Thursday, May 11, 2006
The budget – and when should Xers say “enough is enough”?
Many have observed, if not in gloat then almost always in passing, that Tuesday’s budget was strongly pro-boomer in its biggest-ticket item: new superannuation rules (that will mainly apply from next year).
In fairness, there are some anti-boomer elements within the new package, but these are relatively minor, and look set to be soon tweaked/watered down, anyway.
So just how mind-bogglingly boomer-preferring is the new super regime?
First (although almost no one else has picked this up), giving tax relief all at the back-end (= upon withdrawal), instead of front-end (upon deposit) or along-the-accretion-way-middle, a massive, if opaque, boomer subsidy has been instantly engineered. Back-end taxes can (and of course will, as soon as boomers are safely through the gate) be reinstated, while forgone front-end and middle (accretion) taxes could never be, because they would be overtly (instead of covertly) retrospective. Looked at another way, abolishing front-end and/or middle taxes would have been generationally neutral - and we couldn’t have that.
Then there’s the much-simplified, new $50k threshold for putting tax-advantaged money into super. It seems more age-neutral than the old/current system, apart from the “transitional” provisions. But again, the devil is in the detail, and these provisions are heavily generationally-loaded.
Let’s look at three age-cohort case studies here; one real (= me), the other two hypothetical. (All sums are in 2006 dollars).
Case one (minimum age to ordinarily access preserved superannuation 55)
B1 was born in June 1954. S/he has never struggled to find work, or to buy real estate. While 15 years of her/his award super currently amounts to bugger all (say $100k), and this couldn’t possibly grow into a reasonable nest-egg in the countdown to retirement, s/he is currently doing quite well financially, and so is able to plow significant amounts ($100k a year) into voluntary super.
Under old/current rules
B1 can voluntarily plow $100k a year in, on a tax-advantaged basis, until s/he turns 75 (subject to RBLs, and to whether s/he really wants to work that long, which is unlikely). It is tax-neutral whether s/he cashes in her/his super at, before, or after 60.
Under new/2007 rules
B1 can voluntarily plow $100k a year in, on a tax-advantaged basis, almost until s/he turns 60. From July 2012, s/he will be limited (although this prospect could soon change in her/his favour) to putting in $50k a year. When s/he turns 60, only two years later, s/he will almost certainly cash-in her/his super (one is now allowed, of course, to do this *and* still keep working).
Plus/minus impact of rule change
A big “plus”. B1 will have fast-track accumulated a $1m, tax-free nest-egg by 2014, which will allow her/him to comfortably retire at 60. It is unlikely that, given RBLs and tax, such a cosy-retirement at 60 (starting late and from a low base) would have been possible under the old rules.
Case two (minimum age to ordinarily access preserved superannuation 55)
B2 was born in June 1959. S/he has never struggled to find work, or to buy real estate. While 15 years of her/his award super currently amounts to bugger all (say $120k), and this would at best grow into a middling nest-egg over the next one-to-two decades, s/he is currently doing quite well financially, and so is able to plow significant amounts ($100k a year) into voluntary super.
Under old/current rules
B2 can only voluntarily plow in $40.5k a year in the short-term, until s/he turns 50. After this (in 2009), s/he’s in the same boat as B1, above: allowed $100k a year, on a tax-advantaged basis, until s/he turns 75 (subject to RBLs, and to whether s/he really wants to work that long, which is unlikely). It is tax-neutral whether s/he cashes in her/his super at, before, or after 60.
Under new/2007 rules
In the two years between the new rules kicking in, and B2’s turning 50, s/he’ll be limited to the ordinary $50k annual cap (which is nonetheless still an improvement). From 2009 to 2012, s/he’ll be able to use the last three years of the $100k a year transition-for-50-plusers, after which s/he will be revert to ordinary $50k limit for the duration (although again, this prospect could soon change in her/his favour). Chances are, given the big tax “carrot” for so doing, that B2 will work until turning 60 in 2019, despite the minor frustration (assuming that this isn’t soon tweaked) of “only” being able to put in $50k annually in her/his mid-late 50s.
Plus/minus impact of rule change
An overall “plus”. B1 will have accumulated a $1.2m tax-free nest-egg by 2019, which will allow her/him to more than comfortably retire at 60. It is unlikely that, given RBLs and tax, an equivalent retirement-at-60 would have been financially possible under the old rules. If the new rules are tweaked, to allow B2 to put in $100k annually in her/his mid-late 50s as well, B2 will be obscenely, instead of merely rich in (relatively-) early retirement.
Case three (minimum age to ordinarily access preserved superannuation 59)
X was born in June 1964. He has never held a secure job, and hence owns no real estate. His fifteen years of award super, given patchy employment and the ability to withdraw such, during periods of unemployment, currently amounts to $500. Not surprisingly, he is looking forward to old age pension eligibility in 2029 with a lottery-winner-like fervour.
But this prospect may yet change. In 2007, he gets offered Andrew Bolt’s Herald-Sun writing gig (Rupert has gone bust, and been bought out by a Left consortium), on $300k a year. This salary allows him to immediately start putting significant amounts ($100k a year) into voluntary super, with a view to not even needing the old age pension.
Under old/current rules
X can only voluntarily plow in $40.5k a year in the medium term, until he turns 50 in 2014. After this, he’s in the same boat as B1 and B2, above, except for not being able to, no matter what, retire much before 60, thanks to a Paul Keating-era several-decades-in-advance taper (minimum age to access preserved superannuation increases from 55 to 60, stretched along the June 1959-born to the July 1964-born).
Under new/2007 rules
Unlike B1 and B2, X doesn’t get any benefit from the $100k-transition-provisions (which only apply to those who turn 50 before 2012, regardless of subjective financial circumstances). Thus, he’ll have the ordinary $50k annual cap for the duration (even if the $100k-transition-provisions are soon tweaked, it’s almost certain that such will be in B2’s cohort’s benefit, not X’s)
Plus/minus impact of rule change
A neutral or “minus”. Under the new rules, X will have accumulated a $1m tax-free nest-egg by 2024. This would have allowed him to comfortably retire at 60, but it’s instead mostly subsumed by his buying his first home.
He probably would have been able to accumulate a bit more under the old rules, even factoring in RBLs and tax. But either way, with his whole super (justifiably) blown at 60, he’s once again staring down the barrel/comforter of old age pension eligibility at 65 in 2029.
--
And the “enough is enough” factor? When will my generation be slitting boomer throats on the street for their loose change? Not sure exactly, but it’s definitely on the cards – and there sure as hell won’t be any transition-provisions in the lead up.
Many have observed, if not in gloat then almost always in passing, that Tuesday’s budget was strongly pro-boomer in its biggest-ticket item: new superannuation rules (that will mainly apply from next year).
In fairness, there are some anti-boomer elements within the new package, but these are relatively minor, and look set to be soon tweaked/watered down, anyway.
So just how mind-bogglingly boomer-preferring is the new super regime?
First (although almost no one else has picked this up), giving tax relief all at the back-end (= upon withdrawal), instead of front-end (upon deposit) or along-the-accretion-way-middle, a massive, if opaque, boomer subsidy has been instantly engineered. Back-end taxes can (and of course will, as soon as boomers are safely through the gate) be reinstated, while forgone front-end and middle (accretion) taxes could never be, because they would be overtly (instead of covertly) retrospective. Looked at another way, abolishing front-end and/or middle taxes would have been generationally neutral - and we couldn’t have that.
Then there’s the much-simplified, new $50k threshold for putting tax-advantaged money into super. It seems more age-neutral than the old/current system, apart from the “transitional” provisions. But again, the devil is in the detail, and these provisions are heavily generationally-loaded.
Let’s look at three age-cohort case studies here; one real (= me), the other two hypothetical. (All sums are in 2006 dollars).
Case one (minimum age to ordinarily access preserved superannuation 55)
B1 was born in June 1954. S/he has never struggled to find work, or to buy real estate. While 15 years of her/his award super currently amounts to bugger all (say $100k), and this couldn’t possibly grow into a reasonable nest-egg in the countdown to retirement, s/he is currently doing quite well financially, and so is able to plow significant amounts ($100k a year) into voluntary super.
Under old/current rules
B1 can voluntarily plow $100k a year in, on a tax-advantaged basis, until s/he turns 75 (subject to RBLs, and to whether s/he really wants to work that long, which is unlikely). It is tax-neutral whether s/he cashes in her/his super at, before, or after 60.
Under new/2007 rules
B1 can voluntarily plow $100k a year in, on a tax-advantaged basis, almost until s/he turns 60. From July 2012, s/he will be limited (although this prospect could soon change in her/his favour) to putting in $50k a year. When s/he turns 60, only two years later, s/he will almost certainly cash-in her/his super (one is now allowed, of course, to do this *and* still keep working).
Plus/minus impact of rule change
A big “plus”. B1 will have fast-track accumulated a $1m, tax-free nest-egg by 2014, which will allow her/him to comfortably retire at 60. It is unlikely that, given RBLs and tax, such a cosy-retirement at 60 (starting late and from a low base) would have been possible under the old rules.
Case two (minimum age to ordinarily access preserved superannuation 55)
B2 was born in June 1959. S/he has never struggled to find work, or to buy real estate. While 15 years of her/his award super currently amounts to bugger all (say $120k), and this would at best grow into a middling nest-egg over the next one-to-two decades, s/he is currently doing quite well financially, and so is able to plow significant amounts ($100k a year) into voluntary super.
Under old/current rules
B2 can only voluntarily plow in $40.5k a year in the short-term, until s/he turns 50. After this (in 2009), s/he’s in the same boat as B1, above: allowed $100k a year, on a tax-advantaged basis, until s/he turns 75 (subject to RBLs, and to whether s/he really wants to work that long, which is unlikely). It is tax-neutral whether s/he cashes in her/his super at, before, or after 60.
Under new/2007 rules
In the two years between the new rules kicking in, and B2’s turning 50, s/he’ll be limited to the ordinary $50k annual cap (which is nonetheless still an improvement). From 2009 to 2012, s/he’ll be able to use the last three years of the $100k a year transition-for-50-plusers, after which s/he will be revert to ordinary $50k limit for the duration (although again, this prospect could soon change in her/his favour). Chances are, given the big tax “carrot” for so doing, that B2 will work until turning 60 in 2019, despite the minor frustration (assuming that this isn’t soon tweaked) of “only” being able to put in $50k annually in her/his mid-late 50s.
Plus/minus impact of rule change
An overall “plus”. B1 will have accumulated a $1.2m tax-free nest-egg by 2019, which will allow her/him to more than comfortably retire at 60. It is unlikely that, given RBLs and tax, an equivalent retirement-at-60 would have been financially possible under the old rules. If the new rules are tweaked, to allow B2 to put in $100k annually in her/his mid-late 50s as well, B2 will be obscenely, instead of merely rich in (relatively-) early retirement.
Case three (minimum age to ordinarily access preserved superannuation 59)
X was born in June 1964. He has never held a secure job, and hence owns no real estate. His fifteen years of award super, given patchy employment and the ability to withdraw such, during periods of unemployment, currently amounts to $500. Not surprisingly, he is looking forward to old age pension eligibility in 2029 with a lottery-winner-like fervour.
But this prospect may yet change. In 2007, he gets offered Andrew Bolt’s Herald-Sun writing gig (Rupert has gone bust, and been bought out by a Left consortium), on $300k a year. This salary allows him to immediately start putting significant amounts ($100k a year) into voluntary super, with a view to not even needing the old age pension.
Under old/current rules
X can only voluntarily plow in $40.5k a year in the medium term, until he turns 50 in 2014. After this, he’s in the same boat as B1 and B2, above, except for not being able to, no matter what, retire much before 60, thanks to a Paul Keating-era several-decades-in-advance taper (minimum age to access preserved superannuation increases from 55 to 60, stretched along the June 1959-born to the July 1964-born).
Under new/2007 rules
Unlike B1 and B2, X doesn’t get any benefit from the $100k-transition-provisions (which only apply to those who turn 50 before 2012, regardless of subjective financial circumstances). Thus, he’ll have the ordinary $50k annual cap for the duration (even if the $100k-transition-provisions are soon tweaked, it’s almost certain that such will be in B2’s cohort’s benefit, not X’s)
Plus/minus impact of rule change
A neutral or “minus”. Under the new rules, X will have accumulated a $1m tax-free nest-egg by 2024. This would have allowed him to comfortably retire at 60, but it’s instead mostly subsumed by his buying his first home.
He probably would have been able to accumulate a bit more under the old rules, even factoring in RBLs and tax. But either way, with his whole super (justifiably) blown at 60, he’s once again staring down the barrel/comforter of old age pension eligibility at 65 in 2029.
--
And the “enough is enough” factor? When will my generation be slitting boomer throats on the street for their loose change? Not sure exactly, but it’s definitely on the cards – and there sure as hell won’t be any transition-provisions in the lead up.
