A Scrooge Performance, By Public Demand
Sydney Morning Herald
Saturday May 10, 2008
Investors should not expect much from next week's federal budget. The clear message from the Treasurer, Wayne Swan, is that he will be more of a Scrooge than a Santa Claus - at least for his maiden run.
Nevertheless, the financial services industry has lodged its usual set of claims, many of them centring on superannuation. You might think the Coalition government had emptied the bag on super reforms by making super payouts tax-free for the over-60s (except for those in untaxed funds) and abolishing the limits on how big your tax-free super payout could be. But even before it won office, Labor was talking further reforms, including additional saving incentives.The Minister for Superannuation, Nick Sherry, has spent the past few months hosing down industry expectations. This year, the Government's emphasis will be on low-cost reforms, such as reducing the administrative burden on super funds, reuniting workers with lost super, and simplifying product disclosure statements so that investors can find out what they need to know about their funds without sorting through volumes of legalese. Self-managed super funds are also receiving government attention. Sherry has expressed concerns about the aggressive selling of these funds, the low level of understanding by some trustees, and some funds' high cost levels. The Government is also watching the development of new instalment warrant-style products which allow self-managed funds to borrow. But so far, the big stick has remained in the cupboard. The only big-ticket item on the super agenda is the introduction of tax-advantaged first-home saver accounts. These accounts were an election promise and will enable first-home buyers to save their deposit in super-style savings accounts - though industry feedback suggests they may not be up and running by the proposed July 1 starting date. Sherry is still talking about new savings incentives, but they are now more of a medium-term goal - one that is "consistent with a responsible fiscal policy". Items on the industry's wish-list, such as expanding the popular super co-contribution, giving all investors the same tax breaks on contributions, and lifting compulsory super contributions to 12 or 15 per cent, have not been squashed completely. But you would be an optimist to look for them next Tuesday. It is hard to argue that further super spending should be a priority in next week's budget. Frankly, there are more pressing needs. But the adequacy of super savings remains one of the long-term issues that needs to be addressed, particularly with high interest rates and weak investment markets eroding the money we have left over to save, and our willingness to lock it away in super.One issue that is causing growing concern in the super industry is retirees who are still in debt. This was raised last year by Dr Vince FitzGerald, the chairman of The Allen Consulting Group and author of the landmark 1993 report on national savings. In August he released an update, National Savings Revisited, commissioned by the Investment and Financial Services Association, which claimed increased household debt offset a good deal of the unrealised gains in super funds and would need to be repaid in the future. It found this would significantly reduce the funds available to provide an income in retirement. Unfortunately, all that wealth we have tied up in housing tends to stay tied up until well into retirement. In a recent interview with the industry magazine Superfunds, FitzGerald said super was being "white-anted by debt" which threatened to undermine the whole purpose of compulsory super. Whereas previous generations of retirees left the workforce debt-free, he said, a growing number are retiring with debt and using their super to pay off those borrowings. Last year's AMP/NATSEM report, Baby Boomers - Doing It For Themselves, found that most baby-boomer households carried some form of debt. More than a quarter of households still had a mortgage, and that figure increased to more than 30 per cent for couples who still had children living at home. Simon Kelly, NATSEM associate professor, says the baby boomers have always been comfortable with debt and some are using their super to pay off loans or to extend their homes to better accommodate their children. He says there is an argument internationally that if individuals are provided with a pension they won't save. And while that does not apply directly to Australia, he questions whether super is seen as a safety net for some, particularly with it now tax-free from 60 years. "Perhaps they're saying that if they have tax-free money they won't need as much," he says. Kelly says providing tax-free super to those aged 60 may encourage some to leave their money in super longer, but this may mean they simply defer paying off their debts as well. The Allen/IFSA report found the retirement savings gap was greatest for women, current retirees and those close to retirement, people under 40, and the self-employed - who typically plough most of their money into their businesses hoping they can sell it to fund their retirement. That is quite a list and suggests that if the Government is serious about addressing the adequacy of retirement incomes there won't be a one-size-fits-all solution. It may even involve unpopular measures alongside those saving incentives. FitzGerald told Superfunds that the super system should be more strongly oriented towards retirement income streams, with access to lump sums limited to ensure super was used for its intended purpose.But it would be a very brave Scrooge who adopted that reform.
© 2008 Sydney Morning Herald