. These problems were tackled in the Future of Financial Advice (FOFA) reforms introduced by the previous Labor Government. As with so many Rudd and Gillard initiatives, this is currently being reversed by the Abbott Government, with Assistant Treasurer Arthur Sinodinos set to scrap many of the key changes.

The Government states that this will reduce compliance charges of about $190 million per annum and another $90 million in implementation costs borne by financial institutions. One of the reforms being reversed is the need for a planner to meet with their client at least every two years to allow that client to opt in or out, but not keep paying fees for what is, in effect, no service. Research by Industry Super suggests the original FOFA reforms would have added $144 billion to the private savings under advice and that the average cost of advice would nearly halve, from $2046 to $1163, by 2027. 

So this takes us back to our two leaders. President Obama sees a lack of fairness when it comes to sharing his nation’s riches – he wants a safer retirement savings mechanism and a bill which reduces the tax breaks for the rich at the expense of poorer pre-retirees.

And Prime Minister Abbott tells the world, at Davos, that the market knows best, and we should get out of the way and let it run. Unsurprisingly, his government is supporting this ‘winner takes all’ philosophy with a reversal of legislation which attempts to help ordinary Australians get a better deal from largely bank-employed financial advisors who can currently take fees for no advice for years on end.

If it is true that an ageing population is one of the greatest challenges we face – and that our future productivity is tied to the economic input of our older citizens – why wouldn’t we support them now to have increased prosperity in the future? Adding $144 billion for a cost of just $300 million seems like a no-brainer to me.


    To make a comment, please register or login
    18th Feb 2014
    The only way we will ever have a fair retirement is to have all politicians and public servants on the deal as the workers who actually employ them. Why should they get a better deal than anyone else? The" After Office" perks should also cease. Why should they be able to treat tax payers money as their own. Joe Hockey says THE AGE OF ENTITLEMENT IS OVER. Come on Joe show us your bona fides. This alone would overflow the budget black hole.

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