It’s clear from actuarial forecasts that the Government is on an unsustainable course with ‘welfare’.
Circa 1910, the Federal Government introduced a welfare payment scheme to essentially help feed Australians who were; 1/ living below the ‘poverty line’, 2/ living well beyond their life expectancy and 3/ were too old to work. This scheme still exists today and is known as the Aged Pension.
The Australian Aged Pension in 1910 was subject to a residence qualification of 25 years and was available to men from age 65 and women at age 60. Life expectancy in Australia for the period 1901–1910 was 55.2 years for males and 58.8 for females.
Today, 106 years later, life expectancy has improved by about 30 years, to approximately 85 years (or 75 if you are an Indigenous Australian) yet surprisingly the Aged Pension still remains available at age 65. So based on these statistics, it is understandable why the Government is starting to progressively move the Aged Pension qualifying age up to 67 years as well as undertake a number of other welfare reforms.
We are starting to see more onerous qualifying rules in many areas following the Review of Australia’s Welfare System (McClure Review); the purpose of which was to “identify how to make Australia’s welfare system fairer, more effective, coherent and sustainable and encourage people to work”. We are being told to be more responsible for our own financial well-being and to aim for a higher standard of living, well above the poverty line where the Aged Pension sits.
Crucial to framing an incentive to achieve financial independence in retirement was the Keating Labor Government’s 1992 introduction of a compulsory superannuation guarantee system as part of a major reform package addressing Australia’s retirement income policies.
The new reality is that we need to be accountable for funding our lifestyle when we cease working (or retire), unless of course you are content with living on the poverty threshold by relying on Government welfare to survive i.e. approx. $35,000 per annum per couple (Aged Pension).
Australia’s median gross household income in 2013-14 was $80,704, some 130% above the Aged Pension entitlement. So what does ‘financial independence in retirement’ actually mean in dollar terms and how much ‘capital’ do we need? Clearly we all have different circumstances but the point is that in reality, we need extremely large amounts of ‘capital’ for a below average retirement ‘income’.
For example, the levels of capital ‘self-funded’ retirees need to enjoy a joint sustainable indexed pension of $50,000 p.a. is a tidy ‘nest egg’ of approx. $1,000,000.00 (30 year annuity assumes 4.75% return, 2.00% inflation).
Given the magnitude of these numbers, you would think that the Government would introduce policies that complement their welfare objectives, but not so. If you read the 2016 Federal Budget glossary it states “In the 2016-17 Budget, the Government announced a package of reforms designed to improve the sustainability, flexibility and integrity of the superannuation system. It set out a clear objective for superannuation: ‘to provide income in retirement to substitute or supplement the Age Pension’ which guided the superannuation changes”.
So what was the Government’s significant reform to superannuation? They reduced the amount you can invest in superannuation by approx. 42% per annum… yes, totally illogical and contrary to the policy objective.
This naive, theoretical, bureaucratic nonsense that apparently asserts ‘less is more’ reflects very poorly on the judgement of our Governors, particularly if we are to believe the notion that ‘simplicity and clarity lead to good design’. So what is going on?
NB: None of the above applies if you are a retired Politician, Government Bureaucrat or Public Servant, with taxpayer-guaranteed defined retirement benefits.
1st November 2016