Retirement in a Police State

Always hold onto something. That’s the lesson our friend Jordan learned the hard way during a flying trapeze show last weekend. We’d been telling him for months, but he just wouldn’t listen.

It was halfway through the show. A particularly bizarre one. First your editor tried to perform the wrong trick. Then the two experienced flyers missed their tricks. So it was down to Jordan to look like we knew what we were doing.

He managed to pull off a particularly high whip-plunge, made the catch and returned to the bar elegantly. So far so good. But as he returned to the board he started from, Jordan did his trademark move of not holding onto anything.

He landed on the board standing up. He momentarily styled (posed) for the crowd with a big smile on his face. They cheered. Then Jordan suddenly disappeared.

Retirement is going to be much the same for the coming generation of Australians. They’ll work for decades, building up retirement assets and paying taxes to fund other people’s pensions. Then they’ll plant two feet onto the seeming safety of retirement, pose to the world for their job well done…and then take an unexpected tumble.

The age of entitlement is over‘,said Treasurer Joe Hockey at a conference in 2012. Remember when that used to mean ‘dole bludgers beware’? Today it supposedly means retirees are in for a nasty surprise. Changes to the retirement age, an assets test and pensioner offsets are all being murmured about backstage.

Financial advisors are licking their lips across Australia at the news. You know what a change in rules means for them, don’t you? Income.

We find the idea of a million financial plans having to change morbidly amusing. Getting as much as you can out of the government’s Superannuation tax incentives and pensions is the first rule of retirement planning, according to our professional development readings. But those fail to mention whether the payments and tax incentives will still be around by the time you retire.

All this reinforces a key theme of The Money for Life Letter. Government benefits are there for you to reclaim some of the absurdly high taxes you’ve paid over the years. They’re not to be relied upon, and certainly shouldn’t be a central part of your retirement plan. There’s a much better way to play the government’s budget anyway.

Of course, the really interesting part will be how politicians plan to pass legislation that reduces a rather influential and growing voting bloc’s cash in hand. Everyone plans on retiring eventually. Those who plan the least plan to rely on the government the most. And those who plan the most expect their careful plans will pay off. Either way, nobody will be happy if their welfare income is reduced or delayed.

What’s surprising is that the government is actually doing the opposite of what it says it plans to do. According to an OECD report, increases in the pension were the biggest biggest contributor to a 30 per cent increase in real public social spending between 2007-08 and 2012-13, a rise more than double the OECD average‘ says Dan Harrison in The Age. Another increase in the pension occurs tomorrow. And another one in September according to the Federal Minister for Social Services Kevin Andrews.

While Hockey talks about cutting payments and delaying them, single age pensioners are facing an increase of $15.70 a fortnight and couples $23.80.

What about the generation which will be paying for all this? Apparently they’re growing up in poverty, struggling to buy a house, can’t get a job and pay too much in taxes already.

The same OECD report concluded that child poverty is on the increase in Australia while poverty among the elderly is in decline. Children don’t vote.

University graduates do though. But they don’t seem to know how. After campaigning for carbon taxes, parental leave and environmental protection, they’re discovering jobs are hard to come by. 2013 was a particularly bad year for university graduates. Graduate Careers Australia published data showing one in five employers which traditionally employ graduates didn’t, and 60% said budgetary or economic conditions reduced their intake.

Those that do get a job can’t get a house. First home buyers remain at a historically low proportion of the market, making up just 12.5% of owner occupied purchases in the last quarter of 2013.

Of course, when property prices begin to fall it will be the first home buyers who did take the plunge that get hit first. With the highest loan to value ratio, they’ll find themselves underwater in no time. Their irresponsible buddies who don’t have the financial discipline to save up for a deposit will find themselves ruling in a buyer’s market.

Despite all their bad luck, the future workforce, taxpayers and pension funders of Australia are taxed. ‘If the government really wanted to introduce an equitable system, it would have to ask why it taxes a 20-year-old 15 per cent on earnings while 70-year-olds pay nothing,‘ says financial industry commentator Rice Warner.

A dollar saved is a dollar earned replies the government. Why tax people it will have to pay a pension to anyway?

This is the kind of logic only governments can afford. Mostly because they command people with hard batons and funny hats. Anyone who wants to opt out of the social contract we supposedly have with the government to pay taxes finds out that they can’t.

What gets lost is why the government doesn’t just leave us all alone. Scrap the tax loopholes by scrapping the taxes. Make the retirement age a factor of how much you save, not your age. Get rid of property loopholes in the assets test by getting rid of the assets test.

What’s inequitable and unsustainable is the fact that the power to mess about with people’s lives exists in the first place. It will always be abused by politicians, interest groups and powerful voting blocs. While this state of affairs exists, the majority can be kept relatively happy. And that’s all you need in a democracy.

In coming years, retirement will be the issue that unites the majority. We don’t see how government is going to cut entitlements while that’s the case. Europe wasn’t able to.

The real question is how politicians will try to fund the age of entitlement.

On that note, we happened to overhear an interesting conversation travelling back from Queensland. A pair of uni students who had attended some form of ‘change the world’ conference were talking about Apple’s tax dodging. One do-gooder was trying to explain how Apple avoids paying for its fair share of Australia’s insulation schemes and stimulus cheques. It didn’t go as planned for him. Here is a rough transcript, translated from generation social media speak:

‘What they do is have Apple Ireland import stuff at cost and they sell it to Apple Australia at a huge mark-up. Then Apple Australia sells it with only a tiny mark up on that price here.’

‘Then how do they pay no tax?’

‘Well, all the profit is kept in Ireland, which has a low corporate tax rate. Apple Australia barely breaks even, so the tax here is small.’

‘That’s genius!’

We laughed out loud at the dismayed look on the face of the tax enthusiast.

Maybe the unwittingly libertarian girl he was talking to will follow our upcoming conference on Twitter. We’ll be tweeting all the live action from World War D. You can follow us @DRAUS.


Nick Hubble+
for Markets and Money

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Having gained degrees in Finance, Economics and Law from the prestigious Bond University, Nick completed an internship at probably the most famous investment bank in the world, where he discovered what the financial world was really like.

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