ALP Policy will Reduce Retirement Income by 5%

Once upon a time, the Labor Party used to claim that it existed for the benefit of the workers. As Professor Geoff Warren at ANU has pointed out, clearly the Labor Party is not concerned about working people, who have made it to retirement, nor indeed are they worried about people on lower tax rates that have squirrelled a few dollars away to buy CBA shares or Qantas shares.

At the moment voters aren’t paying attention, if I ask my mum, she looks a little quizzically at me, if I ask the teenager who has bought a few shares, she does not know about the proposed change.

And that is where Geoff Wilson of Wilson Asset Management comes in, Wilson’s fury at Labor’s proposed changes to dividend imputation rules, which would stop individual and super funds claiming cash refunds for excess imputations credits not used to offset tax liabilities, has been bubbling along for some months. He’s been steadily mobilising his army of 80,000 investors across the Wilson Asset Management listed investment companies to support his campaign.

But is this just a fund manager flogging his own goods. As it turns out, no!

Proposed Policy

Labor has said that if elected, they will seek to stop individuals and super funds claiming refunds for excess imputation credits not used to offset their tax liabilities. The measure is allegedly aimed at wealthy investors, but as the Australian Financial Review has reported previously Labor forced to exempt full and part pensioners after a backlash.

Is the Policy Equitable?

It’s a pity the teenager or a single mother is not an age pensioner!

Why should a 19 year old be disadvantaged, in an economy where savings are already hard enough for the young? Why should those people who seek to improve their lot, be discouraged by Government policy?

The so called  “retiree tax” proposed by the opposition is expected to improve the budget bottom line by $55.7 billion over a decade. So once again we have politicians seeking to put their hands in the income earners pockets

Impact on Retirees Income

Economic modelling from the Australian National University has found the Australian Labor Party’s proposal to end cash refunds for excess imputation credits will result in a significant hit to the hip pocket of self-funded retirees, and that the effect would be similar to reducing the average superannuation fund balance at the point of retirement by up to nine per cent.

Australian National University economist Associate Professor Geoff Warren has found the existing dividend imputation regime boosted retirees’ income by 5 to 6 per cent, while also helping underpin demand for Australian shares. He went onto say the impact of Labor’s proposed changes had been understated and would amount to a significant hit on retirement savings.

“It’s a pretty hot-button issue amongst retirees at the moment,” Warren said.

“By buying Australian shares that are fully franked, people actually end up with a real kicker to their investment return. That benefit we found is worth up to 5 or 6 per cent in income during retirement on average. It’s a pretty large number.

“So, threatening to take it away is quite significant for some.”

The Australian National University’s modelling shows that a loss of the franking credit refunds was like reducing superannuation balances by 8 to 9 per cent. For a person with $500,000 in their super balance and access to imputation credits of 1.37 per cent a year, this can add up to a reduction of about $44,000. For someone with $1 million in their super, it can be as much as $95,000.

Unintended Consequences

Of course, this is pure genius, by reducing the retiree’s income they become dependent on the government for social security sooner. Social security and welfare currently represent 35 per cent of the Australian Government’s expenses or in more eye watering terms that is around $191 billion next year.  The level and sustainability of this expenditure is already a key issue for the Parliament.

Warren further points out that having access to imputation credits meant many investors had a considerable “home bias” towards Australian equities. This change may see financial advisers and fund managers reassess their exposure to local shares. Given the decrease in expected returns, investors may look elsewhere, say to international shares. Furthermore, it is an appropriate way for investors to reduce risk by buying international shares and including them as a greater portion of a balanced portfolio given the very narrow exposure to industries in Australia.

The flip side is that a change in policy might result in retirees providing less support to Australian companies via the investments they make. As a result, we could see less capital available to Australian companies and lower share prices as a result of diminished demand. As a net importer of capital, that does not seem like a very smart idea. Further, lower capital growth and capital gains could lead to lower tax receipts which will impact upon the budget and the level of long-term government debt.

Professor Warren has also pointed out that while Labor’s policy may be targeted at the wealthy, over time as people retired with bigger superannuation balances, a greater number of people would be affected by the loss of refunds, in effect Labor has created a new tax creep.

Labor Response

Shadow treasurer Chris Bowen said the Australian National University paper did not model Labor’s policy and failed to take into account the pensioner exemption, which was a critical component. “The pensioner guarantee means that those receiving the full or part pension (or other qualifying payments) will receive their franking credits,” Mr Bowen said.

Like all these things, what the policy does is encourage retirees to find a way to get a part pension, thereby avoiding the impost and in so doing, further burdening the tax payer.

In comments to the Australian Financial Review on 26 September 2018, Mr Bowen said “More than half of all cash refunds going to self-managed superannuation funds are to those with balances of more than $2.4 million. Given the vast majority of retirees with superannuation savings are in super funds with tax liabilities, most retirees won’t see much of a change to their retirement incomes under Labor’s policy.” The problem is of course that Mr Bowen has completely neglected to say, that many retirees are in fact in allocated pensions, or at some point they will be, and for them excess franking credits will be lost whether they have balances 1.2 cents or $2.4 million. As such, Mr Bowen’s comments are in fact disingenuous.

Responding to the claim of “home bias”, Mr Bowen said the policy would help de-risk the retirement savings pool by encouraging people to diversify their portfolio. One wonders if Mr Bowen has factored in the impact of lower levels of available capital on the Australian economy?