Should Equity Pain Be Offset by a Universal Pension? (Part Two)

Due to a relatively easy past, retirees are sleepwalking into a difficult future.

Over the last decade, cost of living pressures have been mostly contained and investment markets have performed beyond expectations.

It’s been a real win-win.

However, that was the road travelled…but what lies ahead?

More of the same? Unlikely.

That’s not how cycles work…as those who lived through the Roaring Twenties and depressive 1930s OR low inflation 1960s and high inflation 1970s found out.

The fortunes of one decade tend to be reversed in the following one.

Should that pattern repeat, the decade ahead is likely to be one of rising costs and falling investment markets.

If this happens, then expect the current murmurings for the introduction of a universal pension scheme (UPS) to increase in volume.

While a UPS might be good for retirees, what about the younger generations who have to foot the bill?

In Part Two of this series, we look at the proposed model and how these systems work in Europe.

The alternative

In the ‘status quo’ camp is:

Public Service Commissioner Andrew Podger wants government legislation to ensure retirees draw down on their savings through annuities and home equity release programs targeting deductions from deceased estates.

Some have described these draw-downs on deceased estates as a “death tax”.


The use of ‘death taxes’ to describe the repayment of debt owed under a reverse mortgage scheme is just a tad hyperbolic.

The dearly departed parent/s used the home equity drawdown/s to fund their lifestyles. The lender is simply recovering the outstanding loan balance (capital and compound interest) from a commercial contract that was entered into willingly by both parties.

Or if parent/s have drawn down on superannuation funds to make ends meet (or buy a car or travel), then that hardly qualifies as a ‘death tax’.

Should taxpayers foot (an even larger share of) the retiree’s living costs so there’s a greater estate value for beneficiaries to share amongst themselves?

The use of ‘death tax’ is emotive claptrap that does nothing for an informed discussion.

Under the current scheme, the Age Pension is there to fully or partially provide income support (together with heavily subsidised pharmaceuticals) to those who are deemed — under a sliding asset and income scale — to warrant such assistance.

Those whose financial position exceeds the means test (self-funded retirees) are personally responsible for generating the income needed to fund their lifestyles.

Dividends. Rents. Interest payments. Annuities. Account-based pension payments.

COVID-19 was a serious disruption to these traditional income streams. Dividends were cut. Rent holidays were enforced. Interest rates sank to 0.1%.

The income squeeze has been the catalyst for debate on revolutionising our approach to funding retirement incomes.

Spokesperson for the National Seniors, Ian Henschke said:

If every year, you worry whether the market will give you enough or not, you have little choice but to be conservative.

I’m sure many retirees feel this way, having lived through two of the biggest market downturns in recent history. It’s a terrifying financial rollercoaster you really don’t want to get on.

It’s true, it can be a terrifying financial roller coaster. But that’s life in the grown-up’s world.

It’s bad enough we have ‘helicopter’ parents shielding children from life’s ‘nasties’, let alone proposing we introduce a ‘helicopter’ State to protect us from the risks associated with our investment decisions. Where does personal responsibility come in?

Yes, COVID-19 was a unique and unexpected situation. However, every prudent plan should include a cash contingency fund equivalent in value to three years’ worth of living expenses.

The notion of the State being the ‘income provider of first resort’ does not sit right with me.

According to YourLifeChoices:

The top two pension systems in the world — in The Netherlands and Denmark — both have defined benefits schemes, or universal basic pensions, in place.

And the preferred option is Denmark with a 50/50 approach.

Half universal pension and half means-tested pension.

From YourLifeChoices:

…there is a middle way, where half the pension is paid to everyone and the balance is income tested. Denmark has such a system.

The advantage is the universal part pension gives everybody a base to build on while the means-tested pension ensures that no-one lives in poverty.

Another advantage is that the means testing will cease at a lower level of assets or income than currently, as it would only apply to half the pension.’

Before we go on, I have one question.

Weren’t we told the introduction of the UPS 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.

And from MacroBusiness:

Ian Henschke, the spokesperson for National Seniors, says that the axing of the means test would be a win-win for everyone in the end.


It looks like the means testing bureaucracy gets to stay in place under the Danish scheme.

Anyway, let’s not get distracted by this argument’s inconsistencies.

As mentioned previously, for every charitable act, there is a donor.

In Australia, our personal ‘donation’ rates in addition to the 10% GST are:

Resident Tax Rates

Source: ATO

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In Denmark, according to Wikipedia:

The sum of municipal and national tax percentages cannot exceed 52.05% (2019) — the so-called “tax ceiling” (Danishskatteloft). Including the labour market contribution of 8%, the maximal effective marginal tax rate on labour income in 2019 is 55.9% (=0.08 + 0.92*0.5205). For capital income, there is a separate, lower maximum tax rate of 42%.

Denmark has a non-deductible value added tax (VAT) of 25%.

I’m assuming by ‘capital income’ they’re referring to capital gains.

In Australia, provided the asset is held for longer than 12 months, the maximum tax rate is 22.5% plus Medicare levy.

What about the Netherlands?

Fat Tail Investment Research

Source: Wikipedia

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Just for comparison purposes, €68,508 is approximately AU$106,000.

Fat Tail Investment Research

The Dutch pay over $10,000 more in tax on the same income.

And the difference between what we pay and what they pay only gets wider for those on higher incomes.

Their VAT rate is:

Netherlands Sales Tax Rate

Source:Trading Economics

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I understand the National Seniors is a lobby group doing their utmost to press the claims of their members.

After all, in the horse race of life, the horse named ‘self-interest’ will always win by a nose.

And in accepting that truism, what about the self-interest of the Gen X, Gen Y, millennials, and Gen next?

Has anyone bothered to ask them if they’re in favour of paying higher taxes (in addition to paying off student loans and repaying six- and seven-figure mortgages) to fund this rather generous scheme for baby boomers?

Oh, wait. Let’s tell them it’ll be there for when they reach pension age (which we all know will be pushed out beyond 70 in the decades to come).

We saw the same overpromise and underdelivery with Whitlam’s wonderful theory in the 1970s.

The reality is, as the years go by and the numbers of boomers who live beyond 90 and 100 grow, the system will be tinkered with. And do you know who will get shafted?

The younger generations who footed the bill for this socialist dream.

What I’m about to say will be hard to swallow for a lot of people — I know this because over the years I’ve been met with a huge amount of backlash — but it is an absolute fact that gets lost in the emotion.

Age pensioners (my father included) will defend their right to a pension with that old, tired line of ‘I paid taxes all my life.’

So what?

Those taxes were used by the government of the day to meet the expenditures of that day. None of those taxes were set aside to fund future pension liabilities.

Pensions are paid today courtesy of the taxpayers of today.

It’s only fair and reasonable today’s taxpayers be engaged in a discussion that (most likely) involves them having to contribute even more to government revenues…especially when some of their additional tax burden will be paid to Gina Rinehart, Andrew Forrest, et al.

In my opinion, the current system — while far from perfect in its application and implementation — provides (in the main) a safety net for those who need it.

And for those who have the financial means to not burden younger generations of taxpayers, they should be left to their own devices to fund their retirement lifestyles…and that includes me.

If it means eroding the capital base and there’s less left for beneficiaries to inherit, so be it.

I accept the popularity of this view is likely to vary based on demographic cohort.

However, as someone who would be a recipient of the proposed UPS, I can hardly be accused of self-interest. My interest actually resides with my children and their friends.

To me, it’s unjust to ask them to pay more so that myself and others like me can receive more. That’s just plain wrong.

And no amount of fancy modelling will convince me that the numbers stack up…because in practice, they don’t.

There will be no government savings in bureaucratic expenses. These schemes — once introduced — become the thin edge of a very costly wedge.

As you can see in Denmark and the Netherlands, someone always pays.

The current system ain’t broke, but the proposed UPS could send us broke.


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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