Retirement Incomes Integration Superannuation Social Security Taxation

1
Retirement Incomes Integration Superannuation /
Social Security / Taxation

• A Presentation of a Paper
• By
• Geoff Dunsford Michael Rice

2
Retirement Incomes IntegrationPurpose of Paper

• Highlight current Anomalies, Difficulties,
  Complexities and need to address prospective
  National Budget deficits
• Highlight need for Government Goals/Objectives
  for Retirement Incomes
• Suggest Approaches to Solutions to Anomalies,
  Difficulties, Complexities and Prospective
  National Budget Deficits
• Comment on Difficulties involved with
  Implementation of Changes

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Retirement Incomes IntegrationCurrent Anomalies

• 1 million in super 1 million home still
  collect part age pension! up to 19 September
  2004.
• Thereafter 900,000 in super and still collect
  part age pension.
• Increase retirement savings from 150,000 to
  300,000 no increase in retirement income!
• Cost of Age Pension from life office 250,000
  on best estimate super fund basis 150,000!
• Take early retirement spend super claim age
  pension from age 65!
• No tax deduction for voluntary employee
  contributions salary sacrifice only available to
  limited number of employees.

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Retirement Incomes IntegrationCurrent Issues

• Age Pension inadequate as a safety net
• Age Pension too generous for middle - Australia
• Allocated Pensions
• Individual bears investment and inflation risks
• Individual bears longevity risk
• Some pensioners sharing accommodation are
  Couples Others are Single, and receive
  higher pensions
• Pensioners home equity has grown in value but
  is still exempt from means tests
• Forecast increases in Budget Deficits
• Little incentive to work beyond Age Pension age

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Retirement Incomes IntegrationProblems and
Solutions

• Paper focuses on 12 problems
• Most solutions either eliminate anomalies, or
  reduce long term Government expenditure, or both
• Solutions are only approaches to dealing with the
  problems. They all require significant
  development
• Presentation focuses on 7 of these
• Slides for others are available if questions
  raised

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Retirement Incomes Integration

• Problem
• The Equity of Retirees in their own homes is not
  assessed under the Means Test
• Possible Solution
• Assess (Excess) Potential Home Equity Release
  Income

7
Retirement Incomes IntegrationHome Equity Income
Plan Reverse Mortgage
8
Home Equity Income Plan Reverse
MortgageAccumulation of Mortgage Balance v Home
Equity
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Retirement Incomes Integration

• Problem
• The Life Insurance industry does not provide
  lifetime annuities on attractive terms due to the
  need to allow for the self selection of
  annuitants.
• Possible Solution
• Part of a Retirees Superannuation Assets are
  Compulsorily required to be used to Purchase a
  Lifetime Annuity
• (Compulsory purchase annuitants can be offered
  more attractive terms than self selected
  annuitants)

10
Retirement Incomes Integration

• Problem
• There are insufficient financial incentives for
  those eligible for the Age Pension to work beyond
  Age Pension age
• Possible Solution
• Ignore Earnings from Personal Exertion under
  Income Test Assessment

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Retirement Incomes Integration

• Problem
• The Assets Test assesses marginal assets on a
  basis which often results in reduction in total
  Income. It is also inconsistent with the Income
  Test
• Example A Male Retiree age 65

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Retirement Incomes Integration

• Possible Solutions to Assets Test Inequities
• Means Test Incomes Only, Deeming Income from
  Specific Assets as required
• Deem all Assets as capable of providing Means
  Test Assessable Income at a Current Complying
  Lifetime Pension Rate

Notes Pensioner then could use some of his/her
assets to purchase the Age Pension denied
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Retirement Incomes Integration

• Problem
• Early Retirees can spend their Superannuation
  benefits and then claim the Age Pension
• Possible Solution
• Make Access to Super prior to Age Pension Age
  Conditional upon setting aside funds to purchase
  the Full Age Pension at Age 65.

Notes This seems a better solution than simply
increasing the Superannuation access age to 65
for all benefits, or introducing Deprivation
Rules.
14
Retirement Incomes Integration

• Retire Age 60 Superannuation Lump sum 500,000
• Access Age 65 Funds to Purchase Age
  Pension 150,000
• Immediate Access Balance of Funds 350,000
• Consider Minimum Immediate Access
• For Change of Lifestyle Needs say 20 100,000

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Retirement Incomes Integration

• Problem
• The superannuation surcharge is a highly
  inefficient form of taxation
• Possible Solution
• Eliminate Surcharge in Favour of Increase in Top
  Marginal Tax Rate

16
Retirement Incomes Integration

• Top Marginal Tax Rate of 47 Medicare Levy
• Paid on Assessable Income in Excess of 62,500
• Earnings 125,000
• Assume 9 Super Contribution 11,250
• Superannuation Surcharge at 12.5 1,406
• Equivalent Increase in Marginal Rate 2.25
  to Total Top Marginal Rate
  49.25 Medicare Levy

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Retirement Incomes Integration

• Problem
• Targeting of Welfare Dollars leads to Poverty
  Traps and Disincentives for those at the Margin.
• Marginal Means Tested Benefits suffer triple
  marginal tax
• Reduction in Pension
• Increase in Basic Tax and Medicare Levy
• Reduction in Seniors Tax Offset
• Possible Solution
• Hold maximum marginal tax threshold at 50 of
  marginal income

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Retirement Incomes Integration
19
Retirement Incomes Integration Superannuation /
Social Security / Taxation

• A Presentation of a Paper
• By
• Geoff Dunsford Michael Rice

20
Retirement Incomes Integration

• Issue
• Currently, those suffering around 50 or more
  Reduction in Marginal Income, through tax and
  loss of benefits are
• Majority of Pensioners
• Many of those with Family Benefits
• Some on Unemployment Benefits
• Some on Single Parents Allowance
• All on incomes in excess of 62,500 p.a.
• In Aggregate, possibly, the majority of
  Australians whose incomes are in excess of 6,000
  p.a. Impact is unfair across taxpayers
• Solution
• Make everyone subject to 50 marginal effective
  tax rate in conjunction with substantial
  increase in minimum tax threshold, say from
  6,000 to 20,000, higher non taxable Dependants
  and Child Benefits, and withdrawal of
  superannuation surcharge, and the current mish
  mash of family benefits and tax offsets.

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TransitionImplementation by cohorts

• Existing retirees
• Older workers (50 to 65)
• Consolidators (35 50)
• Youngsters (lt35)

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Retirement Incomes Integration

• Existing Retirees
• Focus on avoiding changes to available cash
  income
• Those near Retirement (60-65)
• Incentives for working longer (older)
• Minimal changes to expectations
• Older Workers (50-60)
• Simplify Retirement Income arrangements
• Discourage Early Retirement
• Consolidators (35-50)
• Encourage Voluntary Contributions
• Eliminate Poverty Traps
• Youngsters (lt35)
• Can accept negative long term impact of
  necessary changes made now

23
Retirement Incomes Integration

• Problem
• Married couples as individuals receive less Age
  Pension than Singles or those in other types of
  relationship living in the same house
• Possible Solution
• Move Age Pension Assessment from Couples to
  Individuals

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Retirement Incomes Integration

• Problem
• The Life Insurance industry does not make
  available annuities which provide income
  guaranteed to keep pace with living standards
• Possible Solution
• The Government Issues Bonds which provide income
  which is Guaranteed to Increase in line with
  Increases in Average Weekly Earnings or the Age
  Pension

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Retirement Incomes Integration

• Problem
• The government is at risk of increasing costs of
  Age Pensions when retirees investments fail to
  provide expected levels of income throughout
  retirement
• Possible Solution
• Require Purchase of Equivalent of Part or Full
  Age Pension with Compulsory (SG) Superannuation
  Benefit at Retirement (as a private investment,
  subject to the Means Test)

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Retirement Incomes Integration

• Problem
• The government is at risk of increasing costs of
  Age Pensions when retirees investments fail to
  provide expected levels of income throughout
  retirement
• Possible Solution
• Offer All Retirees Opportunity to buy from the
  Government the Balance of Age Pension (or Full
  Amount) they were denied under the Means Test

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Retirement Incomes Integration

• Problem
• Frequent Means Tests are often harrowing for
  pensioners and involve significant time and
  effort on their part as well as the Governments
• Possible Solution
• Pay Age Pension to All People from Advanced Age
  probably too costly even from age 85
• Means Test Once Only worth looking at

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Retirement Incomes Integration

• Problem
• There are insufficient incentives for individuals
  to make voluntary contributions to superannuation
  funds
• Possible Solution
• Allow Tax Relief for All Types of Voluntary Super
  Contributions (subject to limits)