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Dear Under-50 Investor

Dear Under-50 Investor

Dear Under-50 Investor,

Superannuation will be no good for you if you are under 50 today, so invest the absolute minimum amount into super.

That means, no salary sacrificing, no co-contributions, no non-concessional contributions. Ignore the calls to save tax and boost your super you will be soon contributing 12% of your salary anyway. This is not advice but a challenge to others, much more qualified than I, to dispute it and explain why I am totally wrong. By the way, as a fund manager of course, I am financially delighted to be completely wrong on this one!

What I am saying is risky – I may be labeled a ‘generationist’. Note my tongue is firmly in my cheek during the writing of this entire rant (and that’s partly because I have only ever invested the bare minimum into super). More seriously however, I am also swimming against a veritable tsunami. There are so many on the teat of this topic that one risks offending with a ‘less is more’ stance.

What I am not saying is that you shouldn’t invest. You must invest, irrespective of your age. What I am questioning is the wisdom of investing through a structure that may not be as tax effective, nor may your funds be as accessible, in the future as it appears today.

Since about 1995 (when I was 24 years old) and my accountants at the time suggested I put more money into super, I have staunchly told anyone my age who would listen that they’d be mad to put extra funds into super. I have always thought ‘you’ll never see it’. The reasoning was simple enough; Super was set up by baby boomers, for baby boomers. And since I am not a boomer, the favourable tax environment enjoyed by the boomers, I believed, would be gradually eroded such that it wont be any advantage when it comes around to my turn. ‘No thanks’ was always the response I gave my accountants when they suggested I’d be wise to put additional funds into super.

A superannuation storm has now been stirred up by the Labour party and many investors, who have been maximizing their contributions, are screaming blue murder.

Like an episode of some Socialists Unite sitcom the outcome of my prediction is a benefit for the greater good but not for the people to whom this missive is directed.

As you read on you will observe a shift in policy towards to super. Individually, the seem like minor modifications. But taken chronologically, there’s a trend in place that may mean investing within the super structure is becoming less and less attractive for the young.

Now please don’t regale me with tables showing how Joe Citizen can save tax by stashing away a little extra into super or how a person on a low income will be better off thanks to the governments co-contribution scheme. What I referring to is a change, over many years, to the very rates of difference between investing inside and outside of super and an erosion in the benefits that exist today.

As the aggregate amount invested gets bigger, and as baby boomers get older, the temptation to tap into the giant pool simply becomes too great for the government to resist. In the 2013-14 financial year the total tax effectiveness on superannuation will be just over $33 billion. There will be many minor storms along the way. The current war appears to be about taxing withdrawals from accounts with very high balances. Over time however I expect it is inevitable (thanks also to poor economic and fiscal management – see my post here on The Balance of Payments and my meeting with Andrew Robb) there will be a gradual erosion of the attractiveness of super for younger people.

In the 1991 Budget, Treasurer John Kerin announced that from 1 July 1992 , under a new system to be known as the Superannuation Guarantee (SG), employers would be required to make superannuation contributions on behalf of their employees. When the Keating Labor government introduced the system in 1992 (The National Wage Case established guidelines to require new industry superannuation schemes to conform to Commonwealth operational standards) it was part of a reform that sought to address the inevitable climactic change in the government’s finances that would be brought about by a generational avalanche. In 1993, the World Bank endorsed Australia’s three pillar system for the provision of retirement income as world’s best practice.

There are however two points to note. Compulsory Super was introduced not because of some altruism on the part of the government of the day but because of the cost that would be imposed on governments of the future as baby boomers aged and required increasing medical assistance and to offset the cost of the pension as the bulge in the population approached and passed the qualifying age.

The second observation is this; it was introduced by baby boomers for baby boomers.

The proposed solution to the inevitable train wreck on government finances was a combination of a safety net (a means-tested Government age pension), a compulsory superannuation contribution by individuals (forced savings) and finally a voluntary version of the same thing.

The trade unions agreed (as they had done in 1986) to forego a national 3% pay increase in return for an equal contribution into superannuation. The 3% was matched by an employer contribution, which would increase over the years to total 12%. Between 1992 and 2002 contributions were progressively increased from 3% to the subsequently capped 9%.

Tellingly, the Howard government was criticised by former labour Prime Minister Paul Keating for not increasing the compulsory rate. Of course there would be more than double the amount of money in the super system today (not withstanding the impact of silly money management practices and GFCs) if the rate was 15% since 1996 instead of 9%.

And this brings me to my next point; the amount of money in the super system. There’s $1.4 trillion approximately and of that about $439 is being self managed. That’s $1.4 trillion. Hmmmmm. If I was a government number cruncher, I would find that $1.4 trillion more than a just tasty morsel. I wonder what would happen to the government’s coffers, if we taxed it just a little more here? Or perhaps we extend the age before people can get it there? And what if we cap the amount they can take out now that all our boomer mates have withdrawn what they need? Or what about taxing payouts? Gosh we could really do something fancy with all that money now that it is so temptingly locked up form people and they keep putting more in!

I think you get the drift. Recently I was at an awards ceremony and a popular expert on investing was giving a lecture on super with a long-winded history of the introduction of the pension.

Here’s the history taken from an interactive schooling website: “Coming into effect on 1 July 1909, the Commonwealth aged pension initially provided £26 ($52) per annum to men and women over the age of 65 years. This figure was just under one quarter of the ‘basic wage’ which was decided in 1907 by Justice Higgins. To be eligible for the pension, an individual had to be able to meet a number of criteria. They had to have resided in the Commonwealth for more than 25 years and to be of ‘good character,’ (despite the latter not being defined). Non-residents, the Indigenous people of Australia, Asians and Indigenous people from the Pacific Islands, New Zealand and Africa were completely excluded from claiming the pension.

To ensure that those who were most in need of the pension received it and also to limit the cost to the government, the 1908 Act also provided that the Commonwealth old-aged pension be means- and asset-tested. An individual who had an income of more than £52 ($104) per year or owned property valued at more then £310 ($620) became ineligible for the pension.

In 1910, around 34 percent of those over 65 were receiving the old-aged pension. The average life expectancy of an Australian was only 55.2 years for men and 55.8 years for women, which meant that not many people lived long enough to receive the pension. Today, the average life expectancy of Australian men is 77.6 years and 83.5 years for women. Since more Australians are living beyond 65 years of age, unprecedented numbers are becoming eligible for the aged pension. In 2004 the number of aged pensioners reached 72 percent.”

Interestingly our investing expert – a boomer himself – focused on the very last point along with a carefully placed reminder that Australians were never meant to qualify for the pension because they would be deceased, on average, a decade or so before they qualified.

Wham! There it is. Get people to start realizing that they were never meant to get the money anyway. Maybe, one day, we’ll hear the argument we’re not meant to qualify for our super until ten years after we’re deceased too. Don’t laugh. If government finances become sufficiently precarious and there aren’t any boomers left to upset, anything is possible.

The train has left the station and the evidence is everywhere. The government wants to get their hands on your super and they don’t want you to get as much of it.

Today the Gillard government is considering ending the tax-free status of super withdrawals. But this is not the first change that seeks to repeal some of the claimed largesse that individuals enjoy through the super of the pension. Way back in 1994 the pension age for women was raised to 65, in 1996 the superannuation surcharge was introduced to tax contributions above a predefined level.

These changes however were followed by a golden era – a period of apparent government generosity. To reduce the financial burden on the government a Pension Bonus scheme was introduced in 1998 and a person could accrue a pension bonus payment by deferring claiming the pension while still working. The maximum age for SG contributions increased from 65 to 70 in 1997 and then to 75 in 2002. The Super Surcharge was reduced from 15% to 12.5% in 2003 and co-contributions were introduced for low income earners. In 2004, the Treasurer released A more flexible and adaptable retirement income system as part of ‘Australia’s Demographic Challenges’ announcement. Amongst other things this report proposed to allow access to a person’s superannuation, in the form of an income stream, before they had left the work force (i.e. transition to retirement pensions) and to scrap the work test for those under age 65. 2004 was also the year that the Superannuation surcharge was reduced again from 12.5% to 10% and in 2005 Treasurer Costello abolished it altogether. In the same year the work test governing contributions made under age 65 ceased to operate.

Then in the budget of 2006 the generosity towards baby boomers really cranked up. In the Budget, Treasurer Costello announced plans to simplify superannuation. “Simpler Super” includes:

– exemption from tax on end benefits for Australians aged 60 or over from I July 2007;
– no tax on a lump sum;
– no tax on a superannuation pension;
– reasonable benefit limits to be abolished; and
– transferring super between funds made easier.

The implementation date was at the peak of the pre-GFC froth, 1 July 2007.
And the generosity continued into September that year when the Social Security assets test threshold was raised from $531,000 to $839,500 for a couple and from $343,750 to $529,250 for an individual. It was estimated that more than 300,000 extra people would be eligible for the age pension.

Next, the taste of blood.

In 2008, Labor’s first Budget contained details of a review of taxation – “Australia’s future tax system”, to be chaired by Dr Ken Henry and the terms of reference included the government’s commitment to preserve tax-free superannuation payments for the over 60s. But in May of that year Minister Sherry announced consultation on a measure (introduced by the Coalition Government) requiring future superannuation contributions and existing balances for temporary residents to be transferred to the ATO. If unclaimed after 5 years, the amounts would be confiscated. A forecast of up to $1 billion in additional revenue annually was predicted.

In December the same year the Act requiring temporary resident’s superannuation benefits to be paid to the ATO, if not claimed within 6 months of departing Australia, commenced operation. In 2009, the Act raising tax rates of Temporary Residents’ superannuation benefits when paid took effect.

In 2009 Minister Sherry announces a review (it later became known as the Cooper Review) followed by the terms of reference into the governance, efficiency, structure and operation of Australia’s superannuation system. In July of the same year the rate at which the government superannuation co- contribution was paid was reduced “temporarily” between 1 July 2009 and 30 June 2014 but would return to $1.50 for every $1 contribution (subject to income test threshold) on 1 July 2014.

In the same year, the limit on concessional contributions (formally known as tax deductible contributions) was reduced from $50 000 p.a. to $25 000 p.a. for 2010 onwards. The Pension Bonus Scheme was completely abolished.

The following year the government responded to the Henry Review and the Superannuation Guarantee rate was proposed to be raised to 12% between 2013–14 and 2019–20, and the Superannuation Guarantee age limit would be increased to 75 from 1 July 2013.

Meanwhile, the government proposed changes to the co-contributions scheme. And surprise, surprise, the government co-contribution rate would be set permanently at $1 for every $1 of personal contributions made by those receiving an adjusted annual income less than $31 920 p.a. So much for the “temporary” change and the promise to return to $1.50 made back in 2009. The qualifying age for the age pension would now also increase by six months every two years until it reaches 67 years of age on 1 January 2024.

In 2011 Superannuation Minister Bill Shorten confirmed that the amendment to abolish the age limit meant that from July 2013, up to 51,000 eligible workers aged 70 and over will receive the superannuation guarantee for the first time.

“Making superannuation contributions compulsory for these mature-age employees will improve the adequacy and equity of the retirement income system, and provide an incentive to older Australians to remain in the workforce for longer”.

It may be subtle to you but to me the shift is well underway. You cannot put $1.4 trillion of long-term equity in front of a government struggling to balance its books and expect them to not be tempted to tinker.

Today’s announcement by Gillard to end the tax-free status of super payouts for those with more than $1 million is another shining example that ‘generationism’ is well and truly underway and the battleground is superannuation.

I believe by the time someone turning 40 today is entitled to extract their super, the tax rates will be higher, the amount they can withdraw will be lower and they may not qualify at all because the age, at which they can qualify, will move. Remaining in the workforce longer will be something that younger people will need to get used to, to fund the profligacy of the generation before.

The government will argue that the greater good – infrastructure, healthcare et al – is best served with a sound balance sheet and so if you all keep contributing more super for longer we collectively will have better roads and cheaper healthcare. So much for funding your own healthcare with the proceeds of your concessionally-taxed super! I believe that in the longer term you will be funding the government’s expenditure by contributing to super. It is simply too big to be ignored.


Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

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  1. Paul Friedrich

    As a Financial Planner we have been espousing the necessity to have worthwhile investment goals and plans outside of your super if you are born post 1964 for some time. Good to see some awareness of this need in a public domain like this.

  2. David Szeto

    Roger, you absolutely bang on. TREASURER Joe Hockey has just confirmed plans to lift the pension age to 70!!

  3. Raymond Luxuryyacht

    I had a huge HECS debt when I started in the workforce. What I could never get over was that I had a debt but at the same time I was building up an asset that I wasn’t going to see until I was at least 55 (I have always thought, like the carrot on the stick, access to super for Gen X and beyond would just be beyond reach). It was a double-whammy. I was paying 6% of my wage in HECS and 9% in super. 15% of my wage was gone. What I should have been able to do was pay my HECS with the 6% of my wage that was my SGC and, temporarily and until my HECS was paid off, put only the rest (3% of my wage) into super.

    I am convinced that people are less able to find their feet sooner, buy a house and build up real wealth because they are spending their formative years in the workforce forking out for a liability and an asset which they cannot marry up.

  4. As a 31 year old, I take a lot of interest in this subject. The hard part I am coming to grips with is this:

    If I put a $100 salary sacrificed into super, after the contributions tax of 15% I have $85 to invest.

    If I don’t salary sacrifice that $100 and pay it out into my net pay, it comes out as $63 after taking out 37c in every dollar in personal income tax.

    If am correct, $85 vs $63 means that any investments from my net pay need to outperform salary sacrificed super by 35% to get even . That is a huge margin to make up. This is why I find it hard not to invest in super.

    I guess the point you are making is that they may/will increase controls and taxes so that it is not so much of a tax incentive.

  5. Look, if you have your money in a SMSF and if you want your money but the government wont give it to you just withdraw it all and do what you will with your money. If you can get others to do the same better. Your not stealing your own money.

  6. @Yavuz Atasoy

    Do not forget. A tax imposed today for the $1m crowd will eventually gobble us all up when inflation makes $1m the norm..

    The max anyone can now contribute is 25k.

  7. Isn’t politician apathy about the future (beyond the election) AND an election soon, the perfect opportunity to get both parties to agree prior to the election to bipartisan legislation that NEVER allows any changes to super?

    Yeah yeah I know they can do anything in the future, but it would at least make it harder to change.

  8. Hi Roger, I enjoyed reading your post. I’m not sure I understand the strongly pessimistic view you have regarding potential changes. Based on current legislation, superannuation in my view offers great concessions to enable a person to maximise their ability to self-fund their retirement.
    Such a fear of ‘Australia’s future tax system’ would surely spill over to all facets including the tax arena outside of superannuation. Not utilising the current benefits of super is akin to advising someone to never purchase their own main residence for fear of the CGT exemption being abolished.
    My view of the baby boomer effect is that the demographic is, and will continue to place such a huge strain on the government pension that future changes to superannuation will be enticing in nature to make it easier for a person to fund their own retirement.
    I say work with what you have. Unless what you have is a crystal ball.

  9. A great article with a big picture view of the future regardless of who is governing. How can they not resist taxing the future of super. At least we are expected to live until we can see pension today.

  10. “Today’s announcement by Gillard to end the tax-free status of super payouts for those with more than $1 million…”
    Are you sure that’s what she said?
    From SmartCompany.com.au on 7 Feb: Prime Minister Julia Gillard confirmed with Parliament yesterday the government “will never remove tax-free superannuation payments for the over-60s”, including super lump sums and pensions”.
    No more policy details announced as yet. Don’t jump the gun…

    • Hi Richard,

      The column was originally written before the second announcement you cite. She retracted after the avalanche of responses clearly showed her we were not happy!

  11. Hi Roger

    Fabulous article. My late father, who was a grocer, told me years ago that the problem with Super was the tampering governments “and that you wouldn’t see the money in the long run”. Basically, there is too much that changes in the world to have confidence in it- especially if you have a federal Labor government.
    I have 2 daughters in their early 20’s and the last thing I would encourage them to do is worry about Super. It works for me, but I am a Boomer. An increasingly nervous one though.

  12. I agree and believe in all of that.

    I think I wrote about this before.

    Super is big skim.

    Government can change legislation any time and take money — example Argentina — or restrict withdrawal — example Hungary.

    Retirement age is going to be moved up —which is default on promises — possible to the age when you going to be dead.

    Also they can tell you for your safety only to invest money in bonds which are going to be inflated away.

    And last all this helpers who manage our super are having great time eating big chunks of our money through all kind of fees.

    Nice article Roger! I was/am surprised that you did it. Hat down to you.

    Would like to see similar article by Mr. Warren Buffett about american retirement funds ( IOU from government ) and their government real debt.

    Thank you all

  13. Roger – I suspect Alan Kohler reads your columns! I am watching Inside Business and his monologue is on how the retirement system is broken, super isn’t going to deliver for people but it’s GREAT for the managers, etc etc

  14. @AHOVINGTON There was a time you could access your superannuation if you where leaving the country.

    Too many abused the system and “left” the country taking their superannuation and then coming back in.

    The leaving the country and being able to access and take your superannuation should be introduced. After all it is “your” money, not the governments, not the superannuation fund managers (if not self managed).

    If I decide at say 50 years old that I don’t like the socialist leanings of the governments and wish to emigrate to another country, I should be allowed to take my superannuation with me.

  15. Something a lot of people don’t realise is how the pollies own super is sacrosanct. Effectively the capital value of their own super is 5 million on average at retirement, yet because they have a differentiated super system will they be subject to increased taxation?. NO, in fact the silence on increasing tax on Public Service Super is deafening. Come on pollies how about leading by example on this one!

  16. Brilliantly succinct Roger.

    Here is my not so succinct response.

    Firstly, I didn’t realise we had cynical politicians in 1908? But it does sound familiar.

    The treasure chest is so large even with silly management & gfc, it’s irresistable. $1.4 trillion @ 5% is $70 billion. Oh! and why don’t we turbo charge the funds pool with a 33% SG (before silly management) from (a) the productive economy and (b) our unproductive taxes (from the productive economy) for those lucky enough with protected local, state & federal government jobs for life.

    There we go fixed Australia’s financial problems with a “stroke of the pen”.

    Now how inventive can they be at wasting nearly every dollar of that annually, continue to stuggle balancing the budget and not become a global creditor nation? No imagination (or thought) is required to achieve this outcome, sadly.

    I can’t wait for the “Super Mining Tax”, sorry “Super Wealth Tax” sequel where instead of 3 rock kickers we get 4 pillars & a few unions around the table.

    I feel a movie coming on?

    Loved the rant, Roger. Book was great as well. Glad to see you suffered a few misguided but well meaning financial interpretations at uni as well. Thanks for the ease of Valuables wisdom.


  17. Hi Roger, good post, and considering all the responses, you obviously hit a nerve. It’s certainly something I worry about seeing as I am in my early 40s and have plenty of years to go. I’m in a similar boat to David. My employer matches voluntary contributions, kicking in 4% if the employee makes a 5% voluntary contribution. This generates an immediate 80% return so it’s hard to knock back, and difficult to imagine a tax outweighing that return. However, if the government prevents us accessing the money, it’ll be another story altogether …

  18. In principle, I have no problems in paying some tax within my super in while pension phase. However I need to have some attractive tax advantages for keeping my money within super. Let’s be realistic tax free super did not exist until, if I am right, about 5-6 years ago. I am also against people piling in excessive amounts of money into super, and not paying any tax all (Remember John Howard’s last term and $1M tax free contributions into super???, although GFC may have destroyed most of them). For me excessive amount would be, say, anywhere north of 3-5 millions. Why should people with excessive money inside super not pay tax? The issue is what that amount should be, and I think $1 M is too low, considering the current economic climate. If we are going to tax super, then let’s include all forms of super, such as politicians judges and defined benefit super as well. I know a lot people who get paid significant amount of super from their defined benefit schemes. If a person who gets paid $ 5,000 – 6000 a month from his/her defined benefit you need to have about A$ 1 to 1.2 M (maybe more) to generate that sort of income. Why would they not pay tax. There also totally untaxed super accounts which means no tax paid until withdrawal (15% at withdrawal).
    By the way I am right at the very tail end of baby boomers so I have not even considered myself a baby boomer. And I stopped voting for Labour long time ago and unlikely to vote again. Not sure Liberals will not do worse (from super point of view), if they come to power again. Important point is to have consistency and not changing rules several times a year. So people can have some sort of confidence in the system. I think these changes are destroying confidence in super.

    • Do not forget. A tax imposed today for the $1m crowd will eventually gobble us all up when inflation makes $1m the norm..

      The max anyone can now contribute is 25k.

  19. Hi roger – very interesting article but the one point (under current legislation) you did not cover was the 15% tax to non dependent beneficiaries – remember that the money will usually go from the superannuant to the spouse in a account based pension – it is from the survivor it then goes to the no dependant beneficiaries – the adult children (less 15%). So there you have it – 15% on the way in – 15% tax while it is there and potentially 15% on the way out!

    Carerful tax planning for everyone is important

  20. Thanks Roger. This is useful as i was beginning to have my suspicions. I will now check them out more thoroughly.
    Being 47, I am really cranky at all the changes this govt is making to MY super savings. Just last week I wrote to my MP (Labor) expressing my opinion and received a stock, PR reply about how this step is “making the super system fairer by ensuring tax incentives are more even across income ranges”. None of my other questions, including the halving of the concessional contributions rate (which effectively doubles the amount of time it will take me to save enough), were even mentioned. I received gobbledegook about how Labor lowered interest rates (bet you didn’t know they were responsible for that!) and they have a new kiddies dental scheme and an NDIS and shared the benefits of the mining boom with their lovely payments.
    I believe that the current approach is either incompetent (they are unable to see the cumulative effect of these changes) or unethical (they know but will not admit). Paul Keating was very overt – I remember his announcement 28 years ago that by the time I retire I would not be receiving a pension.
    Now I am being financially nibbled to death.
    You’ve given me a bit more motivation to check out – oh – I feel so much better for getting that out!

  21. Roger, what is to stop the Government changing the rules (full stop) of investment ? If Gen X and Gen Y – as the media would have us believe – don’t really care about super, and hence, put as little into it as possible (with many not even actively selecting their investment option), then the problem is still there…you could argue, exacerbated.

    They will change the rules regardless. Introduction of CGT, tax rates, whatever. The only solution is to have money both inside and outside of super.

    I have to agree though, what about those people with a SMSF, who have slightly more control (or the illusion thereof), compared with those of us investing outside of super ?

    I am mid-30s, so if a week is a long time in politics, another 30-35 years is an eternity. Taking people’s money away – for politicians of any flag colour – is suicidal. People still remember the corruption and scandals for years after, so any politician has to be careful that they don’t wreck it for those that follow in their own party.

    Besides, any Government HAS to encourage people to save for their own retirements. They cannot afford the massive amount of retirees – be they boomers, Gen X or Y who will retire – to all to go onto the pension (if it even exists then). They have to walk a very fine line between raiding the honey pot, being seen to and allowing concessions to it.

  22. I completely agree and have thought this for some time now. I am 40 and, apart from believing that the rules will change by the time I am eligible to access my super, am planning to have the choice to retire at age 55, should I wish to. Funnelling all of my investment funds into super won’t allow me to make that choice.

  23. Interesting article Roger. It is very hard for the financially profligate to resist raiding the piggy bank, whoever they may be. I agree with AHOVINGTON’s post above. Perhaps we will start seeing more Australian business people and investors leaving to reside in Singapore. Presumably then this will erode Australia’s taxation base over time. Perhaps you should open an investment business for Australians there?

  24. Hi Roger, It’s been a while. I think this is my first post under the new format. In regards to raising the pension age to 67, when Kevin Rudd ,if my memory serves me correctly, first raised the issue as PM my first thought’s were,’Finally they’ve found a cure for arthritis’ and other such health problems for the aged. Anyone who spends they entire working career it physically demanding jobs, and I’ve still got 10 or 12 years to go, will tell you that they’re well and truly ready to retire at 65 to rest their burnt out body and spend a bit more time relaxing and fishing and family time and fishing. But I suppose that won’t be taken into account when the decision is made

  25. When I started work, I contributed double the 5% of my pitiful annual starting salary required to attract the employer contribution of 15% of my final average salary for each year of service. Eight years later, John Howard introduced the Super surcharge on High income earners; so I slashed my super contributions to zero so I would average 5% over the remainder of my working life. My redundancy lump sum was equivalent to 12 times my starting salary, which I rolled into my SMSF and grew to 44 times my starting salary over the last six years. So despite the uncertainty and the avarice of Governments along the way, I have accumulated a (currently tax free) nest egg freeing me from the shackles of wage slavery forever.

  26. simply remove the current govt and replace them( we have the opportunity shortly) , with a body that thinks longer term benefit , not short term surplus, as we do have a major retirement issue in this country.

  27. Martyn Compton

    Hi Roger, Great article and I would agree with most of your conclusions. I am on the cusp of the arbitrary boomer cutoff date and have for some time been concerned about the shifting sands of superannuation. One question you have not answered, after pointing out the (possible) problems is some solutions – should we all be setting up trusts, investment businesses or moving to Bermuda with heavy suitcases?
    One other comment, if I may be so bold. You are correct baby boomers set up super for themselves and at the moment they have the power. In 20 years that power will have shifted to a new generation, there will be fundamental shifts in demographics and demand sized consequences on the economy. Do you think the GenY Gen Z, the “me, now” generation will really want to restrict their access to their money when they are in power? I suspect the shouts of “turn on the taps” may make todays chorus of “tax the rich” sound like fluttering in the wind.

  28. Hi Roger,
    Thank you very much for that insightful article. I concur completely and have been telling my friends and family the same exact thing. After being in the Army for 16 years, I kept getting that same sinking feel about super from my early 20s. The goal post kept changing and you could see that there was no chance of me ever seeing my money. The rules are onerous and beauracratic and it seems to me to be set up for the oldies and forgets about their kids. You always hear how the oldies got this and that from the welfare state and then as our generation gets there. Nope, sorry, we cannot afford that now.. and let’s not talk about how generous the super packages are for government and senior beauracrats.. Unfortunately as you say and I keep saying…..I will die before the government gives me my super money!

  29. christophe capel

    Great post Roger. Enjoyed reading it and definitely makes you think twice about investing (sorry I meant wasting) more money in super especially with its poor returns and with the government changing the rules regularly to their advantage.

    Noticed three little typos: “As you read on you will observe a shift in policy towards TO super. Individually, THE seem like minor”

    “Gosh we could really do something fancy with all that money now that it is so temptingly locked up FORM people and they keep putting more in!”



  30. A self-managed super fund has high administration costs so I rule that out. Personally, I have taken the opposite view and decided it is silly to invest funds in stocks outside of super as I have a long-term investment horizon and so do not want to realise capital gains outside of super since gains are taxed at higher personal tax rates and I want to take full advantage of the franking credits in the tax favoured environment. So I’m using An Option that allows 80% of the account balance to be allocated to S&P/ASX 300 stocks. If I realise capital gains on stocks held for more than 1 year, then the CG tax rate falls from 15% to 10%. Furthermore, when stocks pay fully franked dividends, The fund credits the after-tax value of the grossed up dividend when the dividend is paid and this amount is credited to the cash transaction account rather than at tax time. Unfortunately, I would prefer to allocate 100% of my account balance to Australian equities and provided this feedback to the fund. The one other thing I like about It is the Australian Equities asset class management fee is approximately 0.3% which is quite reasonable for investing some of the 20% that I am not allowed to invest directly. I would also like an option to cheaply invest in international equities at reasonable transaction costs but this is unavailable at present. At present, when you hit retirement age and if you wish to move to an allocated pension, then you must realise all stocks and incur capital gains tax at that point in time. I’m 30 years off that so there is time to convince The Fund that they should allow account holders to rollover equity holdings into an allocated pension account to avoid CGT at that point. The other great advantage is that I am in charge of selling stocks when their fundamentals change or are overvalued etc. I like this much better than putting an investment manager in charge of the money and having excessive portfolio turnover that leads to excessive capital gains on a tax return. As already mentioned, a further benefit is tax-free investment income in the pension stage. The pros outweigh the cons in my opinion.

    Regards Paul

  31. Dennis Bergmans

    “Remaining in the workforce longer will be something that younger people will need to get used to, to fund the profligacy of the generation before.”

    Warren Buffett has some fantastic articles where he writes about the consequences of spending excesses from a preceding generation to the next. He forecasts political and social unrest as a result. Case in point – Greece.

    While I agree with you for the most part on your rant, I have some differing reasons why.

    My first point to think about – putting money into super for a 20 year old, means they can’t (except in very limited circumstances) touch the money until they retire, possibly 40 or more years away. You can still save for retirement outside of super, yet have access to the money if required.

    My second point – instead of putting money into super, that 20 year old can just pay the tax on their income and pay it off their home loan. At current home loan interest rates, 5-6%, and at a 30-40% tax rate a person would have to earn a 7-9% pre-tax return on other investments to match the return they could get on saving money on their home loan. AND the home loan return is guaranteed AND that return is tax free.

    I have run out of time for now. I have more points to follow at some stage.

  32. I think this article is spot on. The rules for super have changed more often than a baby’s nappy. Putting additional money into this system is akin to giving it away to charity as the chances are a very good, as Roger has pointed out that you will never get to see it, or at best a smaller portion of it.

    The solution is simple look after yourself by investing wisely in shares, property etc. Just don’t get suckered into a “Tax Break” that eventually will be a “Tax Take”. Nobody who invests seriously does it for the tax break as the aim is to make money, typically the tax break is because you are losing money.. aka negative gearing on property.

  33. Hi Roger, I agree – thank you for this very insightful and thought provoking article. Timely and absolutely right on!

    Kind regards,

  34. David Sherington

    Hi Roger, I have been having exactly the same thoughts. I’m 31 and my view is that working hard to build up a decent super balance could either be a godsend or a complete nightmare. I continue to salary sacrifice as my employer incentivises me to do so and have made some good investments via Skaffold but all I can do really is cross my fingers and live in hope that some grubby, crooked communists (there are a few in the press currently) wont show up down the track who want to steal it from me to redistribute to people who have not made the same sacrifices as I have to get to where I am. I’m also in the process of setting up an SMSF and I plan to go it alone for now with all of my accounting and compliance as I believe that the fees being charged in this space are highly opportunistic for something that could easily be done using a BGL license and a little data entry. My other concern is that the government could jack up compliance requirements and costs, so even professional accountants and educated people are required to employ highly qualified specialists on even more lucrative terms. If things get too hard and fundamental retirement promises are broken, I feel that there are going to be a lot of jaded people who will resort to desperate means. I’m sure that the thought of relocating all super assets overseas and absconding to a safe and friendly jurisdiction in retirement to escape socialist tyrany is starting to cross people’s minds. Just look at what has happened in France with the 75% tax they introduced there – successful and enterprising people will not put up with it and will start to look for ways around it or will just get out all together. Government meddling and intervention is distorting the free market here already and in many respects it has made the place quite uncompetitive.

  35. I agree Roger, I’ve only ever made a voluntary contribution once, of $1000. It was one year I was eligible for the co-contribution so it seemed like a good idea. Unfortunately after that there was a period of negative returns and I realised I would’ve been better off investing the money myself. A relatively cheap lesson overall though :)

  36. Great article.

    I’ve never come across this line of reasoning before so thoroughly done.

    Reminds me of a saying when I was younger ‘how much gold do you think the dragon can hoard and not expect raiders to come after him?’

    There is another augment for the government taxing more of super in the future and that is the more that other overseas governments tax super (like in Europe at the moment) the more justification this government has also.

    Thanks for the above, for the first time I’ve rethought about my super.

  37. I totally agree with you. Super was created by Boomers for Boomers.

    I agree with you though, not because of the tax issue, but also the fact that asset price inflation is not going to occur when you have a big load of people trying to extract an income from financial assets to fund their retirements.

    It’s the same with the downsizing in the housing market, etc.

    The fact is that in a broken political system, no government wants to take tough decisions about taxes and spending and therefore chooses either to raid the low hanging fruit or punish savers by dropping rates to historical lows.

  38. philipsainsbury

    “Australians were never meant to qualify for the pension because they would be deceased, on average, a decade or so before they qualified.
    Wham! There it is. Get people to start realizing that they were never meant to get the money anyway. Maybe, one day, we’ll hear the argument we’re not meant to qualify for our super until ten years after we’re deceased too”

    Not quite sure what your point here is. People are now expected live beyond the 10 years of the current pension age of 67, so (77 male & 83 female), and therefore most will qualify for Pension by today’s standards. So it’s hardly fair to compare pension age v life expectancy from 1910, to Superannuation today. Given that super can be accessed in one form or another by the age of 60 how are we going to hear the argument that “we’re not meant to qualify for our super until ten years after we’re deceased too”

    “Or perhaps we extend the age before people can get it there?”
    What benefit would it be to the government if preservation age for super was increased? Investment income in super is taxed at 15%, yet when member lump-sum withdraw, any investment income generated can by taxed at the individuals marginal tax rate. If member takes an account based pension, then investment income on that part is tax free. I don’t think you’ve explain how the government will gain tax wise by increasing preservation age.

    • Thanks Phillip,

      Thinking in terms of current legislation, I’d say you are right. Thinking more imaginatively I’d say; keep in mind the drawings are spent not reinvested…

  39. C’mon Roger, tell us what you really think!

    It is unfortunate, but a government that has got itself in financial strife will generally go for the short term ‘fix’, even if that is to the greater detriment later on. Having retirees putting more pressure on the age pension in future years by being less financially independent is a less immediate problem than paying for today’s expenses and promises, and that big juicy lump of other people’s money just sitting there is hard to resist.

  40. Hi Roger, Great article and I completely agree with your reasoning. Labor is attacking our super like bears raiding the honey jar to fund their addiction to excessive debt and spending.

    What can one do about it is the question.

    Any suggestions?

    Cheers, Raymond

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