I read an article in today's paper about the how Australia's Labour Party wants to boost the Superannuation contribution from 9 percent to 15 percent. What made me upset is how they want to find this extra money. They want the workers to boots their contribution from 9% to 12%, the for the government to kick in the remaining 3%.
It blows my mind. Where do these idiots think the government gets its money from? From taxes! They treat government money as a bottomless pit of funding. So basically, they want to boost the already high taxes another 6 percent.
For those who don't know, a superannuation is a mandatory retirement account, similar to an IRA in the US, but worse. Your employer is required to contribute 9% of your pay to this account. So if you earn $50,000 a year, your employer should also pay an additional $4500 to your superannuation account. Then of course you have to pay all your income tax and other taxes.
Here is where superannuation accounts suck compared to IRA's and 401ks in the US. They tax and fee the shit out of so it doesn't have a snowball's chance in hell of growing.
Contributions: The government takes 15% of your 9 percent contribution right off the top. Then the account holder helps themselves to contribution fees ranging from 1 to 2 percent. So by the time your money gets invested, a good chuck of it has already disappeared.
In the US, the accounts are not taxed. All of your contribution starts working for you. They are, instead, tax deferred.
Growth: The government takes 15% of all capital gains from your investments every year. They do not offer any tax breaks for capital losses. So basically, your investment has to carry the burden of taxes on its back. That reduces your return on investment enough to make a huge difference over your working lifetime.
In addition, the account holder also gets to help themselves to some more of your money in both annual and monthly fees that vary. Some ding a fixed percentage. Some have a fixed amount. Some are both with caps after your balance gets large. Still, you have to pay them out of your earnings. Another monkey on the back.
In the US, there are no taxes on the earnings. All of your earnings go right back to work earning more money for you. Just like with the contributions, all taxes are deferred.
Distributions: This is when you finally get to take your money out of your retirement account after a lifetime of working. Guess what? After taxing the shit out of your contributions and your earnings, they hit your one more time for another 15%. And some of the fund managers also get to charge and "exit" fee. They get to charge you money for giving you your own money. Nice?
In the US, they tax the distributions too. It can even be higher than 15%. But keep in mind that those tax dollars you are paying at distribution were working for you for all those years. When you do that math, it makes an enormous difference over the average working lifetime.
Insurance Premiums: This is Australia's dirty little secret, and one that boils my blood. Somehow the insurance industry got their fingers into the retirement investment business and convinced the government that it would be a good idea to allow people to pay their life and disability insurance premiums from their superannuation contributions.
This is a terrible idea for so many reasons. First off, some younger people are paying for life insurance they they don't need, and don't even know they have. What happens is that an insurance company will talk a company into "opt-out" insurance coverage for their employees. So unless you tell your employer not to, they will give part of your 9% contribution to an insurance company. In some cases, the premium takes 100% of their money. There is no choice, needs assessment, or anything. So rather than making their money work for their retirement, it is wasted on insurance that they don't need. A 21 year old person with no dependents doesn't need life insurance. What they need is to have every dollar working for their retirement. But it gets wasted on insurance. I suspect that the employer gets a nice kickback from the insurance salesman for this scheme since they have to work together to legally loot their employees pensions.
The most important reason this is a bad idea, even if some one needs insurance, it that it reduces the amount of money working for them. A superannuation is a bet that you will live to retirement. Life insurance is a bet that you won't.
The Problem: The reason for the discussion of boosting the contribution from 9 to 15 percent is because most Australians won't have enough money in their accounts to retire on. But, that is based on current rules.
The Wrong Solution: The knee-jerk solution proposed to this problem from the Labour party is to crank the contribution up to 15%. Can you imagine if 15% of every dollar you earned over your working lifetime was invested for retirement? That would be a huge amount of money, of properly done.
The Right Solution: Labour is so wrong about their idea. The solution is not to pour more money in, but to make the current money harder and more efficient. The most effective way to do this is to simply convert the contribution and growth taxes to deferred taxes. That small change, plus time, thanks to the magic of compounding, will grow far more than pouring 15% into the current system.
The second thing that must be done is to get the insurance companies out of people's retirement accounts. The bottom line is simple. EVERY DOLLAR SET ASIDE FOR RETIREMENT MUST WORK EXCLUSIVELY FOR LONG TERM GROWTH AND NOTHING ELSE.
If the government demands that we must wait until we are 60+ to get to our retirement money, then they can also wait to get their taxes from that money.
The Sad Part: The sad thing is that I do not even see my idea being offered as a solution by any politicians of letters to the papers. It is almost like the concept of deferring taxes is insane. But we do it in the US. They do it in the UK. Why not here?
2 comments:
This is total bullshit. everything you have said is totally out of date. Do your research first before posting such rubbish. There have been massive reforms to Australian Super in the past couple of years.
So much of what you've said just plain wrong, it'd take pages to correct you, which i cbf doing. I suggest you go and actually do some reading on Super, check out some other newspaper articles and correct your post.
Actually, the only thing that will be changing on 01-July-2007 is the fact that distributions taken after age 60 will no longer be taxed. They are currently taxes at 15%.
Everything else is still true. Mr. Abs, I would like to know what exactly is outdated or wrong.
My two biggest pet peeves with the SuperAnnuation system are still there. These are (1) that all gains are taxed annually at 15%, and (2) that insurance premiums can still be paid out of contributions.
It is the magic of compounding over a working lifetime that will allow an account to grow. Taxing it as it grows puts a significant dent in what can be earned when compared to tax deferred growth.
And the crime of allowing insurance premiums to be paid from contributions is still there, including the worse sin of opt-out for insurance. This is wrong, wrong, wrong!
So as of July 1, contributions still take a 15% tax hit and a fee hit. Earnings still tax a 15% tax hit and fee hit. Distributions still can be hit with exit fees. And they can still siphon off money to pay for overpriced and/or unneeded insurance.
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