Dad’s Army fumbles housing affordability | Macrobusiness

By Leith van Onselen — Published with kind permission from Macrobusiness.

Broken Window

After his shoddy effort yesterday defending Australia’s giant superannuation rortDad’s Army’s Robert Gottliebsen (“Gotti”), has backed Treasurer Hockey’s proposal to allow young home buyers to raid their superannuation accounts to purchase their first home:

Joe Hockey’s idea to allow first home buyers to use their superannuation to break into the housing market is not stupid…

Most young people in Australia are finding it impossible to gain a first home… we are watching a fundamental shift in the Australian landscape with huge implications for the intergenerational problem…

[Last weekend]…I found myself in the company of a typical first home buyer in today’s market… They can just manage a house or larger apartment but they are saddled with a huge mortgage…

So why would we not say to that couple: “you can invest up to $50,000 of your superannuation in your first home…

A whole generation of Australians could retire without a house because they are unable to get into the market…

A question, Gotti: What do you think the extra demand from first home buyers (FHBs) accessing their super would do to house prices? That’s right, it would raise them, making the scheme self-defeating, much like FHB grants did.

Meanwhile, young people’s retirement nest eggs would be put at risk, potentially increasing their reliance on the Aged Pension (increasing the burden on future taxpayers).

Thankfully, Business Spectator’s young gun, Callam Pickering, understands these issues, penning the following rebuke today:

Australia’s approach to housing is full of misguided policies and dumb ideas…

Australian housing policy can best be viewed as a remarkably successful anti-Robin Hood scheme. We take from the poor (usually those under 40) and give it to the wealthy (often but not always ‘baby boomers’).

Over the years we have introduced all sorts of dodgy schemes to continue this rort…

Allowing younger Australians to use their superannuation for a housing deposit would have a similar effect to the FHOG… It certainly did nothing to boost home ownership…

Exactly. How about policy address the root causes of unaffordable housing – tax lurks, supply constraints, loose capital rules, and over-investment by super funds – rather than applying a band aid solution that will impoverish young people further and fill the coffers of Gotti’s rent-class?

Colin’s Comment: In 1850 Frédéric Bastiat wrote an essay Ce qu’on voit et ce qu’on ne voit pas (That Which Is Seen and That Which Is Unseen) which describes the common mistake of politicians, economists and the general public when devising or assessing economic policy. They focus on the immediate, visible benefit and fail to consider the unseen, hidden costs.

Here is a simple video by Sam Selikoff that explains Bastiat’s Broken Window fallacy:

http://youtu.be/gG3AKoL0vEs

Consumption biggest SMSF risk

Last week the consulting group Deloitte ……. analysis of how long after retirement retirees’ nest eggs would last that was the most profound aspect …..it showed that retirees living “comfortable” retirement lifestyles would run out of superannuation money after just 11 years compared to those that opt for a “modest” retirement lifestyle who would see their superannuation last 30 years.

Read more at Financial Standard – Cognitive function, consumption biggest SMSF risks.

Superannuation is inequitable and unsustainable | | MacroBusiness

I agree with Leith van Onselen that Australia’s aged pension/superannuation regime will be sorely tested over the next 30 years as the number of workers per retiree falls to below 2.5 to 1:

Workers per Retiree

But I don’t agree with his proposed solution:

…The flat 15% tax on superannuation contributions should also be axed in favour of a flat 15% concession. As illustrated above, under the current 15% flat tax arrangement, the amount of super concessions rises as one moves up the income tax scale, resulting in a system whereby higher income earners receive the most super tax benefit, despite being the very people that are the least likely to rely on the aged pension in retirement. A flat 15% concession, by comparison, would improve the equity and sustainability of the system by: 1) providing all taxpayers with the same taxation concession; 2) boosting lower income earners’ super savings and thus reducing reliance on the aged pension; and 3) reducing costs to the budget.

Argument that the flat tax on superannuation contributions is inequitable is based on the presumption that the present system of progressive tax rates is equitable. No doubt high income-earners benefit more from the flat tax than low income-earners, but the proposal ignores the fact that they pay more income tax in the first place. And even after the larger tax savings on their super contributions, the high income-earner will pay a significantly higher average tax rate.

Read more at Superannuation is inequitable and unsustainable | | MacroBusiness.

Australia: Unsuspecting super investors are being sold a pup

David Potts at the Sydney Morning Herald writes:

Retirees with far less than $2 million in superannuation face extra tax bills…… the new tax will apply to all earnings above $100,000 a year from 2014, no matter the size of the nest egg.

The tax net is far broader than the 16,000, or 0.4 percent of retirees, mentioned in the recent announcement. Treasury estimates cited are based on a projected 5 per cent rate of return on investment and ignore the fact that returns can fluctuate widely, from 30% in a good year to -30% in a really bad year. Super funds with as little as $200,000 or $300,000 are affected if they earn more than $100,000 in any given year.

The problem is further exacerbated by capital gains, especially for self-managed funds that are not widely diversified. If a super fund sells a property or large block of shares, the asset may have been held for many years but the entire capital gain is recognized in the year in which the asset is sold. Despite some phase-in concessions, lumpy capital gains could lift a retiree over the $100,000 income threshold.

This is a deliberate tax grab that affects ordinary Australians while being sold to them under the smokescreen of “taxing the rich”.

Read more at Super plan contains a booby trap | David Potts | SMH.

Hat tip to Ody for bringing this to my attention on Incredible Charts forum.

Australia: Super fund returns

Overall, for the 15 years to June 2011, the average ROR for the superannuation industry was positive, with a 15-year average ROR of 5.2 per cent per annum. The average industry-wide ROR, when adjusted for the 2.7 per cent per annum inflation, provided a real return of 2.5 per cent per annum.

Most funds which existed for the whole period had a 15-year average fund-level ROR of between 3.9 and 6.5 per cent per annum.

APRA: Annual Superannuation Bulletin (June 2011)