A fairer go for young people to reduce the generation gap

It’s a myth that young people’s spending habits and lifestyles are to blame for their stagnating wealth. This is not a problem caused by avocado brunches or too many lattes.

Today’s young Australians are in danger of being the first generation in memory to have lower living standards than their parents’ generation according to a 2019 report by the Grattan Institute., titled, Generation gap: ensuring a fair go for younger Australians .

According to the report, older Australians today spend more and have higher incomes and greater wealth than older Australians three decades ago.

But living standards have improved far less for younger Australians. The wealth of households headed by someone under 35 has barely moved since 2004.

Poorer young Australians have less wealth than their predecessors and are far less likely to own a home. In contrast, older households’ wealth has grown by more than 50 per cent over the same period because of the housing boom and growth in superannuation assets.

In fact, younger people are spending less on non-essential items such as alcohol, clothing, and personal care, and more on necessities such as housing, than three decades ago.

Economic pressures on the young have been exacerbated by recent wage stagnation and rising under-employment. Older households are better cushioned from low wage growth because they are more likely to have other sources of income.

If low wage growth and fewer working hours is the new normal in Australia, then we could have a generation emerge from young adulthood with lower incomes than the one before it at the same age. This has already happened in the US and the UK.

Young Australians will also bear the brunt of growing pressures on government budgets.

Because the population is ageing, governments will have to spend more on health, aged care, and pensions. But there will be fewer working-age people for every retired person to pay for it. The number of 15-64 year-old Australians for every person aged 65 or older fell from 7.4 in the mid-1970s to 4.4 in 2014-15 and is projected to fall further to 3.2 in 2054-55.

Governments have supercharged these demographic pressures by introducing generous tax concessions for older people. A subsequent Grattan report, Super savings: Practical policies for fairer superannuation and a stronger budget has suggested that tax breaks on superannuation are excessively generous and should be wound back to help fix the budget.

Super tax breaks cost the budget $45 billion a year – or about 2 per cent of GDP – and will soon exceed the cost of the age pension.

These tax breaks are not well targeted. Two-thirds of their value benefit the top 20 per cent of income earners, who are already saving enough for their retirement. Retirees with big superannuation accounts pay much less tax per dollar of super earnings than younger workers do on their wages.

The share of households over 65 paying tax has halved over the past two decades. And older households pay substantially less tax on the same income as younger households.

Working-age Australians are underwriting the living standards of older Australians to a much greater extent than the Baby Boomers did for their forebears, straining the ‘generational bargain’ to breaking point.

The report insists that policy changes are required. Policies to boost economic growth – such as tax reform, better education and smarter infrastructure spending – are wins for all, but especially for the young. Changes to planning rules to encourage higher-density living in established city suburbs would make housing more affordable. And a fair go for younger people means winding back age-based tax breaks for ‘comfortably off’ older Australians.

Just as policy changes have contributed to pressures on young people, they can help redress them.  The time for action is now: none of us wants the legacy of a generation left behind.

Retirees face increased cost of living driven by global factors, but superannuation is buffering the impact, says ASFA

As skyrocketing inflation pressurises household budgets worldwide, the Association of Superannuation Funds of Australia (ASFA) says Australian retirees stand in stark contrast to their overseas counterparts who do not have the safety net provided by compulsory superannuation.

ASFA Deputy CEO, Glen McCrea says despite the current pressure on household budgets, Australian retirees are in a stronger retirement position than their global peers because of Australia’s robust superannuation system and retirement pillar settings.

“In contrast, the age pension remains affordable for the government in Australia where, in aggregate, retirees on average have larger private retirement savings balances than in most countries in the world. This helps cover costs during tougher times, providing a brighter outlook for Australian retirees than is the case for their international counterparts,” said Mr McCrea.

While the major categories of expenditure including food, transport and energy have all increased over the past quarter, analysis of those increases reveals that the causes lie mainly outside Australia. 

The ASFA Retirement Standard September Quarter 2022 figures have risen in lockstep with quarterly inflation. Couples aged around 65 living a comfortable retirement now need to spend $68,014 per year and singles $48,266, both up by 1.9 per cent on the previous quarter.  The ASFA Comfortable budget assumes one major trip overseas every seven years.

Over the year to September 2022, the amount needed for a single person to fund a comfortable retirement has risen by 6.7 per cent and for a couple by 6.6 per cent, slightly lower than the current CPI of 7.3 per cent.

Strong price rises were recorded across all food and non-food grocery products in the September quarter. These increases reflected a range of price pressures including supply chain disruptions, weather-related events, such as flooding, and increased transport and input costs.

In the 12 months to the September quarter fruit and vegetables prices rose 16.2% and dairy products increased 12.1%. Dairy and related products rose 6.8% due to higher milk prices.

Over the year to the September quarter, imported inflation saw oils and fats up 19.3%, coffee up 10.7% and gas 16.6% and automotive fuel 18.0%. These prices are set to remain high while geopolitical concerns persist.

Increased demand, high fuel prices and capacity constraints saw domestic travel and accommodation up 10.8% over the year and international travel and accommodation up 25.3%.

Meals out and take away foods rose 2.9% due to rising input costs and ongoing supply and labour shortages. Alcohol rose 1.4% due to the increase in the bi-annual excise tax for alcohol on 1 August.

Details for the various updated budgets follow.

Table 1: Budgets for various households and living standards for those aged around 65 (September quarter 2022, national)

Household typeSingle ModestCouple ModestSingle ComfortableCouple Comfortable
Housing – ongoing only$109.24$122.66$128.37$133.94
Energy$35.05$47.08$44.41$55.07
Food$104.04$192.89$134.52$233.80
Clothing$20.86$39.64$27.86$51.88
Household goods and services$37.12$43.51$82.45$101.52
Health$53.33$103.11$109.02$204.32
Transport$103.93$110.70$169.82$183.93
Leisure$104.30$163.73$205.69$309.20
Communications$17.99$20.27$22.50$29.29
Total per week$585.86$843.57$924.64$1,302.95
Total per year$30,582$44,034$48,266$68,014

Table 2: Budgets for various households and living standards for those aged around 85 (September quarter 2022, national)

Household typeSingle ModestCouple ModestSingle ComfortableCouple Comfortable
Housing – ongoing only$109.24$122.66$128.37$133.94
Energy$35.05$47.08$44.41$55.07
Food$104.04$192.89$134.52$233.80
Clothing$20.86$39.64$27.86$51.88
Household goods and services$54.05$77.78$160.70$192.51
Health$93.02$129.74$153.58$241.95
Transport$41.68$52.09$46.88$57.30
Leisure$67.46$96.70$140.39$196.53
Communications$17.99$20.27$22.50$29.29
Total per week$543.65$778.84$859.21$1,192.28
Total per year$28,379$40,656$44,851$62,237
The figures in each case assume that the retiree/s own their own home and relate to expenditure by the household. This can be greater than household income after income tax where there is a drawdown on capital over the period of retirement. All calculations are weekly, unless otherwise stated. Annual figure is 52.2 times the weekly figure.

More information

Costs and summary figures can be accessed via the ASFA website, https://www.superannuation.asn.au/media/media-releases/2022/media-release-17-november-2022

Let’s talk about women and retirement

Why is retirement different for women? Women retire with about 60% of the superannuation funds that men have. They live 5 years longer and they are far more reliant on the aged pension. On the plus side – women are more likely to retain their friendship networks, more likely to be the principal carer for their partner, their parents and their grandchildren, as well being more likely to volunteer to help others.
Listen to my wide-ranging discussion with community radio 2RDJ broadcaster, Neil Lithgow about women and retirement. Listen here:

Super in the time of pandemic

Is our retirement system good enough? Superannuation should enable all people to have an adequate standard of living when retired, according to the Retirement Income Review into the Australian retirement system. The system should not just provide a means for wealthy people to become wealthier, with the help of generous tax concessions.

The Review found that two groups have high levels of financial stress compared to people below age 65: those renting in retirement and those who are involuntarily retired before age pension eligibility age. Retirees who rent in the private rental market are likely to live in poverty and those early retirees living on JobSeeker payments are the worst affected. Even with the age pension and additional rental assistance, these retirees experienced higher levels of financial stress and poverty than the rest of the population.

Following 426 submissions and meetings with 100 stakeholders, Treasury has released the Review’s Final Report which makes findings on how the superannuation system interacts with the age pension, the aged care system and the tax concessions that benefit high wealth individuals.

The COVID-19 pandemic has been incredibly disruptive to the livelihoods of individuals and to businesses on a global scale. Less obviously, most people’s retirement savings also have decreased significantly over the past year. Retirees who rely on their super to top up age pension payments remain concerned that their super investments have been affected by market volatility, leading them to worry that their loss in savings will have long-term effects.

Retirement savings and owning your own home are the most important ways to ensure that people have a buffer in retirement. High rates of home ownership in Australia reduces housing costs in retirement and boosts living standards. Additionally, their home is an asset that they can sell to provide a deposit for aged care or for additional funds if necessary.

While the age pension helps to offset inequities in retirement, its “bare bones” level of income does not provide enough to provide for those without other income. In particular, it does little to improve the situation of disadvantaged groups such as women, Aboriginal and Torres Strait Islander people and those with disabilities who have not been able to accumulate sufficient retirement savings in their working life.

One of Treasury’s first observations was that the current retirement system is complex and poorly understood by many people, both before and during retirement. Then more complications arise when it interacts with the aged care and tax system.

The Report suggested some changes to the retirement system to improve its fairness such as:
• removing the $450 per month income threshold before the superannuation guarantee can be paid;
• paying superannuation while on employer paid parental leave, and
• ensuring that all employees are paid the benefits to which they are entitled.

Australian superannuation funds hold $2.9 trillion of assets invested in local and overseas financial markets. As a result of the Covid-19 pandemic shutdowns of businesses and associated job losses, superannuation proved a welcome financial resource for many who had lost their employment. Over 4 million applicants were able to access their super under the Early Release scheme to supplement their wages or JobSeeker allowances. In total $37.4 billion was paid out in the June 2020 quarter to applicants, a 77.7% increase from the March 2020 quarter.

Many commentators were concerned that low to middle income earners who accessed their super early would be severely disadvantaged in being able to accumulate sufficient funds for their retirement as well as making them more likely to be reliant on the age pension. The debate about allowing people to access their super to fund a deposit for a house has not been resolved with arguments on both sides. In my opinion, too many people have drawn on their super in ways that provided only a temporary benefit now, while suffering a substantial long-term loss to their level of super when they retire.

I look forward to the government’s response – will they improve the system for the most disadvantaged people in the retirement system? Much more needs to be done.

Treasury, 20/11/20, Retirement Income Review – Final Report, https://treasury.gov.au/publication/p2020-100554

Six minutes interview

This story appeared in the March 2020 issue of the NSW Law Society Journal:

BY AMY DALE – FEB 27, 2020

Alice Mantel is an experienced lawyer and adviser on the challenges that many women encounter during retirement. She talks about family law, homelessness, and why just planning one big overseas trip won’t cut it for the final third of your life.

What experiences as a lawyer shaped your decision to advise on planning for retirement?
I spent around 10 years practising family and then elder law. In family law particularly, I was surprised and then concerned about how little many of my clients knew about their own personal financial circumstances. Often, they did not know if their name was on the title of the property, or how much was owed on the mortgage or credit cards. Again, when acting for older clients, often they left making their wills or power of attorney until very late, when there was pressure from their children, which, as you can appreciate, is a very difficult situation for any lawyer. It brought home to me that women need to be prepared much sooner for the unexpected.

What inspired you to write your book, Every Woman’s Guide to Retirement?
I started writing this book before I retired. I was initially doing research to answer my own questions. Years ago, when placing my mother into a nursing home, I realised how difficult it was to find any sensible information to assist me. More recently, I wanted some guidance when I was thinking about closing my practice. After a while, I decided that most books or articles did not seem very relevant to me. They were often very friendly but aimed at chaps who were fairly well off or aimed at women who presumably intended to spend the last third of their life on continual holidays. My research gradually grew into a book that is far more extensive than I had ever contemplated and includes mundane topics like accessing your pension as well as more interesting options such as lifelong learning or starting a new relationship.

What issues specifically apply to women? Bulk of carer responsibilities, less superannuation, longer life span?
I see retirement as very different for women than men. Generally, women are the main carers for their parents, children, partners and grandchildren. At the same time, they come into retirement with significantly less financial resources but live on average five years longer. If they do not have enough resources, those last years are going to be close to living in poverty. It can be a very grim prospect if a woman’s health begins to suffer and there is not always the certainty that your children will be there to look after you.

Women aged 55 and above are the fastest-growing cohort at risk of homelessness. How can we do more to ensure financial security?
It is no surprise to me that older women are at risk of homelessness. It can begin if they lose their home in a divorce settlement and cannot recover financially, but also if they are unable to find work and remain unemployed, either as a result of their own or their children’s health issues. When super funds talk about having a modest retirement, or a comfortable retirement, there is always an unspoken assumption that the retiree owns their own home. That’s ridiculous and increasingly unlikely as recent figures have demonstrated. We need to make a secure home a realistic possibility for everyone.

What about social planning for retirement? How can people prepare themselves to leave the workforce and feel at ease that a happy and fulfilling future is still ahead of them?
Most women retiring today can expect to have another 20 years of relatively good health, so it simply isn’t enough to plan your one big overseas trip and think that’s all there is to it. For working women, one of the major issues around retirement is the loss of their work identity, the loss of income and the social connectedness that professional life brings. We need to plan at least a year ahead of retirement about how we can use our skills and experience in the non-employment sphere – and let me assure you, that is a very large sphere. There are so many not-for-profit agencies looking for directors on their boards or volunteers for their operations. Not having to follow a work routine means you can finally pursue your real passion – whether it is art, woodwork, or caring for your grandkids and even if it might take a little time to find what that is, it will give real meaning to the legacy you leave.