Month: April 2015

Does this represent effective retirement incomes policy?

AustralianActuary Economics

The Australian Retirement Incomes system is based on the three pillars of a taxpayer-funded age pension, compulsory occupational superannuation and then everything else including voluntary savings, causal work, family support etc. The introduction of compulsory occupational superannuation in 1992 has not done much to relieve pressure on the first pillar.

This chart shows how a retirement income is generated in one particular case. The hypothetical individual in this chart enters full-time work at age 21 on a salary of $45,000pa. What follows are 44 years of continuous work, with the salary rising at a real rate of 1.5%pa, superannuation contributions are at 12% of salary over the whole term and the investment return is 3%pa real before fees and taxes. On retirement at age 65, our hypothetical worker targets a retirement income of 50% of pre-retirement income.

It is not inspiring. This person would be unusual among Australians to have a full-time career with no employment breaks, through choice, necessity, unemployment, parenting etc. The earned income is better than the median. The rate of contribution is 12% of salary throughout – at present, most people have no more than 9.5% saved. The real investment return of 3%pa will require everything to go well over a very long period, including through retirement.

The conclusion is that the taxpayer is funding about half this person’s retirement income, until about age 90, when the taxpayer takes over 100% funding obligations.

The smell of tax change is in the air

AustralianActuary Economics

Can you smell it? The prevailing winds at this time of year come from the direction of Canberra as the Government and public servants in the departments of Treasury and Tax work out the policy changes that will form part of the Budget night speech by the Treasurer in early May. When I turn my nose towards Canberra, I can definitely detect the smell of tax changes.

The federal Government executive works feverishly ahead of the Budget in formulating ideas for policy change. Sometimes, the ideas are good, sometimes they are not so good and sometimes they are positively barmy. The work rate is high and the stuffiness in the office air in Canberra gets worse as each day moves into night and the deodorants applied that morning have long ago given up the good fight. At this point, the officials can open the windows or turn up the air conditioners. Usually, it is in the office where the policy idea might be considered by Sir Humphrey as ‘courageous’ that the window is opened. This lets the smell of the idea waft out into voterland and the reaction of voters is a guide to Government as to the acceptability of the idea. In other offices, the windows remain tightly shut and no whiff of the idea gets out until shortly after 7:30pm on the night of the Treasurer’s Budget speech.

Right now, the tax changes under serious consideration, judging by the air wafting from Canberra, include changes to franked dividends, age pension eligibility and negative gearing. Continue reading →