Tuesday, April 29, 2014

A great deal of warning

The year 2040 as the date when the 70 [qualifying age for the age pension] would kick in was speculated on, but there has also been talk of 2029.  Of course, for us oldies, it is neither here nor there because these new arrangements will not affect us.

The point of giving the youngies a great deal of warning is that they can think about their retirement plans now, about how long they should stay in the workforce and how they might structure their assets”.

-          Judith Sloan, “Age-old question needs answers, and soon”, Australian 26 April 2014

Five years ago, when the increase in the qualifying age for the Australian age pension from 65 to 67 was announced in the May 2009 budget, I predicted that this would be an interim increase only.  Sure enough, a further increase to 70 now appears certain.

There are two kinds of demographic reality at stake here. One is objective reality – we are living longer on average, and that the boomer wave in retiree numbers will be cresting for another 15 years or so, and only break c.2030, when the oldest boomers hit their mid 80s.  

The second kind of demographic reality/“reality” is Boomer-Think – that they are not the problem, and therefore the solution need only slightly involve them.  The generally unspoken corollary to this is that the problem just needs to be moved on by a few years, to become a hangover for the next generation.  How this naked blame-shifting has become an entrenched reality is a whole separate essay, however . . .  

Judith Sloan, who I presume is a boomer (i.e. born before 1/7/1962), has been unusually candid in her above choice of words.  Her gloating that “for us oldies . . . these new arrangements will not affect us” may seem somewhat misconceived, as the 2009 qualifying age increase, phased in between 2017 and 2023, affects those born between 1952 and 1957, so leaving the youngest boomer cohort still subject to an older qualifying age.  But this is small bikkies, or as Sloan says, “neither here nor there”.

The boomer pain is inconsequential because the main pain – as always – falls on us Xers.  Not that Sloan quite needs to spell this out; it’s easier just to forget our existence.  Hence, straight after reassuring her boomer cohort, Sloan clinches her case by pointing out that the “youngies” can hardly complain either, as they’ve got plenty of notice to get their house* in order, so to speak. I assume that Sloan, if she thinks about it at all, lumps in Xers as “youngies” – but as someone turning 50 this year, I am more disgusted than flattered at her dismissive labelling.

If you think about it, financially planning a late retirement is very simple.  You will work until you can afford not to.  But setting even an approximate date for this, decades out from the actual event, is ludicrous for most individuals, as it will depend on well-into-the-future income levels, asset prices, and tax and superannuation laws (which are currently ridiculously generous to over-60s, and so, I would suggest, have zero chance of still being in place when Xers start turning 60 in 2022).  All that a far-forward announced increase in the age pension qualifying age actually means for now is another signal to Xers that their lifetime tax dollars are already spoken for.

Not getting back what you’ve put in seems to me to be a dangerous thing to be legislating, en masse and in advance.  Recent debate around upping the pension age has had its useful distractions. (Manual workers will be worn-out by age 65?  That’s what the DSP is for. On average, Xers are going to live to our late 80s, at least?  That’s why compulsory superannuation was introduced, more than 20 years ago.)  But these skate around the much bigger issue – that the tax dollars of ageing Xers will, for the next two decades, be all used up in subsidising the retirement lifestyles of boomers who are, on average, much richer than the Xer worker bees.  When this party starts to end, c.2030, Xers will not – and could not – look to the next taxpayer generation to write our retirement cheque.  If then we don’t have enough super to be self-funded retirees (and most won’t, see sidebar below), then we’ll have only ourselves to blame, using Sloan’s logic of being a 50 year old “youngie” in 2014, pondering “how long [I] should stay in the workforce and how [I] might structure [my] assets”. 

So do your own math here, Xers – and if you also conclude that you are getting shafted, then it’s time to make some noise, if not revolt. Otherwise, the boomers are relying on you not to even notice what’s happening here until the late 2020s:

“Lifting the pension eligibility age further from 67 to 70 by 2034# [I predict 2035; see table below] appears tough, and may be prudent, but it will have no impact on the budget, or any voter, for more than a decade”.

-          Adam Creighton, “Audit commission prescribes some harsh medicine”, Australian 26 April 2014 (emphasis added)

Sidebar:  Compulsory superannuation is an abject failure

Judith Sloan also notes:

“At the moment, more than 80 per cent of those aged 65 or older collect the age pension, in full or in part.  On the current projections, this proportion is not expected to change much at all, although there is a change to the mix of full and part recipients.

Amazingly, the projections do not envisage much change to the proportion of those 65 or older who receive no pension by 2050 — which is nearly 60 years after the introduction of compulsory superannuation”.

I assume that these figures are adjusted forward for the currently confirmed retirement age (i.e. 67, from 2023), but if not, the real figures are even more damning – or “amazing”, if you’re a by-standing boomer voyeur looking at a demographic car crash, like Sloan.

Until now, the main demographic motif with compulsory superannuation has been that it came well into the working life of most boomers, and so they couldn’t be expected to have as much (and/or “enough”) retirement money as younger generations.  Here, older Xers like myself fell into a similar – if much more silent – boat, having also started our working lives pre-1992.  But anyway, now it matters barely a jot whether you’ve had compulsory superannuation for some, most or all of your working life – YOU ARE STILL GOING TO NEED THE PENSION, in part at least, and ASSUMING THAT IT’S THERE, after the boomers are gone.

For Xers, this is a dirty little secret indeed.   Compulsory superannuation was (and I remember this vividly) sold to my generation in the early 1990s on the basis of our expected higher longevity.  Set originally at a modest 3% of income, the magic of compounded returns was spruiked so that it plausibly seemed a viable vehicle for self-funded retirees, en masse – at least when perhaps supplemented by some voluntary contributions in late working-life, when we had money to spare**.  While the delusion of high returns over patient decades has long since gone (in 2008, if not before), and the compulsory percentage rate has gone in the other direction (“compounded compulsion”, anyone?), compulsory superannuation still has an aura of thrifty benevolence around it.  As though someone older and wiser is finger-wagging at us Xers:  “You may not appreciate the forced saving now, but you sure will when you’re 80”. 

That is, our (mostly) modest nest eggs are going to spare us, at least, from the ravages of needing the full age pension c.2050.  But they will have to, as I’ve pointed out above, and the prospect of even a part age pension c.2050 is looking like a 1980s Moscow supermarket – the shelves are bare, whatever the commissars’ bright rhetoric and stern compulsions may be. 

The bottom line is that Xers will be financially-strapped in retirement – I am talking much worse off than the current generation of full old-age pensioners – because they mistook, until it was too late, the state’s compulsion as some sort of guarantee of a comfortable retirement.  On the contrary, compulsory superannuation is a cynical double tax-grab – a means of ensuring Xers pay for boomers’ comfortable retirements while impoverishing our own future, as we meekly add fresh tokens to our steaming token piles – our token futures.

Update 4 May 2035

Told you so; re the pension age of 70 starting in 2035.  No report, that I have seen, has filled in the blanks, aka the taper, between the 2009 changes and the latest ones - thereby implying that (only) the post-1965 born will now have a particularly high pension-age hurdle to leap.  In reality, this age qualifier is only six months older than the 69.5 years that applies to the cohort 18 months older, and so on.  But "sticker shock" headlines, regarding quite distant dates, usefully hide the real story - that ALL Xers are getting shafted by these changes, whatever specific 18 month cohort they fall within.

*  House – Xers’ home-ownership rates are much lower than boomers’, so there is intended irony here.  The role of home ownership in a financially-secure retirement is also a whole other essay.

** Money to spare.  Since PM John Howard created the loophole, every middle or high-earning working boomer aged over 59 has furiously money-laundered as much of their income as legally possible (generally $50,000), by channelling it into voluntary superannuation “savings”, and then immediately withdrawing it, tax free.  Neat trick, eh?  You don’t actually lock a single dollar away, but you get more spending money now, and for free!  And not a loophole that will be around much longer, I am quite sure. But the putrid (bi-partisan) stench – of voluntary superannuation contributions being a transparent tax-dodge, and not a nest-egg builder – will linger long after, for Xers.    

# Here’s my projection of what the 13 May 2014 Budget will bring, if it continues the taper set in 2009 – the age of 70 won’t be bedded down until July 2035.  Note that the first six-months for each taper increase are “downtime”, when no one will actually become eligible.  Hence, the lucky Xers born on 1 January 1966 will become eligible for the age pension (if it still exists) when they turn 70 on 1 January 2036.     

Pension age for those born on or after 1 July 1952

Affects those born (both dates inclusive)
Pension age
01/07/1952 to 31/12/1953
65 years and 6 months
01/01/1954 to 30/06/1955
66 years
01/07/1955 to 31/12/1956
66 years and 6 months
01/01/1957 to 30/06/1958
67 years
01/07/1958 to 31/12/1959
67 years and 6 months
01/01/1960 to 30/06/1961
68 years
01/07/1961 to 31/12/1962
68 years and 6 months
01/01/1963 to 30/06/1964
69 years
01/07/1964 to 31/12/1965
69 years and 6 months
01/01/1966 to  . . . ?
70 years, then . . . ?

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