Last week’s Intergenerational Report confirms the myth perpetuated by many involved in the sales of retirement investment solutions as being just that — a myth.
“You better take action now because by the time you reach retirement, there won’t be a pension”.
Garbage.
As Your Money has been saying for the past 20 years, Australia’s retirement income system isn’t ranked No.6 in the world without good reason.
The Mercer CFA Global pension index compares 44 retirement income systems worldwide, with Australia holding that spot for the second year in a row. The top three spots are held by Iceland, the Netherlands and Denmark — all countries where tax rates are arguably higher than Australia’s.
Because our welfare system works hand in glove with our superannuation system, it means we are well placed to deal with the baby boomers currently in retirement phase. Equally, those just starting work today can take comfort that their future is reasonably secure.
The Intergenerational Report shows that the proportion of Australians receiving a full age pension will decline over the next few years, replaced with a greater number receiving a part-pension.
That’s thanks to the means testing system that currently applies to all retirees.
The principal behind means-testing is simple. If you have the means to either fully or partially fund your own retirement, you’re compelled to do so. If you choose to have a million-dollar beach house for you and your family to enjoy, that’s fine. Just don’t expect the rest of the taxpaying community to fund your retirement.
The report shows that as a percentage of GDP, the amount spent on age pensions currently sits at 2.3 per cent. By the end of this decade, it peaks at a modest 2.5 per cent and falls back to 2 per cent by 2060.
And make no mistake, our system is pretty generous.
As things stand at the moment, a 67-year-old couple can receive a part-pension with assets of $986,500 over and above the value of the family home, no matter what its value might be. Non-homeowners are permitted an extra $242,000 in assets.
Under the income test, a couple can earn a combined $92,768 and still receive a part-pension. For a single homeowner, the upper asset test limit is $656,500 and income of $60,632
Worth noting is that any income from super — whether a lump-sum withdrawal or by regular payments from a pension fund — is not counted as income by Centrelink.
These thresholds increase three times a year in March, July and September. That said, there’s regular rumblings about the inclusion of the family home in Centrelink’s asset test. Never say never.
But it would be a brave political party that tries to get such a drastic change through the Senate.
The inequity of house prices across Australia shouldn’t be underestimated in setting levels. Whereas $1 might buy you a single bedroom flat in Sydney, you could buy a street of houses in Mukinbudin with the same money. No disrespect to the good folk of Mukinbudin.
What’s interesting is that the family home isn’t immune from inclusion in the other big cost associated with Australia’s ageing population — namely aged care.
As it stands, in-home aged-care packages currently exclude the value of the family home in calculating what sort of daily contribution an individual must make towards the cost of that care. It ranges from $10.88 a day up to $46.98 a day depending on your income and assets.
All that changes if you move into an aged-care facility and there’s not someone left at home that meets strict criteria for the home to remain exempt from assessment.
In this case, the daily care fee can range from nothing up to $459.06 a day, but this daily fee would be for a multi-millionaire. In all cases, you will have a lifetime contribution cap which is set at the date you commence receiving aged-care assistance. That’s currently set at $76,096.50. Once you reach this limit, you don’t need to pay any more.
If anything, health and aged care are the areas where means testing will continue to include the family home and as we live longer these will become a bigger financial drain.