Saturday 25 November 2023

How superannuation was sold to Australians with a necessary lie

Superannuation is the system of private retirement savings introduced in Australia in 1992. It was sold as a 'reform' to provide more working Australians with private retirement savings to supplement (or replace) reliance on the Age Pension. Prior to this, private pensions were generally a 'perk' only available to white collar workers in some industries (for example my first job as a research scientist in the early 1980s had a 'defined benefit' plan that would have provided a fixed multiple (8.25x) my final average (last 3 years) salary upon reaching retirement age (65). The multiple was based on years of service. Of course the company decided to shift the risk of investment performance onto workers by changing the system to a defined contributions plan in the late 1980s (and incidentally removed the redundancy insurance feature) just before making most of the workforce redundant in the late 1990s)).

Initially introduced at a contribution rate (SGL) of 3%, it was part of a 'deal' finessed by the Labor government to replace part of wage increase with a legislated compulsory contribution into superannuation by Australian companies. This helped break the wage-price spiral that had entrenched high inflation in Australia in the 1970s (mostly due to the 1973/4 'oil shock').Introduction of the SGL and universal superannuation in 1992 helped 'break the back' of inflation -- bringing the rate down from a persistent 5%+ to around 2.5% (hence the current Australian 'target' band for inflation of 2%-3%). It was no coincidence that inflation targeting by the RBA was introduced in 1993.

Since its introduction the SGL rate has been increased by a series of Australian governments, with Labor generally being more in favour of pushing for increases in the SGL as part of their 'election promises' to appeal to their traditional base of 'working class' Australians (and low income workers), The conservation governments (Liberal and National Party coalition) have been less keen to increase the rate of SGL, based on their philosophy that decisions to save money for retirement should be left to the individual, rather than government legislation. The conservative government also views the SGL as a 'cost to business', although most of the cost of SGL is actually born by the employees via lower wage rises. However, Labor governments tended to 'bake in' future SGL rises by legislation covering a 'timetable' of future SGL increases -- which conservative governments usually had to promise to not rescind (or would cost them an election. Although this election promise was then often 'kept' by delaying the timing of the next SGL increase).

A side-benefit of superannuation for Labor governments was that their biggest support base (the Union movement - whose compulsory union dues often fed into Labor Party campaign coffers) used superannuation (especially 'Industry Super' funds) as a tool for propping up membership (which has started to flag since the de-industrialisation of Australia since the 1970s). The amount of Industry Fund monies pumped into advertising 'super' as some sort of Trade Union achievement was astounding (they even featured a retired Reserve Bank governor in one ad series).

There has been some debate regarding whether SGL increases actually came at the expense of wage rises. The initial belief was that any increase in the SGL rate would be offset by employers reducing the wage rises that would otherwise have occurred. And it was in fact 'sold' as an inflation fighting mechanism to swap a wage rise for universal SGL (via the Hawke government 'Accord'). But some researchers subsequently claimed that their analysis showed that the SGL increases had little or no effect on wage rises. However, the  government's Retirement Income Review recently provided a fairly definitive conclusion that between 70% and 100% of the increase in SGL has come at the cost to workers of reduced wage rises. So, no 'free lunch' - with increased compulsory retirement savings into superannuation coming at the expense of 'take home' pay (and also 'locked away' until 'preservation age' for good measure). The main sweetener used to sell this compulsory savings plan was that tax on savings inside super (15% during accumulation phase) is lower than the marginal tax rates for incomes above the 'tax free' threshold of $18,200 pa (although it isn't much of a benefit for those in the 19% tax bracket earning under $45K).

But the largely hidden reason for both Labor and Liberal governments being in favour of compulsory superannuation is that the Age Pension was going to become unaffordable over time, due to it being 'unfunded' (paid for out of current tax revenues and government debt) rather than supported (at least partially) by worker's contributions (as is the case with the US SS system, the UK NI scheme, etc). One feature of the Australian Age Pension system (since it was introduced in 1909) was that it was both Income and Assets tested (although there was a brief period when the Asset test was removed during the 60s and 70s).

The Asset test (the threshold over which the full Age Pension entitlement is removed and a part-pension may instead be available) has generally been around 7x the minimum wage (pa) since the mid 1980s:

Unfortunately, although the Asset test excludes the 'principle residence' it does include financial assets, including the superannuation account balance. Therefore, the growth in superannuation savings has directly reduced the number of Australian workers who can access the Age Pension at all, or reduced the amount of 'part pension' available for those with Assets above the Asset test threshold (but not so high as to totally eliminate Age Pension eligibility).

This reduction in eligibility for Age pension has been quite obvious, as is the rapid switch from full Age Pension entitlement to only being eligible for a part pension (and the average amount of part-pension rapidly declining due to the Asset Test and 'taper rate' as Super balances increase):

Indeed, the Australian government's own Retirement Income Review final report projected that the percentage of age eligible Australians having access to the full Age Pension would drop from over 40% to around 20% by 2060:

Overall, introduction of compulsory Superannuation and the increase in the SGL rate over time has

1. Helped transition Australia from entrenched inflation since the 1973 'oil shock' to the 2%-3% 'target band' via the 'Accord', but trading wage rises for superannuation savings.

2. Helped shift the burden for retirement income support from the government (unfunded) Age Pension to the self-funded (via SGL) Superannuation system. The fact that the SGL comes mostly (70%-100%) from lower wage rises is generally not publicized. In fact the Trade Unions generally spruik 'Industry Super' and compulsory superannuation as a 'good thing' for workers.

The way that the Age Pension Asset Test has resulted in growing superannuation balances rapidly restricting access to the Age Pension, and rapidly diminished the amount of partial Age Pension paid out to those still able to access some Age Pension is less well known.

Overall, the introduction of Superannuation in Australia was necessary (as the Age Pension system would have otherwise become unsustainable, requiring draconian cuts to Age Pension rates or much tighter eligibility rules, or significant increases in taxation revenue from a shrinking taxpyer vs retiree pool) but was sold by the Trade Union movement and both major political parties as a 'good thing'. But in reality it has simply shifted the burden for retirement funding directly onto workers -- and made such compulsory retirement savings law.

One 'loop hole' still remaining in the Superannuation and Age Pension system is that the principle residence is exempt from the Asset Test. So it is quite possible for those eligible for a partial Age Pension to increase their retirement income by taking a lump sum from superannuation and using it to 'upsize' their home. I expect that eventually this will be remedied by either a) using a carrot and stick approach to make moving superannuation into 'Pension Phase' upon retirement mandatory, and restricting the access to lump sum payments from pension phase superannuation (eg. the maximum 10% withdrawal rate applied to TRIS pension accounts could be applied to pension phase superannuation balances). or b) putting a 'cap' on the value of principal residence that is exempt from the Age Pension Asset Test (I wouldn't be surprised if the TBC ($1.9MM) or $3MM threshold for the newly introduced 30% tax rate on superannuation 'increase' (taxable income AND unrealized capital gains) eventually became the 'cap' on value of principle residence exempt from the Age Pension Asset Test).

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Saturday 18 November 2023

Credit Scores in Australia

A 'credit score' (or credit rating) in the US is a common concept, as ubiquitous as a SSN (social security number). Australia didn't have the equivalent until fairly recently, with loan applications being assessed by individual lenders, and little sharing of credit information about individuals.

This changed in recent years and now (according the the Australian government 'moneysmart' website)

"Lenders use your credit score (or credit rating) to decide whether to give you credit or lend you money. Knowing this can help you negotiate better deals, or understand why a lender rejected you."


"You have a right to get a copy of your credit report for free every 3 months."

and that

"Your credit report also includes a credit rating, This is the 'band' your credit score sits in (for example, low, fair, good, very good, excellent." have

But it is worth noting that a credit rating isn't the same thing as a credit score.

For example, I was interested in checking my credit report and score, so I created a free account with Equifax and received my free report. I checked that it was accurate, and found that my total 'credit limit' was $1,029,995.00 (mostly the mortgage for my investment property) and my score was 'Excellent'. But the free report didn't provide my actual credit rating, with Equifax indicating that the 'excellent' corresponded to a rating in the band 853-1200. When I clicked on the link to see my credit score, it offered me a paid subscription.

According to moneysmart:

"Depending on the credit reporting agency, your score will be between zero and either 1,000 or 1,200"

To get my actual credit score I installed the free app from ClearScore which provided the credit score from two agencies: Illium and Experian.

The differences were quite intriguing. Illium's score was 999/1000 and gave the Australian average score as being 695 and the NSW state average as being 690.

Experian gave me a score of 920/1000 with the Australian average being 783  and the state average being 782.

The app suggested that I could improve my score by building my repayment history, as it said I didn't have a credit account more than a year old. So they obviously don't count the mortgage or personal loan accounts. So closing down all my old credit cards in January to get my investment property mortgage approved apparently reduced my credit score. Go figure.

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Thursday 9 November 2023

12% solution 'superhero' portfolio and 'moomoo' trading account - end OCT 2023 update

The "12% solution"" recommendation email from David Alan Carter for the end of October remained at 60% SHY (or cash) + 40% JNK (or SHY or cash). So I left the 12% solution part of my superhero trading account sitting in cash this month.

My Moomoo trading account ended the month close to where it started, which was fairly good relative to the benchmark. Total number of trades to date is 13 with a 46% Win:loss ratio, which is about what I was hoping to achieve. Unfortunately, although three of the trades in October were closed within 0.05% of the set target price, one position was closed out at the market open when the price had gapped down below the stop-loss price target. So I lost -$65.52 on that trade vs. my target stop-loss would have limited the loss on a single trade to -$50. Overall my average gain on winning trades so far has been $81.48 (vs. target of $100 gain on winning trades), and the average loss of losing trades has been -$71.16 (vs/ target of -$50 loss limit on losing trades). I will try to close out positions closer to planned target prices in future trades..

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Friday 3 November 2023

Commencing a TRIS/TTR pension

In Feb I cancelled my existing SS (salary sacrifice) arrangement as I needed to boost my salary for the investment mortgage approval process, and would also need additional cashflow to service the investment property loan (as the IO monthly payments and expenses and more than the rental income). However, this meant that my total concessional contributions into super last FY was about $6K less than the 'cap' of $27,500.

To remedy this tax inefficiency without causing myself cashflow issues I've decided to commence a Transition To Retirement (TTR) TRIS pension account within out SMSF. There is no tax benefit within super (as I am under 65 and still working I can't move any of my super balance into 'pension phase' - although I think the $10K of super money I used to purchase a deferred lifetime annuity was counted as $10K of my TBC).as the TRIS pension account won't move into 'pension phase' until I hit age 65, so will still be taxed at 15%.

But it will mean that the minimum 4% pension withdrawal (based on the TRIS account starting balance as at 1/7/23) will be paid to me tax free, and I can use this additional income to afford to make personal deductible super contribution of a suitable amount to ensure my total concessional super contributions hit the $27,500 cap this FY. My SGL contributions this year will be around $12,650 so I will probably need to make a deduction super contribution next June of around $14,850 to reach the CC limit. I have requested the TRIS to be commenced from 1/7/23 with $300K of my SMSF balance, so the min pension payment this FY will be $12,000. That pension payment will cover most of the amount needed for the personal super contribution.

As this will reduce my taxable income by $14,850 and increase my concessional super contributions by the same amount, the overall impact will be $2,227.50 additional tax paid by our SMSF, and $4,826.25 less income tax payable by myself. So the overall tax saving will be around $2,600.

eSuperfund will calculate the TRIS account balance for 30 June each year, so I will know how much I need to withdraw as a pension payment in future years.

When I turn 65 the TRIS (whatever it's current balance is) will automatically be moved into 'pension phase', and I can also transfer my accumulative phase SMSF account balance into pension phase at that time.

Depending on what my total SMSF balance is when I turn 65, I might need to rollover some of my super from my other super accounts so the entire TBC (whatever it is at the time) gets used for the initial 'pension phase' account balance in the SMSF. [I am being optimistic that I might have a total super exceeding the TBC by the time I reach 65].

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Wednesday 1 November 2023

Net Worth - OCT 2023

Chart updated to end of October in sidebar.

Stocks/cash increased $5,953 (+2.82%) to $217,1164. This was mostly due to me lodging my 2023 tax return last month and receiving a tax refund of around $6K due to the investment unit making a net loss since settlement in late Feb (with the depreciation schedule adding considerably to the tax loss. However, a little know fact is that the claimed depreciation has to be removed from the 'cost base' of the investment property, so while you gain an immediate income tax reduction, you will ultimately give half of it back if/when the property is sold and you calculate the realized capital gain)..

Retirement savings (SMSF etc) decreased by -$19,125 (-1.26%) to $1,503,719 in line with the market trend and our asset allocation. We moved $50K from our SMSF cash account into a new investment in Vanguard Australian Shares High Yeild Fund (VAN0104AU) during October. I will transfer another $20K from the ANZ V2 cash account into our Vanguard SMSF account this week to make an additional $20K investment into this fund. DS1 and DW are making sufficient contributions into the SMSF to accumulate sufficient cash to cover the SMSF tax bill next year and DWs minimum pension withdrawal,

Est. of Home valuation (my half) decreased by -$7,670 (-0.73%) to $1,046,809. This was mostly due to ceasing to provide their monthly 'suburb snapshot' information about median sales price for a particular postcode, so I had to use data from similar data provided by - unfortunately they break down the median prices by # of bedrooms in the house or unit, so I had to change to the closest equivalent figure that was in line with reality (ie. house and unit size). The 'Other real estate' (my 'lake house' and the investment apartment) increased considerably over the past month by $91,084 (4.40%) to $2,161,472. However the change in data source made this figure fluctuate considerably, and is probably not a particularly accurate estimate of the actual market values.

The outstanding balance of the investment property mortgage remains at $999.993 during the 'interest only' period of the mortgage. I have about $127K sitting in the loan offset account (which is included in the stocks/cash figure), which helps reduce the monthly interest charged.

Other assets (my online depository bullion account at  Perth Mint, and the bullion value of my gold and silver proof coin collection) increased by -$2,864 (8.08%) to $38,290. The lack of correlation between bullion prices and the stock and property markets is one of the (few) reasons it can be a good idea to have a small (<5%) amount of bullion in your overall asset allocation, simply to reduce portfolio volatility without too much overall decrease in portfolio return.

Overall, NW increased by $73,106 (1.87%) to $3,975,461 during October. But I have no idea how close to reality (market value) this figure really is.

The tenants moved out of my investment unit on 25 October, so the agent is now advertising for new tenants. They left owing four weeks of rent - which will just be covered by their bond and rent deposit, Fortunately there was no significant damage to the unit that would require repairs. The agent estimates the rent should now be around $880-$900 per week, so it is being advertised for $890.week, Considering the unit rented for $850.wk back in Feb (and this was about $50 higher than otherwise due to the tenants having a dog, and most landlords in the unit would not allow pets), the rent has increased considerably in little more than six months. Hopefully the apartment won't remain vacant for too long.

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