Who Wants to Talk About Australian Pension Reform?

Who Wants to Talk About Australian Pension Reform?

Last week in The Markets and Money, I touched on the unaffordability of the aged pension. It’s an expense that’s going to keep growing and growing unless we reform the system.

It’s a very important issue for Australia so it’s worth discussing in greater detail. Before doing so, I want to mention two things…

First, gold. I’ve been talking about an emerging gold bull market lately. Gold had a big run during December and January, and now that run up is in the process of correcting lower. That’s normal.

In US dollar terms, you can’t get too excited about gold right now. But in Aussie dollar terms, it’s a different story. That’s why I think there’s a big opportunity here for Aussie investors.

So much so that I recorded a special presentation this week on this emerging opportunity. It should hit your inbox tomorrow, so keep an eye out for it.

Second, in the following discussion on pension eligibility, please don’t take it personally. I’ve had the pleasure of meeting many Markets and Money readers. Overwhelmingly, you’re independent and self-sufficient, and the thought of needing or even wanting government assistance is an affront to you.

If you do receive the pension, good luck to you. I’m not trying to take it from those who need it. The following discussion is about improving the outlook for Australia, not any particular special interest group.

So if I offend you with the following thoughts, well, bad luck. I’m not apologising for trying to have a mature conversation about the unsustainability of our pension system.

When initially discussing the topic last week, I also mentioned that the government would be too gutless to touch the idea of genuine pension reform. Sure enough, Social Services Minister Scott Morrison obliged this week by saying emphatically that the family home would not be included in the assets test for pension affordability.

This was in response to the topic of pension reform opening up for a nanosecond. That was just long enough for the government to hear the panicked shrieks of the rent-seeking lobby groups who apparently represent pensioners.

So, despite the exemption of the family home from the pension assets test being an eminently sensible discussion for the nation to have, it was shot down before getting off the ground.

No one is talking about leaving pensioners destitute or making them move from their home. This is about having a sustainable income distribution system whereby the working population doesn’t carry the entire burden of providing for an ageing population.

If things go somewhat according to plan, you tend to be income rich and asset poor in the early half of your career. As you get toward the end of your career, the situation flips around and you’re (generally speaking) asset rich and income poor.

The most valuable asset in older Australian’s portfolios is the family home. And let’s face it, if you’ve owned property for the last 30 years or longer, you’ve been incredibly lucky. Property has benefitted from enormous tailwinds in Australia in recent decades. These tailwinds will not continue to blow in the next 30 years.

Yet, the way the system is set up now means the government expects the working population to fund those who are asset rich but income poor. This is despite the working population facing record house prices and record debt levels to get into the property market.

Talk about the younger generation being screwed over.

I don’t know what the exact solution is, but we need to look for one. And that means talking about it like responsible and concerned citizens.

For example, the government could start thinking about how to set up a system whereby those rich in assets but poor in income can start accessing the wealth locked up in their homes…like through a reverse mortgage system.

I can tell you the banks would like the sound of it. More ticket clipping and fees…and more debt.

But no, what does Scott Morrison do? He goes full vote-grabbing, economic retard. From the afr.com:

A scheme allowing retirees to sell their home for a smaller property and pocket some or all of the surplus without reducing their government pension has been flagged by the Coalition.

Although enabling pensioners to downsize, yet keep the pension would most likely cost the budget money, Mr Morrison argued that enabling retirees to cash in the equity in their homes would be good for the economy because of the extra disposable income it would create.

All I can say is…what an idiot. I guess it would be good for the Australian economy in the short term because you’re letting people unlock their wealth while at the same time maintaining their pension benefits! That is, blowing out the budget deficit even more.

And then one day a few years down the track, Mr Morrison, if you’ve managed to bribe yourself into another term in office, the capital markets might start taking you to account for your juvenile economic rationale by jacking up interest rates for Australia.

I know that idea seems absurd in this low interest rate forever world that we’re in. But in this environment, things can turn on a dime. Keep in mind that there is not as much ‘real’ capital or ‘real’ savings in the world as you might think.

What I mean by that is that central banks have created enormous amounts of liquidityto keep the system afloat, not real savings or real capital. When confidence in central bankers’ ability to maintain this charade disappears, so will the liquidity they have created. That will push global interest rates back up to levels that reflect the amount of real savings in the system.

So yes, interest rates can and will rise in the future. And foolish and profligate governments will come under fire and see their borrowing costs rise. Maybe not this year or next, but it will happen.

Former Commonwealth Bank head David Murray reckons the problem is that society doesn’t really see a problem to address in the first place. This is why the government is reluctant to get the ball rolling. From the afr.com again:

"There is not a belief set in the community that we have an issue to address," Mr Murray told Fairfax Media after an SMSF Association conference in Melbourne about the retirement income system.

"Until that [voter] belief set changes, it becomes harder for the political system and the politicians to deal with that adjustment that we need," he said.

Well, you could start with having competent and compelling leaders telling society why reform is necessary. They could explain the issue in a rationale manner and come up with an equitable solution and a long term timeframe for implementation. That way it wouldn’t further undermine consumer confidence, which, by the way, is still pretty dicey in this country despite record low interest rates.

The way to deal with problems is to talk about them before they become intractable. That’s not what’s happening here. Instead, people like Scott Morrison are talking gibberish.


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Greg Canavan

Greg Canavan is a Contributing Editor at Markets & Money and Head of Research at Port Phillip Publishing.

He advocates a counter-intuitive investment philosophy based on the old adage that ‘ignorance is bliss’.

Greg says that investing in the ‘Information Age’ means you now have all the information you need. But is it really useful? Much of it is noise, and serves to confuse rather than inform investors.

Greg Canavan

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4 Comments on "Who Wants to Talk About Australian Pension Reform?"

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Paul Dwyer
Could not agree more. Scott Morrison spoke before he thought. What he should have said was “We have small number of retirees with significant amount of wealth in the family home. From 2019, those senior home owners with a family home valued over a threshold of $1.5m shall begin to lose part of their pension until their family home is valued at more than $2.5m whereby all pension is removed ( Play with the figures). Explain to the rest of the seniors population (95%) that the savings will be used to support those on the aged pension. Is that a… Read more »
Don Johnston
Yes agree with what is outlined in the article. Currently the pension assets test allows up to $230k before the cutting in the benefit ($116k if you have to go into permanent care) The real problem is what Centrelink consider to be “assets” and the $230k includes all of your assets – bed; fridge; car (at the brought price); caravan; furniture; computer; garden tools; superannuation; credit card limit – yes they deem this as an asset – and if you were frugal enough to save and brought a holiday “shack”in the 1980’s then you have too much in assets for… Read more »
john powers

Even a modest home in a previous working class suburb is usually well over $500,000.

The younger generation often can’t afford these over priced homes so rent instead.

The young are forced to give a fair slab of their income to the pensioner homeowner. So what ..? Who said the system is fair.

However if the government(all varieties) had the snowballs to ask for some compensation after these older folk die …that would help a lot and maybe the system could be sustainable.

Don Johnston you are either deliberately deceitful or ignorant. Credit card limits are not now, have never been and never will be included the asset test. Neither are bank overdrafts, lines of credit, or mortgage redraw facilities. Motor vehicles are assessed at their market value which is basically what you tell them. Household effects and personal belongings include everything in your house, but under s1118 of the Social Security Act, the standard value for that is $10,000, unless you declare otherwise. There is no separate asset limit for aged care. You’d become illness separated and become subject to the lower… Read more »
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