Close to a month into his ministership, Turnbull has set some solid groundwork at the mini-summit. So in a new world of rational political discussions, we put up a suggestion that should be considered in framing a better retirement income solution (for anyone that would hear us)…
The Prime Minister’s Summit in Canberra last week resulted in a strong level of consensus amongst the bureaucracy, business leaders and employee representatives. The agreement to consider a raft of changes including limiting superannuation tax advantages and adjusting capital gains taxes was notable. It showed everything regarding tax can actually be ‘left on the table’ for consideration in a mature policy discussion.
The world did not end with these announcements and this showed Australia was always up for mature economic debate despite years of rhetorical nonsense from our leaders.
So in the new world of rational discussion regarding taxation, superannuation and pensions we have a suggestion that should be considered in framing a better retirement income solution than exists today.
In particular our solution addresses the growing concerns of retirees now exposed to severe volatility in equity markets and a sustained period of low interest rates. These two factors can and will have a pernicious effect on consumption patterns and the economy unless a proper social safety net is created. We suggest a new form of aged pension be contemplated to alleviate the anxiety of retirees.
What is the problem for retirees?
The slowly rising life expectancy of Australian citizens should be regarded as a positive development for our society. However, this extended longevity is having unforeseen repercussions for retirees. They are now questioning whether their super capital is or will generate enough returns to sustain a reasonable standard of living and will be sufficient to meet health care or nursing home costs late in life.
Paul Keating called the extended last ten years of expected life as “the stretch to death”. It is this period that is difficult if not impossible to accurately forecast and no more so than if you are 70 years of age.
So the risk of longevity is beginning to weigh on retirees’ minds and if asset markets continue to generate below long term historic rates then the creation of a social safety net for the aged should be a priority. Otherwise retirees will continue to adjust their consumption down as a response.
A possible solution
Our suggestion is the creation of a non-means or assets-tested pension for everybody aged over, say, 85 years of age. Such a pension will alleviate concerns, which could be misguided, that results in capital being constantly accumulated by the older generation. It is this accumulation that results from uncertainty and a lack of confidence. An aged pension for older people will give some vital confidence to retirees to spend. It is the accumulation of fixed wealth in the older generation that exacerbates the effect of the aging demographics. Its effects are pronounced in Japan and across Europe where deflation is prevalent.
The aging demographics of the western world are well documented as are the ongoing effects on the budgets of governments. Therefore a new aged pension might be regarded as a drag on the budget but it will not be if it is funded by a new levy on pension funds and if it generates increased consumer activity by retirees.
A levy could be assessed on all retirement funds in pension mode (tax free status) and it should be considered as a down payment for the annuity that will be paid from age 85.
Of course the time over which a beneficiary receives this pension is determined by their life. Whilst the recipients will grow over the next twenty years so too will the contributors to the scheme. .
Finally the success of this scheme will be determined by two key points. First, it needs to be structured to be substantially self-funded. Secondly, it requires community trust that the scheme will endure over time. This second issue is critical because politicians make too many promises, only to break them.