Should Equity Pain be Offset by Universal Pension? Part One

A collapse in world share markets is coming. It’s just a matter of when and by how much.

This week’s issue of The Gowdie Letter included the chart Warren Buffett called ‘the best single measure of where valuations stand at any given moment’:

The Buffet Indicator: Corporate Equities to GDP

Source: Advisor Perspectives

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The math on this is very straightforward.

Corporate Equities are valued at 220% of US GDP.

US GDP = US$22.7 trillion x 220% = US$50 trillion.

Let’s say the post-bubble ratio is around 70%.

US GDP = US$22.7 trillion x 70% = US$16 trillion.

Should the “crash we have to have” follow the same mean reversion path as its bubble predecessors, then we can expect around US$34 trillion in paper gains to be shredded.

Any bullets fired in Wall Street are going to ricochet onto our market.

A serious amount of paper wealth — sooner or later — is going to be shredded.

Who will wear the brunt of this wealth destruction process? Those with larger pools of ‘balanced’ savings, pending retirees, and retirees.

Superannuation statements — once a source of great comfort — will transform into communications containing dread and uncertainty.

This pending loss of capital could not come at a worse time for retirees.

As reported by financial site, on 10 November (emphasis added):

Increased living costs led to the highest annual increase in retiree budgets since 2010 according to new research.

Retirees are tightening their purse strings due to being impacted by higher living costs according to the Association of Superannuation Funds of Australia (ASFA).

Retirees are sailing into the perfect storm: falling net worth and rising costs.

What’s the solution?

Some suggest a universal pension scheme would be the answer.

Is it?

In today and tomorrow’s Rum Rebellion, I’ll give you my opinion.

The proponents of the universal pension scheme (UPS) advocate that all persons of pension age eligibility — irrespective of their income or assets — would be entitled to $X per month (as yet, the proposed flat rate pension figure has not been determined).

For example purposes only, let’s say the universal pension is going to be $1,000 per month.

Under the proposed scheme, Australia’s richest person, Gina Rinehart (who reached pension age in February 2020), would qualify for the universal pension of $12k per annum.

Is that fair?

Granted, Gina is an exceptional example.

However, there are plenty of Australians who (when the value of their home is included in their household balance sheet) have wealth measured in the many millions of dollars.

Is it fair for them to be paid (our sample figure of) $12k per annum?

Or should they tap into their own capital base — drawdown superannuation capital, downsize their home, and/or use a reverse mortgage — to fund their retirements?

A vexed question.

According to those championing the UPS:

…[it] could, over time, also be good for the government’s bottom line, as it would eliminate the need for massive administration costs.

It would get rid of the pension assets and income tests, doing away with the need for unfair taper rates, deeming rates and work restrictions, and end the need to engage with Centrelink.


As someone who liaises with Centrelink on behalf of my elderly father, I’m well aware of the frustrations associated with Centrelink’s clunky means-testing system.

However, to suggest a universal pension ‘would eliminate the need for massive administration costs’, is pure fantasy.

Yes, you’ll replace one set of admin costs, but who are they kidding…this is government.

In the public sector, mega departments employing thousands of people are like fiefdoms.

Does anyone seriously believe the Sir Humphrey’s in Centrelink are going to sanction a wholesale redundancy program (as a benevolent cost-saving measure for taxpayers) and weaken their power base?

Dream on.

Those who are no longer needed to assess age pension entitlements will simply be redeployed to roll out the red tape in other divisions or departments.

In theory, getting rid of the inconsistencies and inequity in the treatment of different assets and income streams would make life a whole lot simpler.

But, as we know, theory and practice are two vastly different things.

The Rum Rebellion is a fantastic place to start your investment journey. We talk about the big trends driving the Australian Economy. Learn all about it here.

There was once a universal pension

Australia did (for a limited time) have a universal pension.

Initially, it was available to anyone over 75. Later, the qualifying age was reduced to 70.

As recorded in the Australian government Treasury archives (emphasis added):

The means test was repeatedly modified in the 1970s, with the Whitlam Government initially acting to remove it for people aged 75 or over in 1973 and then for people aged 70 to 75 in 1975. The Fraser Government continued the trend in 1976 by replacing the income and assets test with a test on income only (including income from assets). However, the test was subsequently tightened again in 1978 when the income test was partially restored for people aged 70 and over. The means test was tightened further by the Hawke Government in 1985 when the assets test was reintroduced. Under the 1985 changes, either the income or assets test was applied, depending on which test gave a lower pension level.

Whitlam’s generosity towards older Australians, in theory, was to be applauded.

After all, in the mid-1970s, those aged over 70 represented a fraction of our nation’s population.

On face value, you’d think the ‘Lucky Country’ could afford to be a little more charitable to its senior citizens.

But remember, someone’s charity is another’s donation.

The top tax rate back then was 67%:

Personal Income Tax Top Marginal Rate

Source:  ATO

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While the theory may have been good in the early to mid-1970s, demographic changes proved that in practice the theory could no longer be afforded.

The punitive tax rate acted as a deterrent…why would you want to earn over $X if the government was going to confiscate two-thirds of it?

In recognition of the need to incentivise a labour force (swelling in number with baby boomers), personal tax rates were lowered in the late 1970s through to the late 1980s.

To offset the income tax reduction, we had the introduction of CGT, FBT, GST, superannuation contribution, earnings tax, etc.

The broader tax base was required because more Australians were reaching Age Pension eligibility (originally 60 for females and 65 for males) and living longer.

Money was needed to fund our nation’s social contracts.

Since 1980, social spending has doubled from 10–20% of GDP:

Public Social Spending as a Share of GDP

Source: Our World in Data

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To put those percentages into dollars:

Fat Tail Investment Research

After you adjust for population and inflation, the gap narrows somewhat…but not markedly.

This is why, after a few years in practice, Whitlam’s Universal Pension was abandoned for the means test.

The reintroduction and tightening of the means test in 1985 (and subsequent years) was and has been an expenditure containment measure.

Which is understandable with an ageing population that’s living far longer than the founders of social safety net ever envisaged.

Our nation’s brief flirtation with a universal pension ended because the numbers (tax revenues versus expenditures) just didn’t stack up.

This is what I mean by ‘in theory’ — it all sounds good, but nothing EVER stays the same.

Demographics. Debt levels. Labour force participation rates. External economic shocks. Immigration numbers. Left- and right-wing administrations.

As a result of these ever-changing dynamics, the original system is continually tinkered with an attempt to address unforeseen inequalities, inconsistencies, and budgetary squeezes.

The debate over the preferred universal pension model has all the hallmarks of the republic versus monarchy debate.

Those wanting the status quo to remain say ‘the system ain’t broke’.

Let those with the means fund their own retirement. Why should taxpayers pick up the tab?

Those advocating for change say we need to modernise and get with the 21st century. We should look to the European models (Netherlands and Denmark) for the way forward.

The current means-tested system is far from perfect, but is the proposed UPS just swapping the devil for the deep blue sea?

Tomorrow, we’ll look at the proposed alternatives and whether we, as a nation, can afford a universal pension OR do you take personal responsibility to safeguard your financial position from the perfect storm?


Vern Gowdie Signature

Vern Gowdie,
Editor, The Rum Rebellion

PS: Vern is also the Editor of The Gowdie Letter and The Gowdie Advisory — investment services designed to help everyday Australians avoid the financial pitfalls of a volatile economy and make informed decisions to grow their wealth for generations to come.

Vern has been involved in financial planning since 1986.

In 1999, Personal Investor magazine ranked Vern as one of Australia’s Top 50 financial planners.

His previous firm, Gowdie Financial Planning, was recognised in 2004, 2005, 2006 & 2007, by Independent Financial Adviser magazine as one of the top five financial planning firms in Australia.

In 2005, Vern commenced his writing career with the ‘Big Picture’ column for regional newspapers and was a commentator on financial matters for Prime Radio talkback.

In 2008, he sold his financial planning firm due to concerns about an impending economic downturn and the impact this would have on the investment industry.

In 2013, he joined Fat Tail Investment Research as editor of Gowdie Family Wealth. In 2015, his book The End of Australia sold over 20,000 copies and launched his second premium newsletter, The Gowdie Letter.

Vern has since published two other books, A Parents Gift of Knowledge, all about the passing of investing intelligence from father to daughter, and How Much Bull can Investors Bear, an expose on the investment industry’s smoke and mirrors.

His contrarian views often place him at odds with the financial planning profession today, but Vern’s sole motivation is to help investors like you to protect their own and their family’s wealth.

Vern is Founder and Chairman of The Gowdie Advisory and The Gowdie Letter advisory service.

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