We're having trouble learning to live without inflation

When I became an economic journalist in the early 1970s, the big economic problem was high and rising inflation. The rate of increase in consumer prices briefly touched 17 per cent a year under the Whitlam government, and averaged about 10 per cent a year throughout the decade.

It never crossed my mind then that one day the rise in prices would slow to a trickle – they rose by 0.7 per cent over the year to September – and I certainly never imagined that, if it ever did happen, people would have so much trouble living in a largely inflation-free world.

What? Why would anyone ever object to prices rising at a snail’s pace? Well, of course, no one does. Nor do you see many borrowers objecting to a fall in interest rates.

For savers, however, it’s a different story. Last month, when Reserve Bank governor Dr Philip Lowe announced what’s likely to be the last of many cuts in the official interest rate – it’s a bit hard to go lower than 0.1 per cent – there were bitter complaints from the retired.

“How do you expect us to live when you keep cutting the interest we get on our investments? How long are you going to keep screwing us down like this? When will you take the pressure off and start putting rates back up where they should be?”

Short answer to that last question: unless you’re only newly retired, probably not in your lifetime.

There’s something I need to explain. People like me may have given you the impression that our Reserve Bank moves interest rates up and down as it sees fit, cutting rates when the economy’s weak and it wants to encourage people to borrow and spend, or raising rates when the economy’s “overheating” and it wants to discourage borrowing and spending.

That’s true, but it’s not the whole truth. The deeper truth is that interest rates are closely related to the inflation rate. That’s because much of the rate of interest lenders require borrowers to pay them represents the compensation the lender needs to be paid just for the loss of purchasing power their money will suffer before it’s repaid.

(And when I talk about the lender, I mean the ultimate lender – ordinary savers – not the bank, which is just an intermediary standing between the ultimate lender and the ultimate borrower, probably someone with a home loan.)

So when the expected inflation rate is high, interest rates are high; when the expected inflation rate is low, so are interest rates. The other component of the interest payment lenders receive – the “real” interest rate – represents the actual fee the borrower pays for the temporary use of the lender’s money.

It’s only this much smaller real interest rate that the Reserve Bank is free to adjust up and down. So the main reason interest rates are so low and getting lower is that the inflation rate is low and getting lower.

And that’s not because of the pandemic and the recession it induced, so it won’t be going away when the economy recovers. It’s because, after rising steadily for about 30 years after World War II, the inflation rate in Australia – and all other advanced economies – has spent the past 30 years steadily going back down.

So inflation has gone away as a problem – leaving unemployment and underemployment as our dominant worry – and, as far as anyone can tell, it won’t be coming back for a long, long time.

If so, interest rates will be staying low, and it’s pointless to rail against the Reserve Bank. Rather, people reliant on their retirement savings will just have to adjust to a changed world.

If they want the safety of a bank term deposit, they’ll have to accept the tiny interest payment that goes with it. If that’s not enough, they’ll have to accept the greater risk and volatility that goes with share and other investments.

But let’s not exaggerate their predicament. If interest rates are low because inflation is low, that means their cost of living is low.

Indeed, the Australian Bureau of Statistics’ living cost index designed to measure the special circumstances of self-funded retirees shows their cost of living rose by just 0.7 per cent over the year to September.

Many self-described self-funded retirees take the view that their annual earnings from their superannuation should be sufficient for them to live on, thus leaving what they regard as the “principal” to cover future contingencies or be left to their children.

But, particularly for super payouts large enough to put retirees beyond being eligible for the age pension, it’s wrong to think of that payout as consisting of all your contributions (principal) plus interest. Well over half that sum consists not of your hard-earned, but of the government’s munificence in granting you 30 or 40 years of compounded tax concessions on both your contributions and your annual earnings.

Its generosity was intended to leave you with a sum sufficient to let you live comfortably in retirement, not to set up your kids’ inheritance. Trying to live without dipping into your payout isn’t a sign you’re doing it tough, it’s a lifestyle choice.

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A politician always wins, but this time the choice really matters

If you judged it by the way Labor's been so quick to match the Coalition’s backdated doubling to $1000-a-year of its tax cut for middle income-earners (good idea) and now the Coalition’s plan to help first-home buyers (con job), you’d be justified in thinking that, despite all their furious arguing with each other, there’s little to choose from between the two sides. For once, however, such a conclusion would be dead wrong.

Not for many moons have voters faced such a clear-cut choice between Labor and Liberal.

It’s true that, if you judge the pollies by the way they behave, they’re just as bad as each other. Both sides refuse to answer the question, never say yes or no when they could dissemble, keep saying tricky things calculated to mislead, claim to “feel your pain” when they don’t, keep badmouthing each other and answering a question about their policies by attacking their opponents’ policies, and make promises they’re not sure they can keep.

And – one we’ll need to watch out for if Labor wins – claim to be much more high-principled than the government while they’re in opposition, but then do just the same when they’re in government, justifying it by saying they’re no worse than the last lot.

All true. But where the two sides are very different is in the policies they’re offering. And, although the more unpopular of those policies may or may not make it through the Senate, this is one time I’m inclined to agree with Paul Keating when he repeats his saying that “when you change the government, you change the country”.

Since it’s true that governments lose elections far more often than oppositions win them, the standard practice is for oppositions to make themselves a “small target” – to promise little of substance – so all the focus is on the many things the government has stuffed up.

Not this time. This time it’s the government making itself a small target – running on its economic record, with few policy promises bar its $300-billion tax plan – while Labor has so many controversial policies to go with its popular ones the Libs have been spoilt for choice.

Only the naive believe the battle between the classes ever ended, but in this election it’s more in-your-face than any time since the days of Labor’s Arthur Calwell. The Libs say Labor wants to increase taxes rather than cut them, but it would be more accurate to say it wants to make the well-off (including the well-off retired) pay more tax, while using the proceeds to increase government spending on health, education, childcare and much else, with what’s left over used to repay some of the government’s debt.

Labor plans to abolish tax refunds of unused dividend franking credits for those not on the pension, wind back negative gearing and the capital gains tax discount, reduce superannuation tax concessions, tax family trusts and restore for four years the 2¢-in-the-dollar budget repair levy on income above $180,000 a year, not to mention cancel the second and third stages of the Libs’ tax cuts.

In other words, Bill Shorten and Chris Bowen plan to use both sides of the budget to affect the biggest redistribution of income from high income-earners to low and middle income-earners we’ve seen in ages.

By contrast, the Libs are fighting tooth and nail to protect the tax breaks favouring property investors, self-funded retirees, high-income superannuation savers and business people who’ve gone for years using family trusts to reduce the tax they pay – most of which concessions were introduced by the Howard government.

As well, the Libs’ seven-year, three-stage, super-mega tax plan would favour high income-earners – individuals earning more than $100,000 and, particularly, $200,000 a year – to a degree more generous/blatant than I can remember.

The first stage, which is limited largely to middle income-earners, would give them an immediate cut in their average tax rate of no more than about 1¢ in every dollar they earn. That’s pretty much it for low and middle income-earners.

High income-earners have to wait for stage two (July 2022) and stage three (July 2024) before they get much. But then the heavens would open. Cuts in average tax rates would range from 1.5¢ in every dollar for those on $110,000 to 4.5¢ in the dollar for me and my mates on $200,000 and above.

Next, more than ever before, this election sees Labor going for the young vote (negative gearing, better childcare, preschool and universities) while the Libs defend actual and prospective self-funded retirees.

Except for Scott Morrison’s last-minute, few-details first home loan deposit scheme (which Labor matched within an hour or two). It sounds better than is, mainly because access to it would be limited. Further falls in house prices would do far more to help – but no pollie wants to say that.

Then there’s the minor matter of the adequacy of our contribution to the Paris Agreement’s effort to limit global warming. Here, too, the choice is wide, ranging from the Coalition (just pretending) to Labor (real but inadequate) to the Greens (full blast).

All that remains is a threshold question: will your choice be aimed at benefiting yourself and your family, or the wider community and “those less fortunate than ourselves”?

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Don’t worry, you’ll have plenty in retirement

Some years ago I went to an investment adviser, gave him my financial details and asked if I had enough super to do me in retirement. He didn’t answer, just laughed. I think he thought that someone with my amount of savings shouldn’t have needed to ask.

Truth is, no matter how high or low the standard of living we’re used to, just about all of us worry that we haven’t saved enough to keep it going in retirement. No matter how much we’ve put away, it’s only human to feel a twinge of guilt that we could have saved more. And how much is enough?

The superannuation industry has spent decades convincing us our savings are inadequate, and pressing the government to raise the rate of compulsory super contributions. The “retail” super funds run by the banks keep doing this, but so do the not-for-profit industry funds.

It was they who persuaded the Rudd government to phase the rate up from 9 per cent of wages to 12 per cent by 2025.

But now, at long last, a report by John Daley and Brendan Coates, of the Grattan Institute, has hit the headlines exposing the Great Super Lie. In the words of its title, Money in retirement: More than enough.

The report’s careful and detailed analysis finds that, contrary to everything we’ve been told, the vast majority of retirees today, and in future, are likely to be comfortable financially.

The institute’s own modelling shows that, even after allowing for inflation, most workers today can expect a retirement income of at least 91 per cent of their pre-retirement income. This is way above the 70 per cent level that the Organisation for Economic Co-operation and Development recommends its member-countries aim for.

But how can reality be so at variance with our perception of it? Because the super and investment-advice industries have laboured long and hard to convince us we should be saving more.

Why have they done this? Because every extra dollar we save through super, whether voluntarily or compulsorily, is a dollar they get to take a small bite out of – every year until we eventually take it and spend it.

They call it “clipping the ticket”. The financial services sector abounds with people who’ve thought of another reason to clip our ticket. That’s why its top people are the highest paid of them all, the envy of medical specialists and barristers.

How have they misled us? As the report explains, by exploiting our inability to anticipate how much we’ll need to last us in retirement.

ASFA – the Association of Superannuation Funds of Australia – is the chief offender. It publishes and updates a measure of the minimum amount you’ll need at retirement to live at a “comfortable” standard. If you don’t have that much then, by implication, you’ll be un-comfortable.

Trouble is, it’s designed to reflect a lifestyle typical of the top 20 per cent of retirees today. So, in truth, it’s telling the bottom 80 per cent they haven’t saved nearly enough to have in retirement a standard of living far higher than they ever enjoyed while working.

Obviously, when estimating how much you’ll need, you have to allow for inflation over the likely period of your retirement. Some in the industry exaggerate this by using the expected growth in wages – rather than prices – as their inflation measure, knowing that wages grow faster than prices and living standards rise over time.

After being misled for so long, you probably find it hard to believe your savings are – or will be – more than adequate, so let me explain.

First, most people will have more income than they realise. Most people will be eligible for a full or part age pension, which is increased in line with wages rather than prices, meaning it grows faster than inflation over time.

By now, most people are retiring with a significant amount of super saving. It was always envisaged that most people would retire with some combination of age pension and super.

About 80 per cent of people over 65 own their own home (a huge saving) and most have savings and investments outside the super system.

Second, people spend less money in retirement than they used to, and than they expect to. That’s why the OECD says you need only 70 per cent of your pre-retirement income to be comfortable.

The retired pay less income tax on the same income, whatever it is. They don’t make super contributions, they don’t have mortgages (though those who rent privately are the big exception to the rule) and they don’t have kids to support.

They eat out less (partly because they have more time to cook), drink less alcohol, spend less on transport (no trips to work) and replace clothing and furniture less often. Medical costs are a lot higher, but are largely covered by the government.

And it’s not just that when you’re retired you have less need to spend than when you’re working. It’s also that you spend less as you get older. Spending tends to slow when you reach 70, and decreases rapidly after 80.

Still not convinced? Get this: surveys show the retired worry less than the working about paying bills, many actually save some of their income and often leave a legacy almost as large as their nest egg on the day they retired. Sounds comfortable to me.

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Our oldies have never had it so good

Don’t let anyone tell you Scott Morrison is out of touch. When he says that, if he had the money, he’d increase the age pension rather than the dole, he’s reflecting the views of most older Australians. Everyone knows it’s the old who are the deserving poor.

Except it ain’t true. It was true once, but not for many years.

You might expect the Prime Minister to be better informed than the average punter, but Morrison is from the new breed of politician who see a leader’s job as to reflect the voters’ misperceptions back to them. Read the focus group reports, not the briefing notes.

Something Morrison clearly hasn’t read is the research briefs published last week summarising the findings of the Centre of Excellence in Population Ageing Research – an outfit funded by the federal government to ensure it (and the rest of us) are well-informed about matters such as the adequacy of the age pension.

According to the centre’s director, Professor John Piggott, of the University of NSW, “our analysis shows that standards of living of older people have improved over the last decade . . . Households reaching retirement age today have incomes about 45 per cent higher than those reaching the same milestone 10 years ago.”

That’s a real increase of 45 per cent, after taking account of inflation. How could it be possible? Because the pension is indexed to wages rather than prices, and wages grow by a per cent or two a year faster than prices (until recently, anyway).

As well, the Rudd government made a discretionary increase in pensions on top of indexation.

The centre’s figures show that 62 per cent of age pensioners get it at the full rate, with a quarter getting a part-rate pension because of their other income, and another 13 per cent on a part-rate because of the high value of their non-housing assets.

The centre finds that the rate of poverty (measured as less than half the median household disposable income) among everyone aged 65 and over is only a fraction higher than for everyone aged 15 to 64.

Even so, by now it’s wrong to think of many people retiring with nothing to support them but the pension. Our retirement income system rests on three pillars, with the means-tested, flat-rate age pension being only the first.

The second pillar is compulsory employer superannuation contributions under the “super guarantee”, which began formally in 1992 and reached 9 per cent of wages in 2002. Today it’s 9.5 per cent.

By now, therefore, most people should be retiring with some super savings, maybe quite a lot. The centre says that, in 2016, the median (most typical) super balance for individuals aged 60 to 64 was $68,000, whereas the arithmetic average was three times that, at $214,000 – pushed up by a small number of very much higher balances (including mine).

The median is held down by the typically much lower balances of women, which average 64 per cent less than men’s. Even here, however, the centre says the gap has almost halved over the past decade.

The retirement income system’s third pillar is voluntary super contributions, which are “tax-advantaged”.

Compulsory and voluntary super contributions are already sufficient to mean that 40 per cent of people on the age pension have super and investments as their main source of income. And 20 per cent of older people have so much other income as to make them ineligible for the pension.

But the system actually has a fourth pillar: home ownership. (And a fifth: assets and other savings outside the first four pillars.)

Get this: three-quarters of age pensioners own their home. The centre estimates that, on average, living rent-free in your own home yields a saving of more than $10,000 a year. (As well, the oldest households receive health-related savings averaging about $25,000 a year.)

So significant is the fourth pillar of home-ownership that it’s implicitly assumed in judging the age pension’s adequacy – meaning the quarter of age pensioners who mainly rent privately are justified in complaining about the trouble they have making ends meet.

About 40 per cent of renters aged 65 and over are below the poverty line. And, among those of them living alone, the poverty rate rises to 60 per cent.

If Morrison really cared about the elderly poor, he’d raise the pension rent supplement, which wouldn’t cost much.

In truth, however, his remarks last week were probably more about signalling: the aged – particularly the better-off aged; those dreading Labor’s plan to abolish unused dividend franking credits - should see themselves as part of his party’s “base”, whose interests he represents and will fight for.

Renters of any age aren't part of the base. Nor are the young part of it – and others with a greater risk of finding themselves on the dole – so their interests take a lower priority. Don’t say he didn’t tell you.

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We have a bad case of misdirected compassion

Why do so many of us – and the media, which so often merely reflect back the opinions of their audience – feel sorrier for those who profess to be poor than for those who really are?

Last week, on the day after the single dole was increased by 50¢ to a luxurious $273 a week ($14,190 a year), Malcolm Turnbull’s henchmen succeeded in persuading Pauline Hanson’s One Nation to let him give the down-and-out part of our one nation another kicking. (Sorry, my Salvo upbringing is showing again.)

You’ve heard the news that homelessness is much more prevalent than we thought. According to the Australian Council of Social Service, the Senate’s passing of the Orwellian Welfare "Reform" Bill will, in its first year, add to homelessness by cutting off payments to more than 80,000 people.

The bill contains 17 measures that will adversely affect the lives of thousands of the unemployed, single parents and women and children escaping violence.

You’ve never seen such a list of pettifogging nastiness, yielding tiny savings to the budget.

The unemployed will no longer be back-paid to the day they lodged their claim, meaning the longer Centrelink takes to process that claim, the longer the jobless go without (or have to go cap-in-hand to outfits like the Salvos) and the more pennies the government saves.

Let’s hope it doesn’t make lengthening processing times a KPI.

Until now, the legislation has protected people who can’t complete and lodge their claim because they’re in hospital, are homeless, are escaping domestic violence, or are victims of natural disaster or fire. Sorry, such pathetic excuses will no longer be accepted.

Fortunately, Hanson was shamed into reneging on a commitment to remove a small, one-off “bereavement allowance”.

So, were the media up in arms over this gratuitous attack on people who are already below the poverty line – this “cash grab”?

No, they hardly seemed to notice. Perhaps they were distracted by the bitter tears they were shedding over the plight of all those poor self-funded retirees whose unused dividend imputation refunds the evil Labor Party is threatening to steal.

I’m sure there must be a few retireds with genuine cause for complaint, but I didn’t see any among those whose cries of pain were taken up by a righteously outraged media.

Perhaps the problem is that most political reporters are too young to know how retirement income works. Let’s look at Australia’s most self-pitying and grasping group, the self-proclaimed “self-funded retirees”.

What they mean by this term is that they don’t get the age pension. What they fail to mention to naive reporters is that they don’t get it because they’re too well-off to meet the means test – notwithstanding the best efforts of their investment advisers to rearrange their affairs so they do.

What’s the main reason they’re too well-off to get the age pension? Too much superannuation savings. That’s why I see red every time I hear them claiming to be “self-funded”.

They’ve convinced themselves they’re fiscal heroes who are saving the government a fortune by not getting the pension. Rather, they’ve scrimped and sacrificed for decades to amass the super savings they have.

But they’re deluding themselves on both counts. They conveniently forget that their contributions to super were taxed at 15 per cent rather than their much higher marginal tax rate, as were the annual earnings on those tax-concession-enhanced contributions.

And, since 2007, thanks to Peter Costello (who spent his time as treasurer planting time-bombs in the budget), they’ve paid no tax on their super withdrawals.

As a result, a proportion of their super balance is attributable not to their frugality, but to decades of annual tax concessions, plus compound interest on those concessions.

The higher the payout, the higher the proportion of it attributable to tax breaks rather than actual saving. For most of those with super balances high enough to exclude them from the pension, those accumulated tax breaks would greatly exceed the budgetary cost of that pension, sometimes several times over (as in my case).

That’s being “self-funded”?

Another thing the media’s bleeding hearts (middle-class division) don’t know is that since withdrawals from super are tax-exempt, the money that allegedly self-funded retirees have to live on far exceeds the modest “taxable income” they tell you about.

When they cry poor, these comfortably-off people with their hand out don’t tell you their goal is to get sufficient assistance from the taxpayer to allow them to avoid dipping into the capital value of the shares and property they want to hand on intact to their offspring – who are, no doubt, just as deserving as they are.

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How Labor is taking on the greedy elderly

Talk about missing the point. The media spent all last week working themselves into a lather over Labor's newly announced policy to abolish cash refunds for unused dividend imputation credits. (If you have no idea what that means, it probably wouldn't affect you.)

This promise would be terribly unfair to dirt-poor self-funded retirees, we were told. And it was utter stupidity for Bill Shorten to drop such a monumentally unpopular proposal in the last week of the Batman byelection, which he was now safe to lose.

Except, of course, that Labor won comfortably, with little sign the policy had much effect.

The media smarties' greater failure was their inability to see the bigger picture: the next federal election is shaping as a battle between the generations, with Labor championing the put-upon young and the Coalition defending the privileged old.

According to Canberra conventional wisdom, this too is crazy-brave territory for Labor. The ageing of the population means Grey Power is our fastest growing political force.

Those of retirement age (which includes me) have little more pressing to do than to worry incessantly about their finances, and have developed an unshakable sense of entitlement ("I've paid taxes all my life ..."). Any concession they've been granted, no matter how unjustified or unaffordable, can't be taken back, we're assured.

Well, I'm not so sure.

As a political force, Grey Power has one huge weakness: of all the age groups, the over-65s are those least likely to change their vote. The great majority vote for the Coalition, so Labor doesn't have a lot to lose.

It's among the non-aged (sorry) that most swinging voters are found, and it's by picking up enough swingers that a party wins.

Haven't you noticed how, since 2013, the Coalition has been reacting to Labor's pro-younger policies by flying to the defence of the better-off old? The conservatives are allowing themselves to be "wedged" – separated from the majority of voters.

The Canberra smarties also used to believe negative gearing was politically untouchable. But Labor went to the 2016 election promising to curtail it – while the Libs predicted it would send house prices crashing – and came within a whisker of winning. Labor's persisting with the policy.

Labor went to that election with another pro-younger policy: cutting the tax breaks going to exceptionally well-off superannuants (including me). This time, Malcolm Turnbull, needing help to pay for his company tax cuts, produced his own, Treasury-crafted version of Labor's idea.

The issue didn't feature greatly in the election campaign, but after the Coalition had won, the exceptionally well-off superannuants in the Liberal heartland turned on Turnbull. This advantaged Labor by adding to the disunity in the Coalition's ranks. Turnbull modified his super changes, but not greatly.

And now Labor is planning to remove another super tax concession that goes overwhelmingly, but not exclusively, to superannuants with large share portfolios. The Coalition hasn't resisted the temptation to side with its well-off elderly heartland, nor have the media resisted the temptation to promote its (and the super industry's) misrepresentation of the policy as an attack on struggling retirees (who just happen to own a lot of shares).

How is this another of Labor's pro-younger policies? That will be easier seen if, as seems likely, Labor uses the saving to pay for a promise of income tax cuts for people earning less than $87,000 a year – few of which would go to the retired rather than to the workers who pay for the retired's largely income tax-free status.

If you think an election campaign based on conflict between the generations is not a good thing, I agree. Unless what you mean by that is that the better-off aged should be allowed to retain their relatively recently conferred tax advantages, and the taxpaying non-old should continue to lump it.

It's a pity John Howard and Peter Costello (the chap who kept issuing reports warning that population ageing would play merry hell with the budget) didn't worry more about future generational conflict when they spent most of their 11 years in office slipping new benefits for the aged, particularly self-funded retirees, into the budget.

They started with the private health insurance tax rebate (the biggest users of private health insurance services are 60 to 79-year olds) and moved on to giving the alleged self-funded retirees the "seniors and pensioners tax offset", also making it easier for them to get health cards and pay the pensioners' rate for pharmaceuticals.

In 1999, they gave negative gearing a huge boost by introducing a 50 per cent discount on capital gains tax. And they decided that anyone who paid so little income tax they couldn't take full advantage of their dividend imputation credits should be sent a refund for the balance.

On the younger side of the ledger, while they didn't invent HECS debts for university students, they greatly increased them.

Then, in 2007, Costello introduced sweeping super changes, making super payouts completely tax-free for people over 60. He also made a lot of supposedly self-funded people eligible for a part pension.

Since this largesse was quite unaffordable, Labor and Coalition governments have been chipping it back ever since.

Even so, we retain an income tax system where how much you pay sometimes depends on the size of your income, but other times on how old you are. And that's not going to lead to intergenerational conflict?

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