It’s no secret that politicians like raiding wealth. That’s probably how politics got started in the first place. A bunch of cavemen banded together on a hunting party figured out they could take other people’s wealth simply by outnumbering them. Beats having to chase woolly mammoths around.
Democracy today is little better. And still uses the party system. The big difference is that those getting raided seem to put up with it more obligingly. Apparently because they get to vote.
Usually wealthy individuals and big companies control accumulated wealth – the kind worth raiding. In Australia, it’s the mining industry that was a target these last few years. And so our politicians levied royalties, taxes, mining taxes and super profit taxes on those who provide resources. Meanwhile farmers, who also extract resources, get subsidised. For example, Australian farmers received flood relief while the mining companies operating in the same areas didn’t. The difference is in who has the wealth for raiding.
Now I don’t have a problem with helping the needy. In fact, I think we have to do it. But there’s a big difference between helping the needy and raiding wealth. Using government to transfer wealth is dangerous because of the power it gives those doing the distributing. First of all, they have the power to take. And second, they have the power to selectively give what was other people’s money. You’re a lot less careful with other people’s money. At least politicians are.
Retirees are where the money is now and where it is going to be in the future. Retirees may represent a growing voting bloc, but my bet is that your wealth is the politicians’ next target. They have to pay for their harebrained schemes somehow. And you’ve got the money.
$1.6 Trillion in Superannuation
The Australian government has created one of the biggest build-ups of politically controlled wealth ever by setting up the Superannuation system. The combined total assets in the system topped $1.6 trillion this year. Just think of the kind of government spending that could finance. We could have Abbott Airports, or Shorten Bridges all over Australia…or maybe in Afghanistan and Iraq.
You might think that the money you’ve been paying into Super all these years is yours. But you can’t get close to it without following the government’s rules. So is it really yours?
Either way, the irresistible pile of money is there, just waiting for the government to take it. But can they? Of course! The government already controls the Super system right down to its day to day operations. It is truly surreal to dig into the complexity and nuances of how Super works, as I’m required to do for ‘professional development’ at the moment. It’s the political equivalent of a peacock’s plume. Ridiculous complexity to convey power and control. It works on voters in the same way as the birds. They get ‘taken advantage of’.
The government is already using their power to skim off some of the cream from the Super system. Daryl Dixon in the Australian gave four examples:
- ‘the severe cut-back in the concessional contributions caps, even for older people with limited superannuation;
- ‘the additional 15 per cent contributions tax surcharge on taxpayers with annual incomes of more than $300,000;
- ‘the now abandoned 15 per cent tax on annual pension fund income above $100,000;
- ‘and the penalty tax levied on excess contributions.‘
In other words, the government is already using its substantial control over the Super system – where all this wealth has accumulated – to get its grubby hands on your cash. And you can’t escape because you can’t get your money out until you retire. The trap has long since snapped shut. In fact, you have to keep paying more money in each year of work, at an increasing rate in coming years as the compulsory contribution rises.
This is also why there’s a crackdown on lump sum payouts in the works at the moment. The government doesn’t want you escaping from Super too fast. My guess is that you’ll soon be forced to keep your assets inside the Super system in retirement so the government can keep control for longer. They’ve already added incentives to do so.
It won’t be difficult for politicians to make more amendments to the Super system so they can skim more cash off the top. For example, the government is sick of people reducing the liquidity of their Super by investing in property. You can easily sell shares and buy government bonds, as I expect the government will force retirees to do soon. But selling property to buy them is unreasonable. So the government wants to avoid letting retirees do so.
Changes like these won’t get much resistance. Unlike the miners, the Superannuation industry is very much in love with government. It created their industry in the first place after all. It set up the enormous regulatory complexity that Super workers make their exorbitant fees out of. And guarantees them business.
What about political opposition? Well, there will be no big company lobbyists to stop them. And whoever is in opposition won’t put up much of a fuss. Both political parties like their spending, after all. And because of an ageing population, life will be difficult enough for young people. It won’t be hard for a politician to argue that the older generation has left the younger with a huge demographic burden to bear. They have.
And so the young will need to manage the retirement system’s wealth for the good of the nation. How? Taxes, taxes, taxes. At least, that’s how things will end up. For now, things like banning Super lump sum payments are on the agenda.
Notice how policy makers are controlling your money when they tinker with Super. Because that will be forgotten as they take more and more control.
By the way, if you think my warnings on Super are over the top, just take a look at America’s Social Security system. The enormous amount of assets it collected out of taxes were invested in government bonds to pay for government projects. But that’s absurd because the people collecting Social Security payouts would show up on the government’s expense account anyway. In other words, the taxes paid into Social Security have already been spent by the government, instead of investing them for future payouts. And so now those collecting the payouts will get cash from the government anyway. Just in the form of debt repayments instead of direct transfers of wealth.
Despite the uncertainty of the future, whether it’s the government taking more and more of your super, financial markets crashing, property markets falling or personal troubles like your health deteriorating, Australian retirees don’t seem to be worried about retirement.
Taking Early Retirement
The Australian Bureau of Statistics is reporting that Australians are retiring earlier than anyone expected. The average retirement for men is 59 and 50 for women. That’s incredible. It’s completely surreal. But wait till you hear how they’re doing it, also from the Australian Bureau of Statistic’s new retirement survey:
- 46% of retirees listed ‘government pension or allowance’ as their main source of income
- 55% of retirees took their super assets as a lump sum payment
- Of those who took a lump sum, over 30% used it to pay off or improve their home, or buy a new one
- Over 10% used it to buy or pay off a motor vehicle.
What the government has done by creating Super is create a lottery-like windfall of cash for people as they hit retirement. And as a result, Australians are confusing retirement with a midlife crisis. Now that’s fine if you’re doing it on your own money. But they’re not, because they end up broke and on the pension – precisely what Super was designed to avoid. Yes, that’s a reason to restrict lump sum payments. And that’s how the politicians will sell it to the voters. But it doesn’t change my point that the government is playing with other people’s money, which is what causes the problem in the first place.
Even before retirees tear through their Super, they’re optimising their financial affairs by making reckless investment decisions to get more money from the government. Of course, many financial advisors practically advocate this. I was shocked to see that one of the main goals of retirement planning, according to those educating finance professionals, is to get access to as much government funding as possible. I suppose if you’ve been taxed all your life, the feeling is that you’re entitled to the benefits. Which you are in my opinion. But it’s still a disastrous mindset to set yourself up with a lifestyle that’s reliant on the government budget. Does Joe Hockey look reliable to you? Call me a puritan, but I’m not going to advocate relying on the government to anyone.
The ‘she’ll be right’ and entitled attitude to retirement that Australians are taking could end up being a good thing…for those who don’t join them. By staying prepared and prudent, your lifestyle in retirement could be far better than that of your peers on an absolute and relative scale.
But how do you prepare? Well, a big solution is not to retire too early. It’s the big mistake that’s so easy to make. My suggestion is to phase yourself out of the workforce. Work fewer hours, or a less intense job. Then take on something that still earns you money, but you love doing. And only stop earning an income when you have to. It’s the secret to a long and healthy life anyway, as I’ve covered before. But continuing some form of work has enormous financial power too.
The point is that you should stay sceptical of the benefits of Super. It may seem like a good idea, but could turn out to be a trap. Putting cash into a politically controlled system is dangerous. It’s like playing a board game with that nephew who likes to change the rules halfway through. You always seem to end up losing.
That aside, we’ve seen how powerful the Super system is for accumulating wealth. We don’t yet know if it can handle the kind of outflow of wealth it will see in coming years as retirees begin to draw on their accumulated savings. My bet is that the system will fail to deliver on its enormous promise of a prosperous retirement for all, and the government will use this argument to step in and take control. All that cash is just too juicy for an elected caveman and his hunting party to ignore. That’s why in the meantime, you’ll see small changes like taxes, restrictions on lump sum payouts and increased contributions. They’re incremental changes towards a very specific goal – taking your money.
Nick Hubble
Contributing Editor, Money Morning
Ed Note: The above article is an extract from an update originally published in The Money for Life Letter.
