THE BIRD FEEDER

A friend recently passed on to me a short piece under the title "The Bird Feeder" that happens to ring too true today. A quick search found that it has been around for a while and has been requoted a number of times. One source here The Bird Feeder.

 

THIS IS THE BEST MAXINE EVER!

I bought a bird feeder. I hung it
on my back porch and filled it
with seed. What a beauty of
a bird feeder it was, as I filled it
lovingly with seed.
Within a week we had hundreds of birds
taking advantage of the
continuous flow of free and
easily accessible food.

But then the birds started
building nests in the boards
of the patio, above the table,
and next to the barbecue.

Then came the shit. It was
everywhere: on the patio tile,
the chairs, the table ...
everywhere!

Then some of the birds
turned mean. They would
dive bomb me and try to
peck me even though I had
fed them out of my own
pocket.

And others birds were
boisterous and loud. They
sat on the feeder and
squawked and screamed at
all hours of the day and night
and demanded that I fill it
when it got low on food.

After a while, I couldn't even
sit on my own back porch
anymore. So I took down the
bird feeder and in three days
the birds were gone. I cleaned
up their mess and took down
the many nests they had built
all over the patio.

Soon, the back yard was like
it used to be ..... quiet, serene....
and no one demanding their
rights to a free meal.

Now let's see......
Our government gives out
free food, subsidized housing,
free medical care and free
education, and allows anyone
born here to be an automatic
citizen.

Then the illegals came by the
tens of thousands. Suddenly
our taxes went up to pay for
free services; small apartments
are housing 5 families; you
have to wait 6 hours to be seen
by an emergency room doctor;
Your child's second grade class is
behind other schools because
over half the class doesn't speak
English.

Corn Flakes now come in a
bilingual box; I have to
'press one ' to hear my bank
talk to me in English, and
people waving flags other
than ”ours” are
squawking and screaming
in the streets, demanding
more rights and free liberties.

Just my opinion, but maybe
it's time for the government
to take down the bird feeder.
If you agree, pass it on; if not,
just continue cleaning up the shit!

Welfare disadvantages recipients

The recent Prager video titled "Blacks in Power Don't Empower Black People" exposes, at least indirectly, another 'inconvenient truth' burdening our Western societies. The video itself, like many Prager videos is aimed at the American viewer, focusing on the fate of African-Americans in modern America. It highlights the failed expectation, by many in the A-A community, that political power would raise the quality of life for African-Americans. Alas not so. The video is worth a view see below.

While well argued and no doubt enlightening to many viewers, especially American ones, I see it as but another example of a 'deeper' truth that afflicts many Western Societies; That living standards of the disadvantaged are not improved by increased welfare.

In America the living standards of African-Americans have not improved despite increases in a range of measures directly intended for that purpose (political power is just one).

Similarly in Australia, despite the very best intentions, sustained attention and significant investment over decades, there has been little progress in "Closing the Gap" between the indigenous and other Australians. The very first sentence of the Executive Summary of the "Close the Gap report for 2017 tells the story

"After 10 years, and despite closing the gap being a national bipartisan priority, it is clear that Australian governments at all levels are, in key respects, failing Australia’s First Peoples."  Close the Gap - Progress & Priorities report 2017

Since it is clear that the measures we have been using for decades do not work, we should do something different.

I suggest something really novel, and I guess abhorrent to many, simply treat all indigenous Australians in exactly the same way as all other Australians are treated. Provide the same job opportunities, the same in welfare payments, and exactly the same law enforcement. Remove the many institutions that over the years have been created specifically for indigenous communities. (There are indeed many. See Key Aboriginal and Torres Strait Islander organisations for a start.)

No doubt some, or even most, have made some positive contribution to some individuals' living standards.  However this has come at a cost. The very existence of such organisations discourages self reliance, engenders a victim mindset and promotes a false sense of entitlement. They are not helping to 'close the gap' at all , but are perpetuating it.

The impact of this change in approach would have slow but long term consequences. No doubt the closing of the many support organisations would save a considerable sum. But much would have to be redirected towards the provision of the types of services all other Australians can expect even in remote country towns; schools, hospitals, policing, doctors, etc. The indigenous communities would not suddenly become 'disadvantaged' as they would receive the same level of welfare and related services as all other Australians.

Of course such a wide-ranging change in approach would have to be phased in over a few years and would take a decade to show results. Still we have tried the alternative and failed, so a new approach is overdue.

Yet the politics make this well nigh impossible. It would take a government with much more intestinal fortitude and political capital than the current mob, so we can only look forward to the next "Close the Gap" report and again shake our heads and point fingers.

How to eliminate the deficit now!

Are we living in La La Land? The polls seem to suggest so. Recent polls indicate we want to have our budget fixed but not at the expense of welfare cuts (see "Voters: cut spending but no pain to fix budget deficit"). Sort of having our cake and eating it too!

http://budget.gov.au/2016-17/content/glossies/overview/images/overview-29.png

At ~$160B Social Security & Welfare is the largest single cost in the budget representing some 36% of total expenditure, and of course it is growing at the fastest rate. With a ~$37B deficit if we were to leave Welfare untouched and bring the budget into balance the savings would have to be made from Education, Health, Defence, the Public Service, etc. I wonder how voters would react to cuts of over 10% in Health and Education. Or imagine how Unions would react to a reduction of 20,000 public servant (ie 13% of the estimated 150,000)!

If this option is not palatable why not just raise taxes? Of course that also received low approval in the poll, but I am sure the pollsters would have achieved a higher rating had the choice been to "tax the rich".  Alas, taxing the rich, won't cut it any more either (see Judith Sloan's article  "Stop the rich-bashing: they pay their share" The Australian 26 April 2017). Unfortunately there is not that much cake to go around.

That now only leaves increasing taxes on everyone, while leaving their welfare payments alone.

Yes! That could work and may even be acceptable. Don't tell anyone that you are taking their money then giving it back to them. They won't work that out. Hey they haven't so far.

Limit welfare to the needy!

But seriously, you could could try something really novel. Limit all welfare payments just to the needy. Who are the needy ? We can afford to be generous, so lets call the needy those households that earn less than the average household income.

While I don't have recent figures, the above table for the 2009-2010 year (Government Benefits, Taxes and Household Income, Australia, 2009-10), shows the various adjustments to household income resulting from social services and welfare. It shows that 11% of Social assistance benefits in cash were paid to households whose income was above the median ( I had to cheat a bit by taking the third quintile and halving it on the basis that half of those in this quintile would be above the median household income and half below.) Taking the total of Social assistance benefits in cash as the total Social security and welfare budget of $160B welfare budget in the above pie chart, the 11% savings is equivalent to some $18B. A significant sum!

If we also consider the Social transfers in kind, a further $36% of these transfers were paid to those above the median household income. Taking these Social transfer in kind as represented by Education and Health totaling ~$105B in the budget, the 36% savings equates to  ~$38B.

By these admittedly simple approximate calculations we can see that limiting all Social security and Welfare payments, and Health & Education transfers just to the 'needy' households, the Federal budget could be cut by ~$56B per annum. This is massive, and certainly enough to not only eliminate the deficit but leave some change to start repaying our debt!.

Super solutions

The Tax Reform whack-a-mole has seen many an idea thrust into the limelight by some interest group, only to be thumped by opponents pushing their own favorite policy. Superannuation seems to be the focus, at least for a few days. So I thought I would take the opportunity to highlight the 5 reform suggestions I raised in an earlier post (Making Super work).

Don't throw the baby out with the bath water

Lets start by observing that there is a purpose for Super. It is to allow workers to save during their working life for a fully self-funded retirement. We know from previous posts (see Not so Super) that without reforms this will not happen for all but the very highest income earners.

The current focus on Super started from a tax reform perspective, and the reason the tax reform debate has turned to Superannuation is to squeeze money out of the system. Specifically to tax the rich, or more politically, to reduce the unfair tax discounts enjoyed by high income earners.

Remember from our projections that these are the only people who will live off their Super without a welfare supplement. So lets make sure that any changes to Super do not end up increasing the number of people on the aged pension.

Keep an eye on the prize

In order for a worker to be fully self-funded in retirement their Super fund balance at retirement must yield an annual income greater than the Aged Part-Pension cut-off.

Lets call this target balance the Self Funded Retirement Threshold. Today with the Aged Part Pension cut-off at just below $50,000 pa, at a yield of, say, 5% the Self Funded Retirement Threshold (SFRT) is $1,000,000. 

All superannuation policies should be focused on every retiree reaching this super balance.

5 Changes to Improve our Super

This objective leads us to consider a wide range of changes that can both lower the burden on our welfare budget and yet increase the number of workers achieving self funded retirement.


Here are 5 suggestions; -

• Taxation discounts on super contributions should be capped. There should be NO tax discounts on super contributions if the projected balance is greater than the SFRT.
• Super fund annual contribution limits should increase as the employee approaches retirement . There is no cost to the government in doing this as the tax discounts automatically cut off if the projected balance is greater thant SFRT
• Retirees should not be allowed to withdraw a 'lump sum' from their Super if by doing so its remaining balance would fall below the SFRT
• Government could issue a government guaranteed Superannuation Bond (SAB) with a fixed rate of return above inflation, say 5%.  There are two benefits to this approach. The government receives a ready source of funds in return for the tax 'discount' on super contributions. Funds that can be used for long-term infrastructure projects. At the same time the individual receives a guaranteed inflation adjusted return on at least part of their super contributions. There should be strict rules pertaining to this special purpose SAB. Here are some suggestions; - 
• Any SAB investment cannot be withdrawn till retirement and its value at retirement is the inflation adjusted value of the sum invested, ie no capital gain. 
• The maximum value of investment for any individual would be limited to the SFRT. 
• The government could manage the SAB to reduce debt and to fund infrastructure projects. 
• It could be mandatory for Super funds to purchase SAB as part of their annual contributions. This 'compulsory' contribution could be equivalent to the value of the tax discount provided on Super contributions. eg if a worker contributes $10,000 in any year to his super and has saved $1500 in tax in making this contribution he would have a mandatory contribution of $1500 to the SAB. 

The current spate of suggestions floating on the airwaves seem to be nothing more than a tax grab. Blind application of such schemes could save money but may further diminish any likelihood of the Superannuation system achieving its goals.

Making Super work

In 'Not so Super' we learnt that our superannuation system is not meeting its design objectives. Even when projected to 2050 there is no increase in the number of retirees who will be fully self funded. This is despite paying greater proportions of their income into Super for an increasing number of years. At the same time the welfare burden of pensions on our national budget will increase, in real terms.

Why is it so?

What is wrong with our Super settings that results in this undesirable scenario? Lets look under the covers.

In the following calculations I have used ASIC Moneysmart Superannuation calculator. It takes into account current tax rates and super contribution rules. It uses a range of assumptions, see Table 1 below, that can be tweaked to meet an individual's specific conditions. For our current purposes, however, I have stayed with all the defaults, including the rate of return of 5.7% for a balanced fund, except I have not built in any rise in the standard of living increase. The figures do account for inflation but the results are shown in today's dollars.

Assumptions (see note 4)	Value
Contribution Fee (%)	0.00%
Management Cost	0.50%
Management cost ($/yr)	$50
Advisor Service Fee	$0
Insurance premium /yr	$100
Salary sacrificed	9.50%
Return on investment	5.70%
Inflation rate	2.50%
Allowance for rise in living std	0
Minimum wage (note 1)	$34,159
Average Earnings (note 2)	$77,195
Single person pension $pa (note 5)	$20,498
Single person part pension cutoff (note 3)	$49,296

Notes
1. National Minimum Wage order effective from 1 July 2015 https://www.fwc.gov.au/documents/sites/wagereview2015/decisions/c20151_order.pdf
2. ABS Average Weekly Earnings Australia, May 2015 http://www.abs.gov.au/ausstats/abs@.nsf/mf/6302.0/
3. Human Services - Income test for pensions http://www.humanservices.gov.au/customer/enablers/income-test-pensions%20Aus%20gov%20Human%20Services
4. Calculations using ASIC Moneysmart Superannuation calculator with all default value except std of living increase https://www.moneysmart.gov.au/tools-and-resources/calculators-and-apps/superannuation-calculator
5. Current Pension rates - single person no supplements annualised http://www.humanservices.gov.au/customer/services/centrelink/age-pension Table 1 Assumptions and Sources I have used the calculator to project the value of a worker's Super Fund Balance for different income levels and investment periods. The income levels range from the minimum wage ($34,159) to $200,000 pa and the investment periods from 10 years to a maximum of 45 years of working life. This latter would be rare requiring a person to start working at age 20 and retiring at age 65. Table 2 summarizes how Superannuation Grows over time for workers on various annual incomes and for various periods. Annual income Super Fund Balance ($'000) After 10 yrs After 20 yrs After 30 yrs After 45 years 34159 (note 1) 34 71 112 179 50,000 48 104 164 264 77,195 (note 2) 75 162 256 411 100,000 98 211 320 534 150,000 148 317 501 805 200,000 197 424 669 1,047 Table 2:  Super Fund accumulation over time In rough terms, every decade adds the equivalent of one's annual income to the accumulated Super. A worker on $77,195, the average wage today, will grow their Super to the equivalent of roughly 4 x their annual income in 4 decades, approx $320,000. Of course different rates of investment return, inflation and contribution costs will affect these figures significantly. The figures themselves do not tell us much. The question is how well these accumulated funds can cater for our retirement.  This is illustrated in Table 3, which shows the annual pension that results from the accumulated funds shown in Table 2. The rate of return used in the table is the same as was used for the accumulation phase, ie 5.7% pa. Annual income Pension income ($'000 /pa) After 10 yrs After 20 yrs After 30 yrs After 45 years 34159 (note 1) 2 4 6 10 50,000 3 6 9 15 77,195 (note 2) 4 9 15 23 100,000 6 12 18 30 150,000 8 18 29 46 200,000 11 24 38 60 Table 3: Annual Pensions resulting from various incomes and investment periods

A person on minimum wage, after sacrificing 9.5% of their salary forr 30 years, will have a pension return of a mere $6,000 pa. This is not nearly enough to meet their living costs and well below the Single Person Aged Pension rate of  $20,498 pa. Similarly a person on average earnings will earn $15,000 pa from their super after 30 years, still below the aged pension. You have to be earning above $150,000 pa to have a Super pension be self reliant on your pension on retirement.

The table highlights in red those super returns that fall below the aged pension rate, in yellow where the super returns are above the full aged pension cut-off but still qualifying for a part pension and in green where the super returns are enough to fully sustain the worker without qualifying for any aged pension.

The sea of red tells the story. Most people will qualify for a full aged pension, a few high income earners will qualify for a part pension and only the very highest earners with longest investment periods will be totally self reliant.

Of course these figures a broad generalisations. Many factors will alter the results. Workers don't maintain the same wage throughout their life, rates of return vary and often, especially as they approach retirement age, workers make salary sacrifice contributions to top up their funds. Also these figures apply for single earners, married couples have different pension cut-offs , etc.

  

Nevertheless the figures do tell a story. Under current prevailing conditions of inflation, contribution rates, rates of return, most workers will have to rely on an aged pension in their retirement.

This exercise has been another way of demonstrating, under the covers so to speak, what the projections discussed in 'Not so Super' already told us. Superannuation is not working as intended.

What is the core objective of Super? 

It is obvious that we do need to make changes, but what should we change?

Before we can make suggestions in this regard we need to be clear about what we want our Super to achieve. 

We really have only a single straightforward objective; - 

The superfund balance at retirement age has to be sufficient to generate an annual pension income which is greater than the Aged Part-Pension cut-off

Let's call this target Super balance the Self-Funded Retirement Threshold, SFRT. In today's terms based on a nominal return on investment of 5.7% pa and given the Aged Part -pension cut-off at $49,296 the SFRT is $864,842. Naturally this will vary as the Aged Part-pension cut-off increases with inflation and as average investment returns change.

Nevertheless the core objective of our Super system is for employees to reach and exceed the SFRT balance in their Super Funds.

5 Changes to Improve our Super

Given this clear objective it follows that all rules governing superannuation should be focused on achieving it.

This insight allows us to consider a range of changes that can lower the burden on our welfare budget and yet increase the number of workers achieving self funded retirement.

Here are 5 suggestions; - 

1. Taxation discounts on super contributions should apply only while the projected balance at retirement is lower than the SFRT. There should be NO discounts on super contributions if projected balance is greater than the SFRT.
2. Super fund annual contribution limits should increase as the employee approaches retirement , without affecting the tax benefits pertaining to these contributions
3. Retirees should not be allowed to withdraw a 'lump sum' from their Super if by doing so its remaining balance would fall below the SFRT
4. Government could issue a government guaranteed Superannuation Bond (SAB) with a fixed rate of return above inflation eg 5%. Any SAB investment cannot be withdrawn till retirement and its value at retirement is the inflation adjusted value of the sum invested, ie no capital gain. The maximum value of investment for any individual would be limited to the SFRT. The government could manage the SAB to reduce debt and to fund infrastructure projects. 
5. It could be mandatory for Super funds to purchase SAB as part of their annual contributions. This 'compulsory' contribution could be equivalent to the value of the tax discount provided on Super contributions. eg if a worker contributes $10,000  in any year to his super and has saved $1500 in tax in making this contribution he would have a mandatory contribution of $1500 to the SAB. Their are two benefits to this approach.  The government receives a ready source of funds in return for the tax 'discount' on super contributions. Funds that can be used for long-term infrastructure projects. At the same time the individual receive a guaranteed inflation adjusted return on at least part of their super contributions.

These are only some potential rules that could help improve our Super system. Many other options are of course possible. However they illustrate that with a clearly defined objective we can better identify the changes that enable self-funded retirement to become a reality for a majority of our workforce. And that would indeed be super!

Not so Super

Superannuation oft lauded as the savior of the working man, is also touted the savior of our welfare state. No wonder it is called 'super'.

What could be better than a system that encourages personal investment for one's autumn years and eases the State's welfare burden to boot. Instead of relying on an ever more encumbered public purse, the working man could look forward to years of idle leisure basking in the glow of self reliance. Indeed Super was introduced with these two objectives in mind.

Like many reforms it has undergone significant tweaking since its inception in 1992 by a forward looking Keating government. Not surprisingly, when Australia is meeting economic headwinds, governments facing an 'entitled' electorate are once again looking closely at superannuation. Some argue that the taxation foregone on Super contributions does not fall equitably across the workforce and should be re-balanced ( see for example ANZ chief economist Warren Hogan says superannuation tax breaks for wealthy too generous). Others point out that the effective tax on super contributions is greater than marginal tax rates and any more 'tweaking' would only further undermine confidence in the system (see National Reform Summit: super tax changes need proper analysis).

I don't propose to tackle these arguments today.  My question is simply,"Is it working?"
Will their contributions to super over their working life free an average worker from relying on an aged pension and as a result will the burden on the state be reduced?

We have a problem..

The Government's recent National Commission of Audit looked at the trends in welfare expenditure to 2050. The graph below is taken from the report and summarizes the result.  

The proportion of those who by their age are eligible for the aged pension, who end up receiving the full aged pension decreases, but at the same time the number of persons receiving a part pension increases. The overall result is that the number of people who can live off their super does not change despite having paid upwards of 10% of their wage into super throughout their lives.

Mmm. Doesn't sound like Super is working like it was meant to.

But worse still; -

"The 2010 Inter-generational Report (Australian Government, 2010a) projected that expenditure on age-related pension payments would increase from around 2.7 per cent to around 3.9 per cent of GDP by 2050." (quote taken from National Commission of Audit)

So by 2050; -

• the same proportion of the workforce will be on pensions as there are today
• Government expenditure on pensions is expected to increase by over 40%

It seems our Super system is not meeting its two objectives. It is neither increasing the number of workers living on their own savings, nor is the burden on the state being reduced.

The unexpected conclusion is unavoidable, our super is not working as intended.

Tweaking is definitely required. However I will look at that topic another day.

A Wel-fairer system

The recent McClure report has highlighted the plight of our welfare system.

Our welfare budget is currently $150 B / yr.

This is spent in a rather complex array of payments to qualifying individuals, be they unemployed, sick, disabled, children, so on. The system is complex, expensive to operate and arguably mis-directed, creating disincentives to recipients to seek work and allocating payments to those not 'in need'.

$150 B is a lot of money! Could it be allocated in a more efficient and more effective way? McClure has suggested a much simplified system that is currently being scrutinized by the government and will no doubt lead to a response over the next few months.

I have only had a brief introduction to the McClure report so cannot comment on it, other than note that it still seems complex. 

It starts by classifying welfare recipients according to various criteria and then establishes how each is to be treated by the system. Although much simpler than the current bureaucratic nightmare, I wonder if this is the right approach?

Welfare, at its core, is intended for those who, for whatever reason, are 'in need'. Simply stated, they cannot afford to pay for their day to day living and medical expenses themselves. It can be due to unemployment, hopefully temporary, illness, disability, etc. No matter the cause, the problem is they have insufficient earnings for their needs.

So why not use earnings as the sole criterion for determining who receives welfare?

Under this alternative approach welfare recipients would all have to pass an earnings test. The test itself would take into account only a few factors, such as number and age of dependents, special needs for the physically disabled, and the value of assets for high nett worth individuals.

Welfare payments would go to those whose earnings were below the benchmark minimum earnings (BME) for their group. The size of the payment would be equal to the difference between their current earning and the BME for their group, but would be subject to an adjustment to ensure there was always an incentive to work. The details for this adjustment have to be thought through and I accept there is some 'devil in this detail'. For the current overview suffice it to note that the adjustment would be sufficient to ensure there is a financial benefit for a welfare recipient to secure employment if there is any opportunity to do so.

I can see two key advantages of this approach. Firstly, it would be simple to administer and easy to understand These criteria are too often ignored when framing government policies. And Secondly it would bring a visible 'fairness' into the system by ensuring that only those in need received welfare payments and that the value they received was related directly to the extent of their need.

I have not done the sums on this (yet), but feel that by eliminating mis-directed expenditure, this alternative approach would deliver a higher welfare benefit to those in genuine need without increasing the overall welfare budget .


Copyright(C)2015 Grappy's Soap Box, all rights reserved