The debate continues to swirl over DIV296 or the government’s proposal to tax unrealised capital gains for super balances over $3 million. In the midst of the debate I took a step back to assess the overall super system in my article The state of retirement in the midst of the super tax fight.

The evaluation criteria I selected and my ratings were necessarily subjective. But I wanted to hear from the Morningstar community and you enthusiastically responded to my call.

Both ratings and comments were provided. I will get to the comments. First your scores on the evaluation criteria I selected along with my view. To see my rationale read the original article.

Stability

I rated the stability of the system as a D. Many members of the Morningstar community thought I was too generous.

Fee levels

I’ve long been a critic of fees on super. I think we deserve better and provided a rating of C. Once again the Morningstar community were more negative on fee levels.

Protection from behavioural risk

The biggest impediment to investing success is often our own behaviour. There are a lot of positives to super from a behavioural risk standpoint as the rules make it very difficult to access our savings. I gave a rating of B and the majority once again disagreed.

A financially literate population

If you are going to entrust everyday Australians with managing their own retirement savings you would think there would be an effort to teach people what to do. Sadly that isn’t the case and I gave this category a rating of D. The Morningstar community joined me in my negative view.

Treatment of society’s most vulnerable

The way we treat the most vulnerable is a reflection of our values. I think we’ve done a good job here and I provided a score of B. Most people again thought I was too generous.

Your comments

It is difficult to summarise hundreds of comments. I’ve deliberately picked some of the more passionate comments. The reason issues like taxation and retirement policy elicit so much passion is because this isn’t just about money.

It is about punishing and rewarding choices. It is about the vulnerability of being in a position later in life that is based on those accumulated choices and having someone – even someone with no power like me – suggests there should policy changes.

Below are selected comments from the Morningstar community grouped by topic area.

DIV296

“Journalists perpetually complain about any change. This is ludicrous. Every such system needs modification occasionally. Do they whinge about something that improves their position? I doubt it. After retirement, investors can move their assets elsewhere if they don’t like the system. But very few will do so, for obvious reasons.”

I’ve never been called a journalist before. I have a slightly different view than the individual that made this comment. The articulated policy objective is that super should not be used as a tax shield to amass wealth that will be passed onto the next generation.

I deliberately stayed out of the debate about the merits of this policy objective. My argument is the DIV 296 proposal is not the best way to do this. I think there are more investor friendly ways to achieve this objective.

One way is to simply tax super more at death or to tax withdrawals from super in excess of $150,000 per annum (Indicating that you have more than $3 million based on mandatory withdrawals). I simply feel that investors deserve a more thoughtful implementation of this policy.

“I am in favour of progressive taxation, especially of wealth in preference to income, but am very concerned about the taxation of unrealised capital gains, which would be taxed again when realised. Such a fundamental change should not apply to people who have been contributing to or relying on their superannuation for many years.”

Couldn’t have said it better myself.

“Simplicity and “understandability” should be the hallmarks of a good superannuation system. It should be remembered that the funds are the property of the investors, not the Government and statements such as “foregone revenue” tend to weaken this fact."

There were many people that made the argument about foregone revenue. I agree more with this comment. My observation is that people tend to pull out the foregone revenue argument when a tax wouldn’t be applicable to them.

In theory everything is foregone revenue because all manners of taxes could be raised. There could be CGT on primary residences. Negative gearing could be abolished. GST could be higher. The marginal tax rates could be higher or the corporate tax could be higher.

Tax policy is supposed to generate revenue for the government while encouraging behaviour and outcomes that are a net benefit to society. There is no constitutional edict on taxes. These are choices we make.

Excluding the primary place of residence from the pension means test

“Do not ever ever think of taking the home we have worked all our life for. It’s all we have. Downsizing is bull**** as most of worked our guts out for our modest home as super wasn’t and isn’t enough to live on together with the paltry 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.”

There were numerous readers that disagreed with my view that the primary residence should be included in the means test for the pension. Most were not as vehement as this one.

I certainly understand this view. Many respondents focused on the desire to stay in their home. My counter would be that there are ways to unlock equity in a home such as a reverse mortgage while continuing to live there.

Everyone thinks they’ve worked hard. And lots of people do work hard. I think I work hard but it would be disingenuous for me to suggest I work harder than the workers that clean the bathrooms in my office building. Many people are not rewarded financially from their hard work and struggle to make ends meet.

I also don’t think that the generational debate is helpful. Each generation has a unique set of advantages and hardships. Each generation thinks the subsequent one is entitled and lazy.

Many young 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.

“Disagree wholeheartedly with the primary residence being included in any calculation. I understand the absurdity of someone gaining a pension while living in a $5 million dollar house but if they could afford the house in the first place you would hope they had paid their share of taxes during the working life. “Investments” to me are in things you don’t necessarily need to live ie extra property, shares perhaps a business etc. Your own house can sometimes be the last place an older person has of their former life, whether it be memories, personal space or maybe the house has been in the family for 4 generations. To be forced to sell to survive should well and truly be the last resort. Maybe if the mega wealthy or overseas business were taxed accordingly there would be a little more to go around for all, (this statement is a whole other debate). I understand that Mark has made clear before that renting is his preference and I think that lends to a bias in that opinion as it doesn’t affect him. (Apologies if that situation has changed)"

For those that are unaware the person who left this comment is correct and I am a renter and have no plans to change that. I think everyone’s view is influenced by their choices. That includes me.

As a non-homeowner I see the tax bias firmly in favour of property. As an example, we can consider the rationale behind DIV296. The argument for increasing taxes on super is that it shouldn’t be a mechanism to amass wealth to pass on to the next generation.

Super tax breaks are generous which makes it advantageous to use super to build up a balance that exceeds what is needed for retirement. But super is not tax-free. And when super is passed on to a non-dependent (a spouse or child under 18) the taxes are quite high.

A primary place of residence faces no capital gains taxes. If a primary place of residence gets inherited the heirs have two years to either sell it without paying taxes or declare it their primary place of residence to maintain the CGT exemption.

As previously stated, there are ways to extract equity from a house. Just get a reverse mortgage. It might be fair to make a distinction between a home that holds sentimental value and an investment account if someone chooses not to buy a home.

Most people who retire not owning a home did not choose to do so. Their super or pension payment needs to pay for a place to live. When you combine that with the opportunity for a reverse mortgage, I do think it is unfair a home is not included in the pension means test.

“The current means test does allow people who are financially able to fund their own retirement to still obtain a part pension & all the benefits that go with that. In fact, some pension funds actively encourage this behaviour.”

I completely agree with this.

“One puts away funds for the retirement in good faith and government has no shame to dabble at it and trying to rip off the retirees and would be retirees. Age pension should be available to everyone who has worked at least part of his life. Australia must be one of the few countries which does not provide age pension to all people who retire from work at the retirement age, yet the politicians receive a government sponsored indexed pension for life. Try to explain why the lot of countries including third world countries provide age pension to everyone according to number of years in employment. There is no means test. Examples are, Colombia, Brazil, Hungary, Switzerland, Slovakia, Czech Republic, Austria, Germany, Albania and I could go on.”

There were several comments related to making the age pension universal. I’ve only lived in Austarila for 11 years and perhaps that explains why I have a different perspective on the age pension.

In my original article I included the age pension in the category of helping vulnerable Australians. I see the age pension as a mechanism to protect the most vulnerable members of society who don’t have assets to support themselves.

Like any other social welfare program this involves taking taxes from one group of people and giving it to another. Taxes are the price we pay for a civilised society and – to me - providing some measure of basic support in retirement is the hallmark of a civilised society.

Clearly many people see this differently. A perhaps simplistic summary of the comments is that if you work and pay taxes you deserve the pension. I completely understand this argument. Personally, I would rather have government support for my retirement come in the form of the tax advantages in super. Just a different perspective.

Financial literacy

“Financial literacy is crucial. Australians will continue to suffer from scams and the shonky if they don’t know how finances work. Financial literacy has been pathetic for generations – it’s about time a government tried to change that."

Completely agree. It is shameful that people are asked to manage their own retirement assets without any formal education on how to do that.

“I grew up (and worked under) the Canadian system before moving to Australia 15 years ago. The Canadian system is good, but I do prefer many aspects of the Australian one. However, I think that the transparency of the system needs work. This would go a long ways to driving down the fees you’ve mentioned. However, transparency is only beneficial the people receiving the information have the ability to understand it and make informed decisions, so I’m glad you’ve included financial literacy. One key difference between the two systems (CAD vs AUS) is around the timing of tax. I’d be curious to hear your views on whether it would make sense to shift the timing of taxation to be similar to the Canadian system where contributions are fully deductible on the way into savings, fully sheltered while growing in the savings plan, but the money is taxed on the way out (during retirement). I fully acknowledge that this level of tinkering would probably never fly politically, but the conversations need to be had, if only to stop this tinkering around the edges that currently occurs.”

I could have put this comment under several categories. I really liked this comment. The Canadian system described in the comment is similar to the system in the US where taxes are only paid when money goes into a retirement account or comes out of an retirement account.

I think this has a lot of advantages. Part of the administrative burden on super funds is for tax reporting. This higher administrative burden leads to higher fees. That applies to SMSFs as well as industry and retail funds.

One of the drivers of the design of DIV296 is the complecity of the current tax situation. For APRA regulated super funds taxes are accrued at the fund level and not on the individual level. This means that effectively an investor is already paying unrealised gains. The government had to contend with this when trying to design DIV296.

Final thoughts

The point of my original article and adding a survey was to create debate. I was successful in that regard.

There are always going to be different perspectives on every issue. Reasonable people can disagree and I’m sure many of my viewpoints differ from yours. I appreciate everyone who took the time to share their perspectives. They are all valuable.

Questions? Comments? Email me at [email protected]

Original article:

The state of retirement in the midst of the super tax fight