Biggest trap for retirees? Our entire retirement income system

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Australia has a policy blind spot when it comes to government support for retirement incomes and it’s one we will be forced to confront in coming years. When we do, it might create a number of retirement traps for the unprepared.

I have a confession to make. I love those TV shows about hoarders. The ones where psychologists and professional cleaners come in to try to help those suffering from compulsive hoarding disorders. It is fascinating and uplifting to watch people overcome and change their lives for the better.

But the real challenge for these people does not relate to the stuff they have collected. The real challenge they must overcome is in their minds. They must see the problem, acknowledge it and then want to change. You can usually tell at the start of a show if someone will succeed. Those who acknowledge the problem and want to change are more likely to succeed.

Just like the hoarder in a house full of junk who can’t see a problem and insists that everything is fine, countries have blind spots as well. In the United States, it’s universal healthcare. Despite all the evidence from countries that have universal healthcare, the US insists it is unaffordable and unworkable.

But Australia has its own policy blind spots. One is the retirement income system. There are all sorts of problems with the system, but as the Retirement Income Review set up by the government is about to find out, there are plenty of people who have a blind spot and will resist any change.

The problems are clear. We have high rates of poverty in retirement. Of the 36 OECD (developed) countries, Australia has the sixth highest rate of poverty in retirement. At the same time, the government pours substantial sums of money into increasing retirement incomes.

The Age Pension is one, but another is superannuation tax concessions. Combined, they are expected to exceed $100 billion next year. To put that $100 billion figure in context, the entire federal government education budget is expected to be $39 billion in the same year and the federal government health budget will be $86 billion.

This $100 billion does not include other government perks that are used mainly by retired people to prop up their incomes – such as excess franking credits. It doesn’t include other concessions not directly related to income, such as the Health Care Card.

If the government is handing out so much money, why do we have such high rates of poverty in retirement? The simple answer is because we’re giving the money to the wrong groups.

If you were starting from scratch and you decided to hand out $100 billion a year to help people with their retirement incomes, who would you give it to? You might give the most to those who had the least. You might think to hand it out equally.

When it comes to super tax concessions and excess franking credits, we’re handing out the most to those who already have the most. Super tax concessions are worth $41 billion per year. The richest 20 per cent of retirees, who are not on an Age Pension or part pension, get 60 per cent of super tax concessions. The bottom half, those most likely to need help in retirement, get just 11 per cent of super tax concessions.

Excess franking credits are even worse. They’re worth about $6 billion per year. When we look at who gets excess franking credits by wealth, the wealthiest 20 per cent get 88 per cent of the excess franking credits, while the bottom half gets just three per cent.

The Age Pension, which is means tested and targeted at lower income households, does not pay enough to keep some households out of poverty, particularly those who rent in retirement or who have a mortgage. Both these groups have been growing in recent times.

But why will things have to change? Because both super tax concessions and excess franking credits are growing far faster than other concessions – far faster than the Age Pension and far faster than tax revenue.

But here is where we insist that there is no problem. We tell ourselves that we don’t have to change, that those who keep pointing out the big piles of rubbish all around us are wrong.

Over the nine years from 2014–15 to 2022–23, the Age Pension will grow at an average of 3.7 per cent per year. Super tax concessions will grow at an average of 7.8 per cent per year or more than twice the rate of the Age Pension. This means that the cost of super tax concessions will soon be larger than the cost of the Age Pension.

Excess franking credits are growing even faster, as shown in the graph below. They were worth just over $1 billion when they were introduced in 2001. By 2015 (the latest figures we have from Treasury) they were worth $6 billion. That’s a five-fold increase in 14 years.

And almost all that growth in franking credits has come from individuals and self-managed super funds, as shown below.

This presents one broad retirement trap and one very specific to excess franking credits.

The longer something that is unsustainable continues, the bigger the correction required. If changes are not made now, then it puts at risk bigger changes down the track that could have a greater effect on people who are about to retire or who have already retired. More specifically, to excess franking credits.

These encourage retirees to overload their investment portfolios with domestic shares that pay large franked dividends. A diversified portfolio is always better for weathering uncertain economic times. An over-reliance on franked dividends leaves retirees exposed if there is a downturn in parts of the economy.

Change is hard, but we need to acknowledge the problem before we can move forward. If we don’t, we end up sitting in a huge pile of rubbish convincing ourselves that nothing is wrong.

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Written by Matt Grudnoff

67 Comments

Total Comments: 67
  1. 0
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    I am always bemused when excess franking credits are seen as unsustainable. How much does the government budget for franking credits? Nil, they are a refund of overpaid taxes as most retirees are on a lower tax rate then company tax. This costs the government nothing. The money does pass through the tax office and some pollies would like to get their hands on it. What is left out on the debate is refund of franking credits occurs for all share holders whether working or not but the focus is on retirees. The franking credit rebate was introduced to have a fair tax system in addition to getting aussies to invest in Australian shares. The incentives have worked and many plan their retirement around the franking credits topping up their other income. This has let Australian companies being able to raise money through hybrid shares and keep the money local. I am the first to acknowledge we do need to look at how we pay retirees but we also need to be careful on other impacts from policy decisions. If franking credits were to be drastically changed, I would move my investment to overseas companies, as many other retirees would as well, and Australia will lose out across the board with companies not able to raise money as easily and share prices much lower than current values

    • 0
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      Well written!

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      Australian companies only pay franked dividends because people want them. Takeaway the refund of excess franking credits and Australian companies will replace equity with debt thus paying interest instead of tax. The only people investing for franking credits will be those who can use them to pay less tax. Nothing in the coffers for the poor there.

  2. 0
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    Why does everyone forget about the National Welfare Fund introduced in the 1940’s and amalgamated into general tax under Menzies. The baby boomers have paid their tax and in so doing their contribution to the age pension. Every one should get the pension. These sort of articles are designed to make us forget the facts and think we should change the system. The trouble is our politicians squandered the money and sold gov’t income producing assets. We need better politicians and STOP TAXING THE BABY BOOMERS.

    • 0
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      There is one thing wrong with this comment – and others

      Baby boomers pay taxes for those receiving an aged pension now, not so they themselves can receive the pension later.

      We don’t pay taxes in order to get the age pension in 10-20 years. It will be up to tax payers in 10 – 20 years to pay our age pension

    • 0
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      The National Welfare fund was a scam so that people paid more tax back when it was introduced. If it had have been a true welfare fund everyone would have been given their individual accounts like the US and other countries.

      You have been conned on this.

    • 0
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      Daveh, most boomers were barely working when Menzies amalgamated the NWF back in the day, heck some were not even born, so it’s drawing a long and somewhat wobbly bow to claim they have contributed much if anything towards their aged pensions. Boomers have plenty of time to get used to the idea the NWF was a dud, the first of them only reached retirement age less than a decade ago and the late boomers have still another decade to go. As Tams says most boomer taxes have gone into consolidated revenue to pay for the expenses of the day, including pensions and other social security. Current and future taxpayers will be paying boomer pensions for the next two to three decades.

  3. 0
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    The usual comments appear trying to justify an unworkable system. If the current government is fair dinkum about tax reform then the haves will have to give up some of their largesse. They won’t do it wiithout a fight however and they do have a lot of clout within the LNP who after all put that system into place.

    • 0
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      I agree Tanker. We have to be careful, however, how we define the ‘haves’. Labor’s attack on self-funded retirees, proposing to stop franking credits, was a classic example of wrong targeting and wrong definitions.

      When it comes to superannuation tax concessions, it not just retirees enjoying unfair benefits. A high salaried worker receives 30%+ tax reduction on contributions to super and income earned in super, while a low income earner gets 0%, and in come cases actually pays more tax than they would if they received the income as wages. That is just so hideously wrong. But Labor insists that situation must be worsened by raising the super levy to 12%.

    • 0
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      Well said tanker.

      The combination of neoliberals with neoconservatives has been the death of economic justice across the western world.

      None of the people who pat themselves on the back for ‘developing’ Australia or making us one of the ‘wealthiest countries in the world’ will ever share the common wealth with the people who did the work. It is as if ‘I, me, myself’ did all the heavy lifting by moving ‘my’ money around, borrowing someone else’s and contributing to the LNP and IPA, while businesses magically produced products and outcomes all by themselves with no further human intervention – let alone cleaners, clerks, tradespeople, drivers, cooks and bottle washers, IT specialists, educators, and so on.

    • 0
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      “… cleaners, clerks, tradespeople, drivers, cooks and bottle washers, IT specialists, educators, and so on” – the very people we found were important during the covid lockdown rather than fund managers and investment advisers

  4. 0
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    The problem in Australia is poverty exists not because we can’t feed the poor, but because we can’t satisfy the rich?

    • 0
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      No it exists because people make poor spending and living choices.

    • 0
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      Give me facts RW. Many many people are subject to circumstances outside of their control.
      Your statement is rubbish & puts everyone receiving anything from the government into the same category.

    • 0
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      Retiring well, I agree. I have colleagues who spend all their income on clothes, makeup and overseas trips. They’ll have no money when they retire and will get the age pension. I paid off my mortgage and saved and won’t get the age pension. The system encourages people to waste their money.

    • 0
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      Fedup, you seem to be forgetting your colleagues are contributing to the super scheme, as sketchy as it is, to help provide for their future retirements. No doubt there are people who make poor choices in many areas, including spending and living as RW frequently points out, and could save more however they unquestionably contribute to the community and economy through spending.

      The economy would be a pretty drab place and a lot less employment if you got rid of the tourism and retail sectors so people stayed home. Sort of reminds me of the agrarian economies of the 19th century with focus on austerity and the bulk of the population living close to the bread line. The recent pandemic induced lockdown showed how quickly business and the community go into distress when consumption spending stops.

    • 0
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      To all the experts on how to spend or save money, consider this. Have three children, get divorced. Pay for oneself, renting, and pay $1800 per month child support for 17 years. If you are able to save more than your super contributions let me know as you may be able to make a lot of money selling that scheme. So please RW be thankful for your own life journey but don’t try and compare everyone with your own unique circumstances !!

    • 0
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      But you are not struggling on welfare inextratime. If you were you would pay no child support. Also don’t get divorced and look after your family instead.

    • 0
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      Farside, the people I’m talking about retired at 55, took their super in a lump sum, and are busy spending it before they reach pension age. It won’t fund their retirement once they turn 66 or 67.

    • 0
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      Fedup, I don’t doubt your partying 55 year olds were like the little pigs in the house of straw but if they have truly squandered their income then the reality of life on the pension will bring them down to earth. Not many pensioners are splurging on motorhomes, prestige mansions and booking luxury cruises.

      There is a silver lining however … their retirements created vacancies in the workforce and opportunities for others. In doing so they directly help reduce unemployment by leaving the workforce and indirectly by stimulating the economy with spending and creating wealth for others.

      It is also worth noting that workforce participation steadily declined through the last few decades of last century before markedly increasing after 2000 (70-80% for 55-59, 45-60% for 60-64) so perhaps this is influencing your perception?

  5. 0
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    Why has this been article been posted? It is a re-hash of his previous article on franking credits. It is a failed policy as it was targeted for SMSF retirees. Also his article uses dates before the current limits on super were introduced.

  6. 0
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    Why has this been article been posted? It is a re-hash of his previous article on franking credits. It is a failed policy as it was targeted for SMSF retirees. Also his article uses dates before the current limits on super were introduced.

    • 0
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      Maybe because it’s even more relevant today as governments, especially this one refuse to do anything about it or even accept that the problem exists. Both major parties are no better than each other but the incumbent is the one that can only make change.
      The system is broken. You can’t bandaid a broken leg.

  7. 0
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    Excess franking credits and super concessions are not the problem. The problem is people with more than $1.6 million in super and the no tax on super after 60.

    There are $50 billion in franking credits not $6 billion. Those extra $44 billion go to high income earners so they pay less tax. The $6 billion in franking credit refunds go to those who need the money to live. If you deny the refund of excess franking credits then only those who can use franking credits will have them thus giving no extra revenue. If people can’t have their franking credits returned they will just invest elsewhere. Super funds will invest more in residential property and other property adding more fuel to an already high property market. Very few of our young people will be able to afford to buy their homes and more will reach retirement with a housing debt.

    Also it is not the lack of money that causes poverty. It is the lack of education on how to spend welfare. All those on welfare should be given a welfare card so that their spending is controlled and it is spent for what it is given.

    • 0
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      Take away super concessions they why would anyone invest their money in super? I certainly wouldn’t as super is nothing but a tax advantaged investment vehicle.

    • 0
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      Welfare card to control how, where, when & what we can spend monies on. A very communist approach.
      The last thing I would want is for any Government to have further control. We have lost enough freedoms & now you want the government to take even more of our freedoms from us.
      Retiring Well is a Commie lol

    • 0
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      Karl Marx, are you sure that wanting to control how people spend their money and exercise choices is communism? I was thinking about this the other day when reading negative commentary on decadent spending ways. It is a frequent theme on this site. Notwithstanding the general intolerance for others choices, I suspect this exercising control over society and the economy and emphasis on austerity tends more toward fascist ideology. Cloistering at home in the 21st century, who would have thought?

    • 0
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      Superannuation tax concessions ARE a problem, RW, and not just in the context of concessions retirees enjoy. The real problem is that high income earners get massive concessions (30% generally) on the super contributions and earnings, while low income earners get little or nothing – and even sometimes actually pay more tax on their super than they do on their wages. This is where the massive problem is. It’s not necessary to stop concessions and discourage investment in super. Just reform it so it’s fair and gives low income earners more help to save for retirement. High income earners don’t need the extra. Change the concession to 15% discount on the member’s marginal rate, including a govt contribution to super where the 15% discount results in a tax less than 0 rate. Result: cost to government is reduced and more people have an adequate super nest egg to fund their retirement, so the cost of the OAP reduces.

    • 0
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      Of course the other huge problem is punishing retirees who saved and handing out to spendthrifts and manipulators, and Labor’s stupid franking credits policy would have put the final nail in the coffin of saving for retirement.

    • 0
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      High income earners pay 30% tax on their super not 15%.

      If you are taxed more on super than you wages it is adjusted at the end of the financial year when you lodge your tax return. It goes into your super fund as a tax credit.

      The problem is not tax concessions on super or franking credits but the no tax on super after 60 where only high income earners benefit. Tax super properly and the problem is fixed.

    • 0
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      No, RW. You are wrong. The vast majority of Australians – high income earners and low – pay 15% tax on super contributions and earnings. For the lowest income earners, this means they pay 15c in the dollar MORE than they would pay on wage income. The next lowest get a concession of 4c in the dollar. Those earning over $180,000 a year get a concession of 30c in the dollar. This STUPID. Why should the taxpayer give someone earning $180K a year 30c in the dollar to build a multi-million dollar super fund and a low income earner only 4c in the dollar? Naturally, the low income earner will then need a pension, because the taxpayer contributed millions to the high income earners and nothing to the lower end.

      Super income should be tax free in retirement if it’s taxed going in and earnings in the fund are taxed, because otherwise you are paying tax multiple times on the same income. But if everyone got a fair go in terms of concessions during the earning phase, and there were sensible caps on how much you could accrue in super, making retirement income tax free would not be an issue.

    • 0
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      If you pay less than 14=5% tax then you will only pay your marginal rate on super contributions too. I know low income earners who pay nothing on their super contributions because they pay no tax.

  8. 0
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    Not taxing a retiree’s super doesn’t cost the government anything. It’s just money they don’t get. It’s like saying that not winning the jackpot lottery is costing me $100,000.

    Why should we pay tax on our super? If we didn’t have it we would be on the Age Pension, which would cost the government a lot more.

    • 0
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      It costs the government in lost potential revenue. You know like all those millionaires & companies that can afford smart accountants to hide their funds offshore so they pay no or little tax, that is also lost potential revenue.
      Of the 2,214 companies covered in the Australian Taxation Office’s transparency report for 2017-18, a total of 710 didn’t pay any tax. Google “how many companies pay no tax in Australia”
      Sixty-nine Australians who earned more than $1 million in the 2016-17 financial year did not pay a cent of income tax. Google “how many millionaires pay no tax in Australia”

      You don’t pay tax on your super, the proposal would be to tax what it makes from your super. Most retirees wouldn’t pay tax unless they were over the total income threshold & that can be adjusted for anyone that is over a certain age or retired.

    • 0
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      NO tax on super after 60 only benefits the wealthy. We need to go back t the old tax system where people paid tax on their super and got a 15% rebate. I actually paid less tax with the 15% rebate than I do now with the no tax on super after 60. However if I had a big income I would be paying more tax under the old system than I do now. Not only that the old system taxes those with more than $1.6 million in super more.

    • 0
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      We do pay tax on the way through our lives with using either after tax money, tax on contributions, and tax on pretax voluntary contributions. We then pay tax on investment earnings. When we retire the only tax free part is the drawdown on a max of $1.6ml.
      We all pay GST, rates and every levy that all others pay. We are still obliged to pay the appropriate tax rate on investments outside of super. The wealthier someone is the more they will pay.
      One of my friends who I have known since school days has retired, after running a successful business, working hard, planning and taking some risk in establishing a manufacturing business that exports to over 60 countries around the world. His kids now run the business but he still has control, and profit shares. He paid $2.5 million tax last year as a retiree. He is wealthy and pays tax. It is only the lucky few who got mega millions into their super while the loop hole was there such as Dick Smith who avoids paying tax. And Dick could move his money out of super into normal accounts if he is concerned about his situation.

    • 0
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      Karl Marx, you could also claim that not taxing the age pension costs the government potential revenue.

      Also, if people paid tax on their super pension, then more people would qualify for a partial age pension, so the government wouldn’t gain.

  9. 0
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    I say pay every pensioner the full pension no income and asset test but tax all earnings including superannuation. Possibly even think about bringing back Death Duties in a certain form.

  10. 0
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    Doesn’t the growth in franking credits just track the growth in individuals and SMSFs buying Australian shares. The steep upward curve just tracking the reduction in other instrument’s interest rates. A partial presentation of information and graphs to deliberately distort? Why wouldn’t people try to maximise returns? A good thing too.

    • 0
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      The growth in franking credits is because people want franked income so companies actually pay more tax in this country than in any other country so they can satisfy their shareholders. One has only to look at the dividend rate of overseas countries to realise they use a lot more debt rather than equity and ay interest instead of tax. Abolishing franking credit refunds will have Australian companies using a lot more debt instead of equity and paying interest instead of tax.

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