Money For the Old and Crinkly | BTalk Australia

(23min 48) The Financial Planning Association (FPA) has submitted a series of recommendations to the Australian federal government’s tax review panel, which is chartered with examining how to position the Australian taxation system to best cater for the changing “demographic, social, economic and environmental challenges of the 21st century”. The review panel will submit it’s own recommendations to the government by the end of the year.

In today’s BTalk Australia Phil Dobbie talks to FPA Director Louise Biti about their recommendations to the panel. How will we cope with the ageing population who could be creating a major tax burden for the next generation?

What changes do you think the government should make? Add your views in the Talkback section at the end of this post.

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• Transcription

Phil Dobbie: Hello, I’m Phil Dobbie and welcome to BTalk Australia. Today we ask the question: is there going to be enough money around when you’re old and crinkly?

In May last year the government announced a review of taxation, looking at all aspects of the tax system to, in their words, position Australia to deal with the demographic, social, economic and environmental challenges of the 21st century. They invited public involvement in the process with a review panel giving its final report to the government in December, this year. Now that’s all very well, but of course, one bit that will interest a lot of us is how it relates to our retirement. The Financial Planning Association argues that key policy changes are needed to ensure that Australian retirees are adequately catered for in all phases of their retirement. And the FPA has said this in a submission to the tax review panel, and it’s the view of the FPA’s own panel on the subject (or its own task force anyway), which is being chaired by FPA director Louise Biti. Louise joins me. Louise, an aging population having enough money to fund retirees must be one of the biggest concerns when it comes to managing and balancing the books over the next 15 years or so.

Louise Biti: It certainly is and it’s one of the major concerns that retirees have — actually having enough money to live on. It’s a very long period that people are going to potentially live in retirement and try and take a lump sum at the beginning of that and ration it out over a 20, 30-year period. It’s an extremely enormous task and one that I think we will all find completely daunting. There’s a number of issues that we need to address. We need to address people starting that retirement period with sufficient savings to get them through. We need to ensure that we’ve got a robust and adequate social security system that can help those who didn’t have the capacity to save, and also to top up and help those people make the money last as long as they need to. Healthcare issues are going to increase as an expense throughout retirement. And looking at the interaction between taxation and social security supperannuation will also help us to achieve some of those goals as well.

Dobbie: We do encourage people to save, obviously, with the superannuation arrangements as they currently stand. Are we just not encouraging people to save enough? Is that part of the problem?

Biti: I think it is. I think people often don’t have an awareness of how much they really need to save. I think the preservation aspects of superannuation and the constant changes that we’ve seen to the system start to undermine the incentives to save as well. They fear superannuation and so people aren’t saving enough. I think people are ending up with high levels of debt that are too high and taking up some of their retirement savings. But I think one of the big issues we’re also finding is that people aren’t really starting to think about saving or retirement until they get close to their 50s or even later. So they’ve got a very short time frame to then save money that’s going to get them through a very long period in retirement. So some of the incentives that we’re looking for are trying to encourage lower income people to also have the capacity and incentive to save — people who are younger, to help them start saving earlier and make the retirement saving process a lifetime thing rather than just something that you approach at a particular age.

Dobbie: Do you think that you’ve touched on it there? Do you think that there’s a mistrust of government regulation? That people are saying well, you know, I could put a lot of money into my super, but the government could change the rules. It’s a long way away before retirement.

Biti: We see a lot of that, and as financial planners, we see a lot of clients who don’t believe that the rules will stay constant. They’re nervous that if they go ahead with superannuation, put their money into there, the government will change the rules. In particular, and what most fear, is that the government will change the rules about the ability to access lump sums. And we believe that we should be creating an income stream culture. We should be creating incentives and desire to take their money just as an income in retirement. But we still believe you need the flexibility for lump sums because everybody’s circumstances are different. People have different needs, they have different expenses, they will need medical expenses in lump sums for that. So we don’t believe in stopping people, or making disincentives for taking lump sums, but we do need to encourage income strength as well. People just fear the unknown and the level of change they’ve seen — often the level of change since superannuation is around political objectives as well. So that’s creating disincentives for people to actually want to use superannuation.

Dobbie: So, what’s the answer? How do we avoid that mistrust? I think part of that mistrust is it keeps out looking and saying when I’m old everyone else is going to be old to and the government is going to be clawing money from wherever it can. I think perhaps people are also worried that tax rules are going to change and they’re going to find themselves with a tax burden that might not exist now.

Biti: Yes, I think this is exactly true. This is an opportunity for the government to look at the taxation of social security and superannuation so we are looking at the whole range. I think, though, there are some major structural areas within superannuation that would be good to see the government say we won’t change these, we are supporting them. It would be good to see them keep those commitments and not back down, because that will start to create some confidence in the public around the use of superannuation. But I think we are getting very clear messages from the government that this is a long-term change. Although, that’s very hard in our political system because each time we get a new government, they quite freely can overrule what other ones have brought in, in previous times. So I think we need to start getting political parties to agree that in these sorts of areas, they’re going to make unanimous decisions and they’re all going to abide by them and try to get some kind of future stability. But if we can also see that the system is thinking about the aging population and the potential impact on our economy (as we get to see the baby boomers moving into retirement), then that will help build some confidence in the system as well. We need to see that the decisions that they’re making are sustainable, given that shift in population and not that they’re just a popular vote that’s helping to keep people happy for today. So I think it’s those sorts of issues and messages that we need to be looking at and seeing how the three systems of tax, social security and super all integrate together and changes are made with the understanding of how they will impact on those other areas as well.

Dobbie: Good luck with that, getting the government to think longer than a four-year term. You are suggesting a two-tiered age pension system, an aged pension to people 65 to 79 and one for 80 years and over. What’s your reasoning behind that?

Biti: As you get older your savings are starting to dwindle because you’ve been spending it in your earlier years, but also as you get older your expenses and the need for extra income can become a bit higher — looking at health and medical and aged-care costs. So what we’re proposing in the system, and there are a couple of different layers to it, is (1) looking at maintaining the age pension, roughly, as it is now. But again, the government is doing a whole other review on the adequacy of the level of that pension. So we believe that it will be interesting to see what comes out of that review so we can get an age pension for that first period of time from 65 to age 80 on an adequate level that meets the needs of the people in that age group. Once we get to age 80, we’re finding that they’re moving into a different phase of their retirement, where they all of a sudden become less mobile, their health is starting to deteriorate, and there are the costs associated with that. In particular aged care and health expenses become higher. So what we’re looking at is that the age pension will change at that point and either move from an age pension to an old age pension or add an old age pension supplement onto the existing age pension. This gives them a higher level of income to help cover those health and aged-care needs. And that is affordable within our system because a lot of those support mechanisms are funded by the government, so this can help. It’s just a different transfer of how it’s going to be funded, but it puts the control on decisions on how people are going to live and the dignity that they’re going to choose at that point back into their own hands by having the money available to make the choices on how to use it. It’s obviously still going to be means tested and can have other eligibility requirements around it if the government feels it’s necessary to limit it to those who do need it for their health or aged-care needs. So, we’re looking at just having the two-tier system and again, it’s all about making it affordable so the government can afford to fund this, but then providing the extra old-age supplement where people need that extra support. We’re also looking in conjunction with that, at a system where people can truly defer the age pension. At the moment we’ve got a system where when you get to aged pension you can defer it, you get a lump sum, it’s a very complicated system, it’s a very misunderstood system and many eligible people miss out because they don’t follow the correct procedures and rules. But it’s also just giving them a lump sum, which is very easily spent on other things or gifted to family. So what we’re looking at is a better system there as well, which defers the age pension while you’re still working or even just living on other resources and that can then top up your age pension when you do apply for it with a higher level of income that compensates you for what you’ve given up. So from a government point of view, there’s a benefit because there’s a deferral on paying the age pension, in particular if that person dies before they make a claim, then the government banks that saving, but for the individuals it means they don’t have to do numbers and compare should I work or shouldn’t I work, it’s all more about what they want to do, knowing that they’re not losing out on the age pension. And that they’re going to get it as income, which is what they really need more when they’re retired.

Dobbie: I suspect by the time we are 65, the government might have deferred the age pension for everyone, whether they like it or not.

Biti: It’s one of those things that’s up there as a question: do they change the aged pension age? In many other countries, they have. The Financial Planning Association doesn’t support an increase above the current pension over 65.

Dobbie: You’re also asking for an increase to the super[annuattion] guarantee. Does that make sense? Doesn’t that really just become another cost burden for a lot of employees? And is it really going to encourage greater super saving? And shouldn’t it really be a discretionary choice by the employee?

Biti: We’re looking at that in an ideal world yes, you may get a choice, but for many people they just don’t have that incentive to save and also don’t have the access to advice in education to help them understand the importance of saving. We are proposing that nine percent is inadequate for many people, so what we need to do as a whole economy is get everybody to an adequate level of retirement savings. We believe the first step in that is getting us to a 12 percent superannuation guarantee. But we are proposing actually a soft compulsion method rather than an obligation that an employer will pay those amounts. So with the soft compulsion method it is still something that the employee is choosing to do, but with a very large incentive for them to actually do that and an opt out method. So it’s basically saying that everybody will contribute and scaling it in there with 1 percent going up to 3 percent with the ability for them to opt out if they choose not to do that. And the tax incentive there in that you still got the same, it’s only a 15 percent tax, rather than your marginal tax rate. And we’re also looking at a system of refund and contributions tax for lower income people to make sure that they are really getting incentives for making contributions into super and it’s not just high-income earners. So it isn’t, we are looking at it as not being an extra cost on employers, however you may find some employers, when the economy improves, may want to offer higher levels of super guarantee as incentive for attracting good staff. But the method we’re suggesting is that the employees will have the ability to choose, but with incentives definitely to actually have to do it.

Dobbie: The super guarantee only picks up a proportion of the population of course, and there’s an increasing proportion of the population that are finding themselves in casual positions, or they’re sometimes, as a means of avoiding those super contributions from the employer and also a lot of people are in self-employed situations, so that’s going to become an increasing proportion of the population. A lot of these people are not saving for retirement. How do we grab them into this process and ensure that they are going to have adequate funds for retirement?

Biti: It is, again, an area that we have looked at because it’s been a concern that we have people who are getting a super guarantee and some who don’t. Self-employed people are of particular concern because a lot of them aren’t saving. They’re just putting everything back into their businesses because that’s where they’ve made the choice that they need the money at this point in time. And that puts the risk of both the current lifestyle and future lifestyle on the viability of that business. What we’re suggesting is that we need to extend the superannuation guarantee to all employees, even those who are self employed. The problem we face is the policing of that, and compliance with the legislation, because at the moment if an employer doesn’t put super contributions in for an employee, the tax department hits them with a penalty. So it’s a fairly big incentive for employers to do that. If you’re going to go to self-employed people, it seems a little ironic to fine somebody for not putting savings aside for themselves. So there are some issues that need to be worked through there. And I guess we don’t have all those answers at the moment, but we do believe that we need to try to extend some guarantee to self-employed people. The government and tax office will need to have a look at how they can actually monitor that and the enforcement of it so that the self-employed people are putting the contributions in without crazy penalties applying to them.

Dobbie: … or without their business collapsing or without forcing them to starvation because the money that they needed for food is finding itself being forced into super contributions.

Biti: That’s right. So there’s all of those issues. We’ve recognised them as an area of need — that there’s a bit of work that needs to be done as to how we actually do it and how you create that environment for them. And then there are the casual workers — we’re looking at sort of all those other areas as well. There’s an area with people who are 70 or older who continue to work, but don’t get a super guarantee paid for them, and we think that’s a little odd that just because they’re older they don’t get the super guarantee. So we’ve proposed that all workers should get the super guarantee, regardless of age. For casual workers, there’s no reason we need the $450 a month limit. We believe that everybody should get the super guarantee regardless of the amounts that they’re earning or the age that they are. Again, there are some compliance issues that come through with that as well. So, while we can look at what we believe is fair and equitable, we also need to look at what’s rational and what can be achieved and the compliance costs. Sometimes they just outweigh the benefits of that incentive. We also have suggested in our submission that the government could look at making super guarantee contributions for some areas of low income people or those who are not working or those who are on carer’s payments. There are certain classes of people who we know they don’t have an employer contributing for them, and they don’t have the capacity to save themselves because they are on a very low income. Potentially the government should look at whether they can make the super guarantee contributions for those people? And you could look at using that as an extension or a replacement of the co-contribution system. So again, anytime we want to look at a measure where the government can put more money in. We are always balancing it out with how do we make this affordable and sustainable. And that’s going back to the first comment we made: we need to have measures that are sustainable, otherwise the government will keep playing with the rules, and if the government keeps playing with the rules, it undermines the whole confidence in the system. So we’re looking at extension of the super guarantee system, but it may be, as we said, we could bring that in conjunction with the co-contribution rules and replace them with an effective super guarantee system.

Dobbie: We’re looking at encouraging saving for retirement on the one hand and on the other hand, Australia’s got one of the highest levels of housing debt in the Western world — one of the highest anyway. Isn’t an argument that says we’d do better to focus on reducing that household debt and using schemes like reverse mortgages to try and access some of that money rather than putting all of that money into savings in the one hand when you’ve got this high level of debt in the other.

Biti: I don’t know. We do have a high level of debt and it is a problem, particularly as we’re seeing a lot of people entering retirement with debt from their home at that point, which means they’re cashing in part of their superannuation to pay off that debt.

Dobbie: Which makes no sense at all, does it.

Biti: It doesn’t. And they’re already in retirement without enough savings anyway, and so they’re using some of that to pay the debt. So yes, there is an argument that you can look at getting that debt down, but I don’t think that that should be at the sacrifice of superannuation. The problem we’ve got is that if you concentrate on just paying off debt and provide incentives to get people to reduce their housing debt, then you have a situation where people will buy houses that are probably more expensive than they would otherwise buy or need. So you can end up with people being too overcashed into property and into their home, and get to retirement with absolutely no savings at all. Yes, they can use reverse mortgages. We’re seeing a bit of a problem with those products and learned that only because of the credit crisis that we’ve experienced in the current environment it started to see the money available for these products being more difficult for the lenders to obtain and finance. And a lot of the products have stopped offering reverse mortgages and there’s a far reduced number of those products available. There are limitations on it, so they can work very effectively for some people. We think they should be used for paying off your home and then having access to the capital in your home. This could be used in conjunction with also saving and superannuation, having money available for retirement. But I don’t think you should concentrate on just one aspect and not the other. You need a balance between the two of them.

Dobbie: Yes.

Biti: So that people do have savings and they also have somewhere to live. But the problem is just concentrating on where they live is then there’s no measure on affordability of how far they can spend on that.

Dobbie: What you’ve been saying makes a great deal of sense, particularly in ensuring that everyone, irrespective of their current employment circumstances, is pushing money into the super funds for their retirement. What’s your feeling? Do you think the government is genuine and open in terms of this review? And are you hopeful that your recommendations are going to be adopted at the end of the year?

Biti: We believe that this is a genuine review, that they are looking at all areas of it appropriately and they’re trying to combine all the areas of tax, social security and superannuation. So we think it’s a genuine desire to look at the system, to have lots of consultation and to take that into consideration. We’re hopeful that some of our suggestions were picked up, but we’re also in mind that there are so many different opposing views across the whole sector of what people specifically want. But I think there are some very common themes coming through. I think that most areas that are contributing to this review are looking at trying to get superannuation guarantee higher, trying to create better incentives and better equity for people on lower income, trying to create greater access to advice education. And I think that’s a really key part of the whole system is that people are only just really starting to become aware of superannuation and what it means. So many people really don’t take much notice of it at all, and really have a very low understanding of what it means and the importance of saving and learning to save. So their access to advice and education becomes really critical in this process. So we think there are some common themes that we’ve put into our solution and lots of other groups have put into their submissions, so we are hopeful that the government will see that it’s a consistent theme and will pick up those suggestions and look at how they can implement them. And we think that is being a fairly open process. Time will tell.

Dobbie: Time will tell. It’s a shame that we didn’t make a lot of these changes 30 or 40 years ago, because changes now obviously are going to take a long time before they really start to have an impact. But it’s been great talking to you. We could have talked all day about this, Louise. It is a complicated subject.

Biti: We certainly could.

Dobbie: Thanks for your time today.

Biti: Okay. Thanks, Phil. Bye.