After publishing an article grading Australia’s retirement system, Mark received a wave of strong reactions to say the least.

In this episode, he and Shani respond to real comments and dig into the deep emotions around super, pensions, Div 296, and retirement fairness.

Whether you’re frustrated about tax changes or curious about why the system feels unfair, this is a thoughtful breakdown of what’s working—and what’s not—in Australia’s superannuation and retirement setup.

You can find the full article here.

You can find Shani’s article on the Div 296 tax here.

Listen on:

You’re able to find the transcript of the episode below:

Mark LaMonica: Welcome to another episode of Investing Compass. Before we begin, a quick note that information contained in this podcast is general in nature. It does not take into consideration your personal situation, circumstances, or needs.

Shani Jayamanne: So, it’s going to be a really good episode today. We’re just going to read quotes from people that you’ve annoyed, Mark.

LaMonica: Okay, this is probably not a great episode for me. It’s also probably going to be a very long episode, depending upon how many quotes you pick.

Jayamanne: So maybe a little bit of background help. So, Mark wrote an article on the state of the Aussie retirement system and asked people what they thought through a survey. So maybe before we get to the people that think Mark is wrong, why don’t you talk a little bit about the original article?

LaMonica: Basically, I just picked different categories and then provided a letter grade for these different categories that I was using to rank to rate the Australian retirement system. And so, I think that was my first mistake, picking letter grades. But to be fair, I went to you. I know that’s not how people are graded in Australia in school.

Jayamanne: Some people are. I was graded with A, B, C, D.

LaMonica: But I went to you, and I said, can I use this? Because I know there’s that whole high distinction, whatever else thing. But you said yes.

Jayamanne: I mean, that’s more of a uni thing. I feel like the A, B, C, D is more inclusive because everyone went to school, right?

LaMonica: Apparently not everyone, I don’t think. But anyway, how about I go through the categories and then we can get to those letter grades and eventually we’ll do those comments. All right.

So, stability, fee levels, protection from behavioral risk, a financially literate population, and treatment of society’s most vulnerable members

Jayamanne: All right. So, what about your grades?

LaMonica: Okay. Well, I’ll give mine first. And then, as part of the survey, people were actually able to go in and vote on their grades as well. So, I’ll give mine and then I’ll give the ones that other people selected. And then, Shani, any thoughts you have on where I went wrong, you can share those as well.

Jayamanne: Okay. Let’s do it. So, the first category is stability.

LaMonica: Okay. And I think, obviously, one of the points of this article was that it was written around this continuing controversy over the Div 296 proposal. So, we’ve done an episode on that. So, this certainly is not on that again. But I think the point is that stability is really important because retirement is a long-term investment goal and you’re spending time, of course, planning for that and saving for it over decades. So, I gave stability a D.

Jayamanne: And that’s not a very good mark.

LaMonica: It’s not. I’ve got plenty of Ds when I was in school. And I never felt great about it. So, the super system should not feel great about it either. But actually, many members of the Morningstar community thought that I was too generous. So, most people, in fact, chose F as a grade. So, 34.18%, so that was the highest category. The next highest category was D with 30.38%.

Jayamanne: So, I wrote an article specifically on Div 296. And one of my biggest concerns is the lack of indexation. And this is an example of how future instability is built into the system, which makes it difficult for investors to plan. So why don’t we move on to the next category, which is fee levels?

LaMonica: Okay. Well, I’ve complained about that a lot. So, it’s probably unsurprising that I didn’t give a very good grade, but I gave a C. And I’d say once again, the Morningstar community was more negative. So, 57% of people gave the fee category a D or an F.

Jayamanne: Who knew you were more positive than the general population, Mark?

LaMonica: I know. I know. It’s crazy. But what do you think about fees, Shani? What’s your view on fees.

Jayamanne: Fees are definitely a key focus of mine in my portfolio. And I do think there is an opportunity to bring fees down. One of the biggest drivers of high fees are all the changes in the industry and the lack of stability that we mentioned before.

LaMonica: So, everything’s related, right? All right. So, the next category is protection from behavioral risk.

Jayamanne: And this is something that we talk about frequently. Investors are often their own worst enemy. And this is an area where super is actually really helpful. So, given the rules around not accessing your super and the compulsory nature of super, many investors are a bit unengaged. And ironically, this is a really good thing, since people think a less, which means less mistakes.

LaMonica: That’s right. And that’s why I actually gave it a very high grade, or at least for me, when I was in school, of a B.

Jayamanne: So that’s pretty good. Did people agree with you?

LaMonica: They did not. So once again, I was just too positive, Shani. So, 37.97% being very precise here of respondents gave a C and then 26% split between D and F.

Jayamanne: So, in this case, I think that the data does support a higher grade than that. We always talk about the Mind the Gap Survey. And that shows the difference between the return on an investment and the return that investors get. Well, in Australia, the gap is narrower.

LaMonica: And maybe Australians are just better investors, but we think it has a lot to do with super.

Jayamanne: So, we’re going to move on to financial literacy next, which is a category that’s close to our heart. And I guess this score is fairly low from you, Mark.

LaMonica: It is. So once again, I gave financial literacy a D. But I think the positive new, Shani, is after our book is released, I’m assuming we’ll sell, I don’t know, ballpark around 20 million copies, and that should actually get that score higher.

Jayamanne: Well, there’s 27 million Aussies, Mark. So, who are the 7 million that are not buying the book?

LaMonica: Probably mostly our friends.

Jayamanne: That just track.

LaMonica: That would be my guess. But I don’t think a lot of children will buy our book, Shani.

Jayamanne: Maybe children who are getting straight As will buy the book.

LaMonica: So, like a young Shani, pretty much.

Jayamanne: I only read Harry Potter. So, I don’t know.

LaMonica: Well, I think those children with the As and they’ll have a better retirement because I think one of the reasons I wanted to include financial literacy in these categories is it is really critical to retirement. So, an educated investor base understands the impact of early sacrifices on retirement savings. I can’t really imagine a scenario where 2.6 million people would pull money out of super like they did during the pandemic if there’s greater awareness of that opportunity cost. And that, of course, is what happened.

Jayamanne: Also, financial literacy is critical to picking the right asset allocation in super, which is the single biggest driver of returns. And if more people understood risk capacity, 90% of an Australian super member base with an average age of 42 would not be in the balanced option with 25% in defensive assets. But that is a situation that we find ourselves in.

LaMonica: Now, you wrote a letter.

Jayamanne: I did.

LaMonica: It was an article.

Jayamanne: Yes.

LaMonica: Not like an official letter.

Jayamanne: No, I didn’t pen it.

LaMonica: Right. But the letter was an open letter to the new government after the elections. And your letter was about financial literacy. And one of the reasons why I was so comfortable giving a low score is because you included all of these stats about the state of financial literacy in Australia. So maybe if you could go through some of those.

Jayamanne: That is true. So, an OECD study shows that less than half of Australian adults can answer questions regarding basic financial concepts such as inflation, compounding and diversification, among Indigenous Australians less than one in five feel confident in making financial decisions. In 2022, the University of Newcastle found that only 30% of young Australians aged 18 to 34 could correctly answer five basic financial questions. And this cohort is making financial decisions that will impact the rest of their lives. So, they’re making decisions based on taking on large amounts of consumer debt, signing up for a mortgage, trying to invest or start a family. And any changes that they make to their superannuation can drastically impact their retirement outcomes. On the other side of the spectrum, research from the University of New South Wales shows that as we grow older, financial literacy drops even as our confidence increases. And this can lead to what the research has called potentially life-altering mistakes.

LaMonica: Now, I said that I used your article and those stats to inform my score, but I think your article had an even bigger influence on the Morningstar community because 42.68% of people picked D like me, but then close to 30% picked F.

Jayamanne: All right. So, we’re going to go on to the last category, treatment of society’s most vulnerable. And this is also another high score from you.

LaMonica: Another B.

Jayamanne: Now, we’ll get to some of the comments later, but how did your grade compare to others?

LaMonica: Well, this is a big surprise to everyone, but everyone disagreed with me again. So, 38.99% gave it a C and then 27% a D and an F.

Jayamanne: Glass half full, Mark?

LaMonica: I know. That’s me. I wish – well, we’ll just leave that.

Jayamanne: Okay. So, let’s go to the comments. What is your overall impression of the comments?

LaMonica: I mean, let’s just say there are some passionate people out there, at least passionate people about retirement, which is great. We do have a very engaged Morningstar community, and I think that was reflected in the comments.

Jayamanne: So, I’ll start with a comment that I know that you’ll like, Mark. So, the respondent said, I’ve always lived frugally, invested carefully, and will now fall foul of Div 296 in a fairly big way. Given the record of longevity in my family, I don’t see my super as being excessive. I will be 81 this year and still occasionally get called in to do paid casual work with the associated payment to my super. The fact that Div 296 is not indexed means it will capture an increasing number over the years. An 18-year-old of my acquaintance has started investing and has set up his own SMSF. He will surely hit the 3 million threshold before he is 30. The retirement age needs to be gradually increased in line with increased longevity. When Bismarck declared 65 as the retirement age in the 19th century and gave workers pension, so they wouldn’t be in poverty, he was also being fiscally sensible, because most people didn’t live long past 65. Times have changed. I can live with the $3 million threshold, but the tax should be indexed and unrealized gains should not be taxed. In the meantime, I’m taking steps to reduce the potential impact of the implementation of Div 296 taxation.

LaMonica: Okay, that comment had a little bit of everything. I really liked it because I like history, and we got that little history lesson on Bismarck. So, Bismarck, Shani, he enjoyed wearing a helmet with a spike on it in German pre-World War I fashion. And he also really liked big dogs. Did you know that?

Jayamanne: Only large dogs.

LaMonica: Yes, so much bigger than Priscilla. So, when he was young, he had a Great Dane called Ariel, which I think is a good name. And then later in life, somebody tried to assassinate him, and he said that he had those Great Danes for protection. And he had one named Tyrus, who apparently was really aggressive, like Biden’s dog, but his Great Dane bit the Russian foreign minister.

Jayamanne: This is very interesting, but I feel like it’s slightly irrelevant, Mark.

LaMonica: It is. It is. But I think the reference to Bismarck was kind of interesting. So, he did start that public pension in Germany in 1881. And even though he was a really conservative guy, and I don’t think actually believed in it, he basically did it because socialism was rising in Germany. And he thought that that would be a way to lessen their popularity. But actually, he picked 70 as the first age. They didn’t lower it until 1960 to 65. So, I guess that’s a little bit of a correction of the person that wrote in.

Jayamanne: Is there anything else about this comment apart from your history lesson on Bismarck?

LaMonica: I think the other thing, and we’ll get into some of the more emotional comments in a bit, but I think why anything around retirement touches off – I mean, I think gets emotional is because people think about who deserves what, why people have what they have, why other people don’t. So, there’s just a lot baked into anything around retirement.

Jayamanne: And I think there can often be a perceived morality to wealth. One reason for this is because saving involves sacrifice. And sacrifice and frugality are of course positive traits to have. And there is also the notion that to amass wealth takes hard work and intelligence to have the career success to amass the wealth in the first place.

LaMonica: And I think that’s where a lot of the emotion that we saw in these comments. And I think people take it very personally when rules change because of course, it seems like something is unfairly being taken from you. And I don’t think it’s just about money. So, it is all that hard work and sacrifice that went into saving that money. And I think money is money, but it’s also really thinking about your life and taking things away from your life. So, I think that’s why people are very upset.

Jayamanne: And perhaps that is a good lead into some of the angry comments. And one area there was a lot of anger was around your call in the article to include the primary residence in the means test for the age pension.

LaMonica: Yes, people definitely did not like that.

Jayamanne: All right. So, I’m going to continue with the comments. For instance, one person said, do you not ever, ever think of taking the home we have all worked all our life for? It’s all we have. Downsizing is expletive. Most of us worked our guts out for our modest home as super wasn’t and isn’t enough to live on it together with the poultry pension. Go out into the real world and talk to us boomers who had to cope with no childcare, no super and a lot of sacrifices. Stop being a keyboard warrior and get out amongst us for the real story.

LaMonica: Yes, it’s hard to know what to say about that. Really didn’t mince any words on that thing.

Jayamanne: No, he’s probably one of the 7 million that’s not going to buy our book.

LaMonica: I would imagine that potentially we lost a reader there. But I mean, I don’t know. I personally discourage people that just like us to buy the book. That might be our largest demographic, don’t you think? Maybe

Jayamanne: Maybe.

William Ton: I’m Will, producer of Investing Compass, and here are this week’s must-reads on Morningstar.com.au. This week in Mark’s Unconventional Wisdom column, he speaks about how investors can navigate their investments and their portfolio in an age of economic disorder. In a world awash with debt, it’s important for investors to understand the impacts on their portfolios and how they’re able to build resiliency into it. Mark presents three steps to achieve this. Financial advisors are investing in droves in separately managed accounts or SMAs. In Shani’s Future Focus column, she looks at the benefits of this investment product and why an increasing number of advisors are joining its church.

Are investors prone to making the same mistake as many golfers? In a special edition of Bookworm written in his hometown in Scotland, Joseph encourages investors to spend less time obsessing over the next stock ID and more time thinking about their big picture approach. Investors can also laugh. At Joseph’s score, he recorded at one of golf’s most historically significant holes during his trip home. Most investors tend to critically analyze their portfolio retrospectively. The recent surge of gold and crypto has increased discussions over the optimal asset allocation for modern times. In this week’s Young and Invested Sim unpacks why the price of gold has exploded and whether the asset should hold a place in the portfolios of younger investors. These articles and more, they’re now in the show notes and let’s get back to Mark and Shani

LaMonica: So, I think this is the emotion that we were talking about and it’s clearly coming out in this response. And I do understand this view. I think many people express the same desire to stay in their homes and I certainly get that. I think my counter would be that there are ways to unlock equity in a home such as a reverse mortgage while you continue to live there. And I think the other thing that was involved in this that we saw in a couple different comments is really this sort of generational debate, which I don’t think is that helpful. So, I think each generation is obviously had a unique set of advantages and hardships and each generation seems to think that the subsequent one is lazy and entitled. And I think a lot of young people, if I can speak for young people, Shani.

Jayamanne: Go for it. Let’s see what you say for.

LaMonica: I think a lot of people who can’t afford homes would probably take issue with the implication that staying in a home is an ordained right that should be supported by other taxpayers who fund pensions while not receiving one themselves.

Jayamanne: Well, one other reader commented on how you might have a bias because you rent.

LaMonica: I certainly might be biased. I think everyone’s view is influenced by their choices and that probably includes me. But I guess my view as a non-homeowner I see the tax bias firmly in favor of property.

So, an example is we can go back and look at the rationale behind Div 296. So, the argument for increasing taxes on super is that it shouldn’t be a mechanism to amass wealth and to pass it on to the next generation. And super tax breaks are generous, which makes it really advantageous to use super to build up a balance that exceeds what’s needed for retirement. But we need to remember that super is not tax-free. And when super is passed on to a non-dependent, so that’s a spouse or child under 18, so that’s what a dependent is, so any non-dependent, the taxes are actually quite high. And I think as we all know, a primary place of residence faces no capital gains taxes. If it’s passed on, the heirs have two years to either sell it without paying taxes or declare it as their primary place of residence to maintain that CGT exemption. And as I said, there are ways to extract equity from a home and get a reverse mortgage. And so, I think, in that comment, I think it isn’t really fair to make a distinction between a home that holds sentimental value and then an investment account if someone chooses not to buy a home.

So just my two cents. I think that most people who retire not owning a home did not choose to do so. So, there’s super and their pension needs to make up for it. And yeah, I think that’s really my rationale about not including a home in the pension means test.

Jayamanne: So, some people did agree with you. For instance, one person said, the current means test does allow people who are financially able to fund their own retirement to still obtain a part pension and all the benefits that go with that. In fact, some pension funds actively encourage this behavior.

LaMonica: All right. Well, that’s nice. It’s nice obviously somebody agrees. But what about you, Shani? So, what do you think should a house be included in the means test for age pension?

Jayamanne: I think I have a bit of a different perspective to you. I think you think that housing is a human right as well and it provides us a source of dignity and security for those in retirement. And in an ideal world, every retiree owns their home and has enough to live off. Of course, real life is much more complex than that. And that’s not the reality and will not be the reality for more Australians as housing becomes more unaffordable.

On one side of this, I’ve seen behind the scenes in the financial planning process. And there were plenty of people that use the exemption as a way to claim the age pension because they felt entitled to it, even if they were sitting on multimillion dollar properties, even at the cost of their quality of life. And part of this was also to ensure that they could maximize their estate for their children. And on the other side of this, when it comes to policies like this, I think people need to either see the family home as a home or an asset, and you can’t flipflop based on what works best for you. And the way that I view my home is that I will likely never realize any growth in it until I can’t climb the stairs anymore, they’re very steep and I have to sell it. It’s not an asset to be realized or valued. It’s my home. And I have to acknowledge that I do have a skewed perspective because I don’t have children. But I see no need to sit on a large asset in retirement with a lower quality of life simply so I can claim a full age pension.

And I don’t think this needs to be an all or nothing situation. There are middle grounds to this. There could be thresholds where values above a certain amount are included. For example, if your house is valued above $2 million, anything above it is included in the threshold for the means test. Ultimately, though, I’m not a policy expert. And I do think that the system needs to be reformed in a way that doesn’t punish people for holding an asset that they’re not going to realize.

LaMonica: Since when did not being a policy expert stop anybody from saying anything?

Jayamanne: Just a disclaimer at the end so I don’t get their emails.

LaMonica: Exactly. Exactly.

Jayamanne: Maybe let’s do one more comment. So, this gets to the Div 296, but in general, the super tax system. So, people are complaining about super copying this extra tax. That’s simply not right. What the government is doing is reducing the tax concessions for people with super aplenty. And that is perfectly reasonable. Why should less well-off people pay for tax concessions for people who have plenty? They’re not being slugged with an extra tax. They are just no longer receiving a tax break designed to help people accumulate a nest egg. I’m not sure what is happening to us as a society. The greed is becoming nauseating.

LaMonica: Okay. So, this was actually a comment that a lot of people made. So, I think it’s kind of this sort of main argument for this tax is that it’s sort of this foregone revenue argument. And I get this. I will say that it seemed like a lot of people that pulled out this argument were not being impacted by the tax. So, it wasn’t applicable to them.

So, I think in theory, everything of course is foregone revenue because all manners of taxes could be raised. So, there could be CGT on primary residences, like I said, is that foregone revenue. Negative gearing could be abolished, GST could be higher, marginal tax rates could be higher, corporate tax rates could be higher. So, I think tax policy is supposed to generate revenue for the government while encouraging behavior and outcomes that are a net benefit to society. And so, there certainly is no constitutional edict on taxes, and these are just choices we make as a society. So, I think we discussed in the podcast on Div 296, we said that we’re not going to comment on if taxes should be raised. That’s really not our job. We just wanted to come up with the view of, is this tax designed in a way that we think benefits investors? Now, obviously, any tax doesn’t technically benefit investors, but I think at least the argument I was making is that Div 296, because of the lack of indexation, because of the varying degrees of taxes you pay based on unrealized capital gains, it just makes it very hard to plan for retirement. And I think that was my main complaint about it.

Jayamanne: All right. So, I think that’s a good place to leave it for today.

LaMonica: I know, lots of comments. And thank you for reading them all.

Jayamanne: No worries. I got all of them.

LaMonica: Well, I know. But they’re all about me. So, thought that was fair. But anyway, thank you guys very much for listening.

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You’re able to find the transcript of the episode below: