A million ain’t a million anymore

A million dollars has always been the great symbol of wealth, at least until now when it comes to retirement savings

Comedy villian Dr Evil, who once threatened to hold the world to ransom for $1 million.

FROM the iconic question ‘who wants to be a millionaire?’ to Eddie McGuire’s Millionaire Hot Seat going head-to-head right now with Simon Reeve and Million Dollar Minute, a million dollars has always been the great symbol of wealth, the faraway target which would deliver a life of leisure and luxury.

Now we are told that it’ll be just enough to buy you a life in retirement on the old age pension.

This adds even greater irony to the always dubious term “the golden years”. Yeah, right, cheap gilded, more like it.

Now true, a million dollars has long since lost its cachet in the residential property market, especially in Melbourne and Sydney.

The seven-figure house price long ago moved out of the Tooraks and Mosmans into middle-class suburbs, and has now made deep beachheads into what used to be solid blue-collar once-were-factory districts.

Factories? What are they, to digress for a moment, younger people are increasingly likely to ask? Do we have any of them in Australia?

But this really is qualitatively different; it turns the whole concept of a “million dollars” on its head.

For rather than an entry point to wealth, as it was all through the 20th century and even into the 21st — at least, still, in popular culture; it becomes instead a marker of at least a threshold to if not quite poverty, certainly a life which is the very opposite of luxury.

Now, a number of points need to be made about the “million dollars buys you the pension” statement from Jeremy Cooper in yesterday’s Australian Financial Review.

It is Cooper, a former top regulator at our corporate cop ASIC, who we have to thank for the simple much more user-friendly structure of “My Super” — one of the great, one of the few, really true “reforms” we have had to the very real benefit of the vast majority of ordinary, financially unsophisticated Australians.

The first thing to be said is that he didn’t quite say that. Cooper was making the point that $1 million would buy a 65-year old couple an income stream of $33,717 — essentially, the old age pension — in today’s low-interest rate environment.

It’s pretty basic maths. You put the $1 million into a bank deposit earning 3 per cent; that gives you $30,000 a year. You take a bit more each year so that ideally when you check out the balance is down to zero.

Later in his piece, he made the point that if the basic long-term interest rate went back to 6 per cent, it would require only $410,000 to buy the (single person’s) old age pension.

But equally what he didn’t point out was that someone putting the million into the bank, might start getting the same amount as the old age pensioner couple, but whereas the pension creeps up — actually, rather gallops — in line with wages every year, “the millionaire” is stuck on the $33,717 all the way to the end.

Now Cooper was making two very important points.

First, we should be very careful about making very long-term assumptions that, for example, $500,000 or even $1 million in a super balance would “guarantee” a comfortable far less a luxurious retirement.

Yes, when interest rates were 6, far less 8-10 per cent; but no when they are 2-3 per cent.

Understanding, as he has pointed out before, super balances in retirement pension mode should be invested heavily into long-term secure fixed interest for safety over return.

This was also unhelpful, he added, as it sends out the wrong signals for savings behaviour — apart from being misleading in terms of the policy debate.

But secondly, that a million dollars is effectively the true cost to the taxpayer of today giving someone (actually, a couple) the old age pension.

Unlike super, we don’t actually set aside the money to fund old age pensions — at least, we can thank former treasurer Peter Costello for trying to do that for public sector super with the money directed from his Budget surpluses into the Future Fund.

To digress for a second time, my proverbial “younger people” are increasingly likely to ask a second question. Budget surpluses, what are they? Do we ever have them in Australia?

Not in my time, as treasurer, Joe Hockey essentially “announced” on the weekend. I’m going to give you just what my predecessor Wayne Swan did: deficits and bracket creep.

Unlike my party political predecessor, Costello, who gave you surpluses and tax cuts, including the return of bracket creep, and then some — albeit, as I’ve noted, in far more benign fiscal times.

But I digress; while we can quibble over the specific numbers in what Cooper was pointing to, his message carried huge implications and challenges to the emerging, chaotic, and potentially both sterile and even destructive “debate” over super and the tax breaks.

The whole point of super should be to get more and more people off the old age pension. Right now it hasn’t, but then it’s only been going for 20 or so years.

But once it’s fully matured, so that someone (everyone?) retiring at 65 — or 70 or maybe, by then 75 — after contributing from the age of, say, 20, would be “rich enough” to be well and truly beyond the pension.

Indeed, ideally, in that post, say, 2050 future, old age pensioners were intended to be the rarity.

But what Cooper’s numbers point to is both how hard that is going to be to achieve. Indeed, it’ll arguably be impossible — most will stay on at least a part-pension.

But also the real cost of each pension is going to rise well into the multi-million-dollar category.

Another digression: the way central banks around the world have forced interest rates down to zero has not simply destabilised current financial relativities and markets, but fundamentally undermined global pension and superannuation systems.

MEMO BILL: ASK DR EVIL

AN INDICATION of what’s at play — and at risk — comes from none other than Opposition Leader Bill Shorten.

Just two years ago when he was the “super” minister in the Gillard government — and agreeing with whatever the PM said, before he jumped ship to the great pretender Kevin Rudd — Shorten set $2 million as the “super rich” benchmark.

He announced that any earnings on super for retirees which topped $100,000 would be taxed. Assuming a “conservative return” of 5 per cent, that would only happen when a balance hit $2 million, he said.

True, at Cooper’s 3 per cent, that figure would blow out to over $3.3 million, making most super balances “safer” from the Shorten super tax — which disappeared with Kevin, and has not so far made a return with Bill.

But it also means even fewer super balances could compete with the pension. It’s that much harder to build up a balance that would take you out of the pension; and why bother if you risked being whacked with extra tax. The key message is the danger in making these grand assumptions about how much is enough? Ask Dr Evil.

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Originally published as A million ain’t a million anymore