System Punishes Thrifty Boomers
Sydney Morning Herald
Saturday November 22, 2003
Cultural commentator Bernard Salt had delegates to the Association of Superannuation Funds of Australia's annual conference in stitches last week as he talked about the ageing of the baby boomers. Salt painted a picture of a generation that had made Number One haircuts the height of fashion (to hide receding hairlines and bald spots), black the colour of choice (to hide expanding hips and disappearing waistlines), and introduced a new phrase to the national vernacular. As they succumb to middle-age spread, Salt argued, the baby boomers concede they are getting ``a bit heavier". Unlike previous generations, there's no way they're getting fat.
But beneath the jocularity is the very real observation that the baby boom generation, by the sheer force of its numbers, is continuing to change our society. When the baby boomers decide to adopt something they do so en masse, and the consequences can be wide reaching.
In trying to understand the incredible rush into residential property investment in recent years, the Reserve Bank should keep one figure in mind: $11,773. That's the current age pension for single pensioners (the level for couples is $19,656 even worse on a per person basis) and it's enough to scare your average baby boomer senseless.
The idea of living on around $225 a week (or $378 a week for a couple) is inconceivable to many baby boomers. Yet, as survey after survey has shown, this is a generation with lots of wealth tied up in their homes, but precious little in accessible savings.
Just as baby boomers rode the late 1990s share boom with their ears pinned back, they have been jumping on the residential property bandwagon. Certainly many are making the mistake of wanting to get rich quick and will be burned by it but they rightly feel they don't have a lot of time left to do it in.
Yet, as two actuaries brought home to the ASFA crowd, most baby boomers will still be dependent on at least a part pension in retirement.
Rice Walker Actuaries' director, Michael Rice, pointed out that the Federal Government's own Intergenerational Report (released as part of its Budget last year) predicts spending on age pensions will rise between now and 2040 and projects that 55 per cent of retirees' income will still come from the age pension. He said many projections of future age pension costs look at what happens when people first reach pension age and ignore the fact that their circumstances change as they get older. For example, while only 35 per cent of men receive a full pension at age 65, around 60 per cent are on a full pension at 80. Women are even more dependent on the government, with around 45 per cent on a full age pension at 65 and closer to 65 per cent at 80.
The bad news for the baby boomers is that this means future governments will find it exceedingly difficult to meet their inevitable demands for a more generous age pension. But their discontent with the size of the age pension will be nothing compared with their indignation when they discover the traps in the social security system that effectively punish them for saving.
PricewaterhouseCoopers' director of asset consulting, Catherine Nance, told the conference that under the present system a retiree can get a full age pension if their assets (excluding their home) are worth less than around $150,000. They get no pension at all once their assets exceed around $300,000.
If someone on $40,000 received compulsory super for around 40 years, they could expect to have a super payout of around $150,000. That means that their savings, plus the age pension, could give them an after-tax retirement income of $21,770. That's probably not enough for many baby boomers, but a big improvement on the age pension alone.
However Nance says that if this person saved an extra 5 per cent of their salary, they could find they shouldn't have bothered. While their savings will give them an additional $75,000, she says the loss of some of their age pension will mean their net retirement income will remain much the same. Instead of getting $10,000 investment income and $11,000 from the age pension, they'll get around $15,000 investment income and $6000 age pension.
Why bother?
Nance says there also isn't much incentive for baby boomers to put off getting the age pension until they're older. The government has a pension bonus scheme that is intended to encourage retirees to do just this. But Nance says it works only for the government. If you delay your pension for two years, she says, you may be eligible for a $4400 lump sum but you've given up $23,000 of pension. Delay for the full five years allowed and you may be able to get a lump sum of $27,700, but you've missed out on $60,000 of pension.
Nance says that there are also big disincentives for working part-time in retirement.
But there are strong incentives to retire early, live it up and then take an age pension. For instance, she says someone earning $50,000 a year who put aside 15 per cent of their income for 35 years would have $250,000 by age 60. If they retired at 65 with this $250,000, she says, they would get an age pension of around $4000 and investment income of around $16,000 a total after-tax income of $20,000. But if they retired at 60 and spent half their money $125,000 they'd still get $20,000 of after-tax income at age 65. Sure, their investment income would be less around $8000 but they'd get the full age pension.
Nance says OECD studies have shown Australia is one of the worst countries for punishing older people for working in retirement. These inequities need to be fixed before the ageing boomers discover that, far from trying to avoid needing the age pension when they get older, they should plan to get as much of it as possible.
© 2003 Sydney Morning Herald
