Should equity pain be offset by a universal pension? Part two

Wednesday, 1 December 2021 — Gold Coast, Australia

[8 min read]

Dear Reader,

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”.’

YourLifeChoices

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.’

Hmmm.

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:

In Denmark, according to Wikipedia:

‘The sum of municipal and national tax percentages cannot exceed 52.05% (2019) — the so-called “tax ceiling” (Danish: skatteloft). 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?

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

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:

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.

Regards,

Vern Gowdie,
Editor, The Rum Rebellion

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.

Since the money madness began in earnest in March 2020, consumer spending — as measured by real retail sales — has gone up 13.5%.

That’s thanks to the Fed’s giveaways, stimmies, non-repayable loans, deficits, and other money-shuffling claptrap.

According to Say’s law, real demand (purchasing power) comes from output. In other words, you gotta have something to spend. And you get it by having something to sell (labour, product, service, etc.).

In the same period as consumer spending, real output (real personal income less transfer payments) went up too, but by less than 1%.

So demand (based on phony money printing, not output) rose more than 13 times faster than supply.

What you’d expect

What should happen under these circumstances? Prices should rise. Which is exactly what happened.

Last month, the median price of a new house climbed to over US$400,000 — a 27% increase from over two years ago.

Even by the Federal Reserve’s own inflation mismeasurement, the ‘PCE deflator’ (Personal Consumption Expenditures) — a measure of inflation based on changes in personal consumption — from October 2020 to October 2021, price hikes averaged over 5%.

This is the highest reading in 31 years…and more than two and a half times the Fed’s own target.

And the PCE deflator for durable goods came in at its highest level in 41 years.

This is very gratifying and reassuring to us. Night still follows day. Gravity still holds everything down to Earth, even in Australia. And the law of supply and demand still works.

Bonner’s law

Not equal to supply and demand or Say’s Law, but still on the books, is Bonner’s law and its corollary.

Bonner’s law says that ‘when the money goes, everything goes’. The corollary tells us that things in the financial world especially get a little funky.

So when the Fed added another US$5 trillion (no point in trying to be precise, we’re talking trillions here), it was bound to set off some weird stuff.

And we’ve we enjoyed laughing at many of the — cryptos, NFTs, meme stocks, SPACs, Cathie Wood, Elon Musk, et al.

And they keep coming!

From the St Louis Fed comes news that US bank deposits are up some 33% since the beginning of the pandemic. That’s a lot more cash in search of something to buy.

Not surprisingly, the Russell 2000, the broadest measure of US stocks, more than doubled in that time.

Since May of this year, Goldman Sachs’ index of money-losing tech companies has gone up 14%.

Another rug pull

And also last week, we learned about yet another ‘rug pull’ in the crypto casino. Here’s Benzinga:

‘Avalanche (CRYPTO: AVAX)-based meme coin Snowdog (CRYPTO: SDOG), themed after Dogecoin (CRYPTO: DOGE), which was meant to last only eight days has ended in a rug pull.

‘What Happened: As per a tweet from the project’s handle, on the eighth day after the launch of the coin, a “massive buyback” was to be orchestrated.

‘The buyback was not successful and a single address rugged over $10 million by swapping SDOG for other cryptocurrencies.’

As near as we can tell, people thought that they would make money by buying a crypto that was yet another spoof…on the gag known as Shiba Inu [SHIB]…on the joke by Jackson Palmer and Billy Markus, known as Dogecoin [DOGE].

The ‘greater fool’ approach is as reliable as any other. It rests upon the assumption that there is always someone dumber than you ready to buy your assets for more than you paid for them.

The creators of the Snowdog [SDOG] token weren’t taking any chances. If there were greater fools out there, they would find them.

So they put out the word that they were going to spend US$40 million buying the coins back in eight days. They called it a ‘game theory experiment’.

Only someone with an IQ substantially lower than his body temperature would believe such a thing. But many did and the Snowdog token rose to be worth more than US$6,000.

The insiders then quickly exchanged their holdings for other cryptos, taking out some US$10 million worth in a matter of hours.

This ‘rug pull’ sent the price of the poor Snowdog down 99%.

This must have come as a shock to the buyers. The cute little puppy didn’t come when they called it. Instead, it pooped on the carpet, bit the hand that fed it, and took off running.

How could it happen, they wondered?

But it is a relief to us. God is in His heaven. The queen is on her throne.

And investors didn’t get what they expected; they got what they deserved.

Regards,

Bill Bonner,
For The Rum Rebellion