2015 Federal Budget News Flash

In this post I have a quick look at the Federal 2015 Budget. I am writing this on the Friday prior to the budget, but it seems some of the budget details are available now:

http://www.abc.net.au/news/2015-05-07/budget-government-to-outline-changes-to-age-pension/6450946

How do the changes to the budget affect self funded retirees?

The major changes that have been introduced are changes to the Full Age Pension and Part Pension asset thresholds. After the changes the maximum amount of assets that you can own while still being eligible for the Part pension will be reduced (from $1.15M to $823K for a home-owning couple), and the maximum amount of assets you can own prior to losing the full pension will be increased (from $286.5K to $375K for the same couple). This changes will come into effect during Jan 2017.

Essentially if you are presently on the Part Age Pension and do not have many assets, you will either experience no change or will be better off, while if you are asset rich, you will be worse off (in some cases significantly so).

As usual, I look at how this will effect our circumstances::

• Previously it was estimated we would be eligible for the part pension at 74, but now the estimate is that we will have to wait until we are 80 to be eligible.
• If we spend the same amount that we were planning prior to the changes, we will run out of money just after 88 rather than my 90th birthday. That is, we have lost two years of funding.
• If we adjust our spending so that we run out of funding at 90, then our average spend goes down by about $2000 per year, and
• We can match my pre-budget level of spending if we save an additional $69,500. That is essentially we are about $69K worse off!

The good news is that the full Pension indexing to AWE, which was slated for removal in the 2014 budget, will be retained and the amount of assets you are allowed prior to losing the full pension has been increased. It seems that the 2014 Budget eligibility changes to the Commonwealth Seniors Health Card (and the Seniors Supplement changes?) may be shelved (although this needs confirmation).

The reasoning behind the changes is that the Age Pension is really meant as a safety net rather than as a supplement to savings.

Before 2015 Budget

After 2015 Budget:

Conclusions

• One of the important aspects of planning for your retirement is financial planning. It’s important to most people to understand how much they need to save in order that they have a good chance of attaining a certain level of income.
• While a certain amount of savings may help to obtain a desired income level, there are many risks that may result in a lower income than expected. Significant risk categories include Market Risk, Longevity Risk, and Legislative Risk. For each type of risk, there may be a mitigation strategy which can help to reduce either or both of the probability of the risk occurring and the overall impact of the risk.
• The 2015 Budget change is an example of a legislative risk being realized. If you have recently retired, have a reasonable amount of assets, and don’t have much prospect of returning to work, you are now likely to have less income than planned.
• Of course, legislative risk doesn’t go away after the 2015 budget. There are many other legislative risks. Taxing superannuation returns is just one example, and is proposed by the Australian Labour Party, http://www.alp.org.au/fairer_super_plan. Taxing pension returns is already in place in the UK, and thresholds are quite low. We could see the labour party introduce their proposed policy here, with thresholds creeping down as successive governments seek new sources of  revenue.
• How to mitigate against legislative risk? Well, one possibility is to  to try to reduce your investments in asset classes that the government is likely to further regulate, for example superannuation. Another is to save more than is recommended fully realizing that governments are likely to change the rules during your retirement or while you are saving for your retirement. That is, you could form a buffer against future government intrusions into your savings. Unfortunately this is likely to make you an even bigger target for confiscatory governments. Alternately, rather than working those extra years and then being constantly disappointed as governments take chunks out of your wealth, it might be best to realize that income is a means to an end, that is enjoyment of life. Australia provides a good safety net for pensioners in the Age pension, and this is likely to continue. It might make sense to spend up in your early retirement while you are healthy and active, get the enjoyment from your savings, and then live modestly when you hit old age. It is possible to model this kind of approach and this may be the subject of a subsequent post.