Op-Ed: Raising retirement age, ignoring economic realities

Posted Nov 22, 2013 by Paul Wallis
The push by bean-counting governments, notably in Australia, to raise the retirement age flies in the face of economic truths. A generation of part-timers will simply never have the money to retire.
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A retired couple.
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Expecting them to be somehow better off by working longer is bordering on pure denial.
The simple fact is that people don't have the money to retire. Does anyone think older people want to live on welfare? Would you? They have to get welfare to make ends meet.
Change that scenario, and you eliminate the problem.
The new head in the sand approach is explained by the Sydney Morning Herald:
When he was a mere opposition frontbencher, Tony Abbott insisted that further raising of the pension age to age 70 ''should not be a political suicide mission''. He reckoned most people enjoyed working and derived from it a part of their sense of self. He even thought they would understand if the Coalition took such a policy to an election.
''This idea that you should study until you're 25, and then retire when you're 55 or 60 and then live effectively on the taxpayer for another 30 years - it's not a recipe for a productive, successful society into the future,'' he said. Abbott was correct on all counts.
So is the Productivity Commission in recommending that the pension age rise from the existing 65 to 70 in an attempt to make the retirement income system sustainable as the population ages.
It is a positive sign, too, that the commission recognises that those who can afford to pay are best placed to contribute to funding the rising costs of an ageing population.
The commission proposes that the government take half the annual real, increased house value of retirees to help fund retirement and reduce the budget burden by about 30 per cent. In effect this claws back some of the costly family home exemption from capital gains tax.
"Help them fund retirement"? With their own money? Cute. Insane, cheap and nasty, showing not even the slightest understanding of retirement issues, but cute.
Another description would be totally missing the facts about the real economic environment. The problem is that actual capital for retirees seems to be the last thing on anyone's mind, and it's the cause of this situation. Australia has fewer excuses than other countries for taking this position. The Baby Boomer retirement issue was flagged 30 years ago, and nobody did a damn thing. Result, the richest generation in history has had to go back to work in its 60s, when it was supposed to retire, feeding back into keeping younger people out of work.
Savings? What savings?
Superannuation is taxed at 15% per year on gains. No tax concessions are available for losses like during the GFC. That takes a lot of money out of savings over time, while providing the financial sector with an estimated $1.5 trillion in capital, plus fees for managing the money. Net loss is about 16% to policy holders.
The net amount of money taken in tax, expressed as even basic compound interest, could only be enormous over 20-30 years. Add to this the fact that compulsory superannuation sets in at about 10-12% of your pay, and you can see why this sudden lack of money to pay Australia’s stingy age and other pensions is so highly dubious. It simply screams lack of planning and lack of insights into real problems for retirees.
Generations X and Y are going to be part time workers. Part time is replacing full time in leaps and bounds in Australia. There is absolutely no possibility of a future economic model for wage earners being the same as the past. The proposal, in effect, is talking about taxing a generation of people who simply won’t fit the mould.
Generations X and Y have already been frozen out of the home buyer market. They can’t afford to buy $700,000 homes or for that matter $400,000 units. Nor do they have the income base to get the loans in the first place.
Which leads us to the impact on homeowners and families:
The private home/primary residence is exempt from capital gains tax (CGT), as it should be. Investment properties do attract CGT, but these people aren’t exactly in welfare class.
Look at the model:
4 person family.
One dies, family wants the capital from selling the old home.
House is worth $700,000
Reduce that by 33%.
Divide it by 3, if that’s the requirement of the estate.
The remaining capital, even left alone and not split up, isn’t enough to buy another property in this market. The amount of money available is miraculously 33% short in a very expensive market. So, use savings to buy another? Where’s the homeowner’s capital? Straight out the window. The proposal instantly disadvantages families in case of death or retirement, when the value of the property is realised.
Australia abolished death duties decades ago, and now it’s coming back? Looks more like lack of ideas than anything else. Also looks like a fix for a revenue system which really doesn't factor in anything but basic numbers, not economic potentials.
Future mistakes already being made
So the situation is this:
Two generations will have limited resources with which to save anything at all.
They’re in a very expensive environment, with a lot of costs.
They’re expected to retire? How?
The scenario for late retirees
So people in their 70s are expected to work? What sort of jobs will they get? Part time. With the expenses of commuting. Brilliant. Non-jobs for non-people, based on an arbitrary decision, with no real capital benefits.
One of the theories supporting this theory, ironically, is that “people will live into their 90s.” How inconsiderate of them. Don’t they know that people are cost centres, not people?
What are these people supposed to retire with, good wishes? Because that’s about all they’re likely to own.
Basic solutions:
• Stop using the current economic model. It won’t exist in 20 years, let alone 50. Do a projection based on the far more likely scenario of a multi-role part time workforce.
• Start doing something about ensuring people can actually save money, like scrapping the tax on superannuation. No doubt there’s a model that says 12% compulsory super = $X in revenue, but the actual revenue is based on hard figures, not theory, as the GFC proved.
• Not taxing super would also drive up capital availability for financial institutions and eliminate the costs of penny-pinching every year. That could help generate investment in job creation and provide more capital for business.
• 12% super is a good idea, but it has to deliver at the other end, not simply provide a source of employment and fascination for bean counters.
• Stop pretending there are non-existent lifeboats on the Titanic. The lifeboats need to be created for the future reality, not simply passed off as a sort of default answer whether they exist or not.
• Scrap payroll tax. It’s gumming up the works for employers and employees alike.
• Do something positive about taking costs off retirees, instead of expecting them to pay for endlessly increasing basics, which are routinely causing instant hardship to people on fixed incomes.
• Enforce hiring of older people! Anyone over 40 can spend years not earning trying to get a job in one of these damn crèche-based hiring schemes.
Australia, as usual, is creating problems for itself in a situation where the fixes are easy. This isn’t productivity, it’s senility, compounded by total lack of talent and an appalling lack of thought into checking economic basics. The Productivity Commission could have asked the Australian Bureau of Statistics to research every single point I’ve made, particularly employment data. It obviously didn’t. Why?
All these issues are instantly fixable. They won’t be fixed by using old methods to address new problems.
The moral of the story: Don’t do things that can’t work. Don’t even think about it. Get your bloody facts straight, then go to work on solutions.