Industry experts warn that superannuation eligibility may need to rise in line with increasing lift expectancy. This would be the biggest change to the system since its introduction 25 years ago.
All you need to know is that you’d be waiting longer to access your savings under the proposals. The idea has merit, in that it’s the fairest way to raise the preservation age. And it’s simple enough to remove any suggestions of unfairness.
There’s just one problem with this idea.
Neither Labour nor the Coalition has any interest in doing anything of the sort. This kind of drastic change to super is politically reckless.
If you’re like most voters over 40, you probably don’t respond positively to the idea. Waiting any longer than you already have to is not something voters will support.
Superannuation and the preservation age
The current system in place allows you to access your super savings from the age of 55 onwards. This is what’s typically known as the perseveration age, and it rises gradually depending your age. If you were born on July 1, 1964 for instance, your preservation age would be 60, not 55.
It’s this preservation age that industry experts want to bring in line with rising life expectancy. The support for such a move is widespread, even among those who don’t see its introduction coming anytime soon.
One of these voices is the shadow minister for financial services and superannuation, Bernie Ripoll. He explains:
‘We need to look at possibly lifting [the preservation age] but the political environment around it is too difficult. The community is not ready. It’s just too politically difficult’.
He’s right, of course. The backlash against such a proposal could decide an election. But is the idea to index the preservation age to life expectancy right in principle?
In theory, it does make sense. It takes away the likelihood of setting arbitrary eligibility targets.
But it takes away your right to choose. Having the choice to access your super earlier in life is something worth preserving. Anything else just assumes you’re not fit to manage your finances.
The arguments in favour of raising the preservation age go along these lines: You’re not capable of managing your own money… You’ll be penniless within a few years… You need to be protected from yourself.
As silly as that sounds, these arguments dominate the debate. Here’s BT Financial Group’s Brad Cooper speaking on this very thing:
‘It doesn’t matter how sensible and conservative retirees are with their money. If they are allowed to start drawing on their super at 55 years, most of them are going to run out of money if they live longer than expected’.
Yet the vast majority of people don’t retire at the age of 55. Let’s assume that you retire 65 with a super balance of $100,000. As of 2024, age pension eligibility will rise from 65 to 67 years. Even with $100,000, you’d be eligible for a pension within 2 years.
For most people, that seems like a fairly reasonable expectation. Why would the system need to change for these people? There’s no reason to whatsoever.
But what about those who retire much earlier?
They’d stand to lose the most from changes to the preservation age. Not only would they wait longer for their age pension, but they’d now need to worry about super too. It’d only worsen their financial situation as they’re exiting the workforce, leaving them with fewer means to provide for themselves.
This is where things get murky.
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Paying for early retirees: who loses?
How do we accommodate for people who can’t work past even the current preservation age? Supporters of change say these workers will need extra support. How much will it cost the taxpayer though? The government is already struggling to contain welfare spending as Australia ages.
That means the government would have to fall back and rely on their usual schemes.
Maybe they’d raid superannuation balances of the wealthy. Reducing super tax breaks for the wealthiest is already part of the national discourse as is. Will that go to supporting those who are being refused their super?
I’m not saying that will happen. But someone will have to pay. And they’ll have to do so because the government won’t let people touch their super until much later in life.
Superannuation taxation will end up resembling the income tax then. Those who have the biggest balances will pay back the most. Is that what superannuation was designed for? No, it was designed to make retirement more comfortable. Forcing people to wait instead will only increase financial anxiety of the neediest.
Again, this all goes back to choice.
The proposal to index the preservation age with life expectancy has some merit. But there needs to be a much clearer plan for how early-retirees will cope under the circumstances. Until that’s clear, and it’s fair on the rest of society, the preservation age shouldn’t change.
Ultimately, every Aussie worker should be able to choose when they can draw from their super. Superannuation is not a pension scheme. For this reason, we should be careful about treating it as one.
The consensus is that changes will have to be made eventually. Right now, neither the Coalition nor Labor will touch the subject. Don’t expect to see anything concrete on this for some time yet. And that’s probably a good thing for everyone.
Contributor, The Daily Reckoning
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