A super fund for all Australians that will self fund retirement for future generations
My Big Idea (One of Many) This idea was sent to Joe Hockeys electoral office in 2014. Never heard back on it. MY BIG IDEA Birth to 21 Super Plan I trust and hope you will get to read this via My Big Idea. With the simple narrative below I hope that someone with insight, will see the simplicity of investing for our future generations without any great cost to the nation. This idea, I believe will alleviate the massive pressure of our nation’s ability to pay for the retirement of those in the future and improve our ability to look after those less fortunate. Please peruse and hopefully understand what I am suggesting.
HOW TO FIX THE SUPERANNUATION OF ALL AUSTRALIANS STARTING FROM BIRTH TO RETIREMENT
Background- Current day
We all pay super when we start work and collect when we retire with hopefully enough to live on and the federal government funds those who are less fortunate. All agree this current system is fair and workable unless you are long term unemployed, female or disabled etc. Cost to government and tax payers is considerable/painful in providing these pensions. 90% plus end up receiving government pension support. In short the system fails its own litmus test of providing enough savings to live effectively thru retirement.
Area of Change in Funded Superannuation
My Suggestion. Federal Government funded Birth to Age 16 Super Contribution Fund based on reworking and adjusting the Family Tax benefit system.
1. Retiring Australians retire with an average of $147,000 in their super.
2. 90% of these retirees will require the old age pension to live.
3. The percentage of retirees vs working persons is increasing.
4. Superannuation savings are very uneven and depend on working occupation
5. This is a massive impost on Federal Government Budgets and will get worse.
6. It is possible to change this over the long term to all workforce retirees being fully self funded.
7. Estimated budget cost is 1% of budget to achieve long term goal.
8. Tax revenue from plan grows every year until self funding and then tax positive to Government in the long term.
9. Plan is based on immediate start of retirement planning from birth to age 16.
10. Cost is $650 per child born then CPI’d until age 16. From age 16 to 21 no further payments made as fund now earns more in interest than Government provides individual per annum.
11. Fund is single entity simular to Future Fund. Minimal administration required until year 21 of individual member.
12. Individual child super is transferred to their nominal Super Fund at 21 or once full time work is commenced. It may be much later for uni students etc.
13. Only children who hold Australian citizenship are eligible.
14. Immigrant children become eligible once citizenship is obtained and benefit from date of citizen ship to age 16.
15. Fund when mature at 21 years of full participation has value of at least $100 Billion and will increase each year depending on ROI and investment environment.
16. At 21 years or later individual accounts are transferred to the individual’s super fund or SMSF for remainder of working life.
17. If a child dies the account is transferred within the fund to support other areas of this generation of children. IE disabilities.
18. The individual account can only be accessed by the child from year 21. No exceptions
Some Figures to consider
1 An annual investment of $650 CPI’d at 2.5% over 16 years at a Return on Investment (ROI) of 6% gives a benefit of $30,000 at year 21 to the individual. Total cost to Federal Government $12,500 over 16 years per individual.
2 This benefit when added to Super Contributions over working life at 6% ROI give a final Superfund Figure of $2,675,000 at age 65. ROI is deliberately minimised to 6%. CPI is set at 2.5%
3 This Super Calculation at 8% ROI is $4,750,000 at age 65.
4 This Super Calculation at 10% ROI is $9,343,000 at age 65.
All of these examples if taken as an allocated pension would require no federal assistance for additional pension at the end of working life.
Excel Spread sheet attached to this document with base figures over 21 and 65 years operation. The plan is based on creating an investment environment where compounding returns in the birth to 21 age result in large compounding returns through out the individuals working life. It makes a tremendous difference especially to those who by fact of their birth will have difficulty earning during their working years ie mothers. Winners All women who leave the workforce to have children still gain strong super compounding earnings throughout under this plan. Currently they have insignificant super for retirement. All Children who are part of this plan Federal Government. A plan that reduces markedly the amount of annual budget revenue required for pensions. This figure is not known but assumed to be in the 12% region of the total Federal Budget. Estimated $32 plus billion at today’s figures. Federal Government. Tax revenue base becomes significantly increased with compounding super returns. This figure is not known but the superannuation growth factor is in the multi trillions of dollars mark in the long term. This will provide enormous tax revenues long term. Federal Government. Cost of public service administration falls from inception to the long term with less pensions required and needing administration. Disability. Tax revenue base can make up significant grounds in other areas of budget need ie disability. Losers Family Benefits Tax participants. The majority of Birth to 21 Super Fund is recommended to be taken from this area. Each year this cost at today’s rate is approximately $300,000,000 per year, for 16 years based on 16 cohorts of 300000 children. Worst case is $4.8 billion with mature fund of 16 years operation. This is offset by tax return of around the $1 billion mark at this stage and increases each year until cost parity is reached and then exceeded in the Long Term. General Points The Birth to 21 Super plan is borne from the idea that Australians (generally) assume they will be cared for by the government and have little idea of how to prepare themselves for retirement thru their working lives. (In short they are retirement disasters and fail with long term super planning,).
I think that a compounded return based on $650 per year CPI’d for 16 years will give new generations a massive start in retirement planning to the order of $30,000 to $40,000.00 at the age of 21 (guestimate at 8% interest, $30000.00 at 6%). The main benefit of this I believe is that this super start, compounding over 45 years of working life combined with their super payments during their working life will mean all Australians who are part of this change will not need government support in their retirement years. There will be exceptions to this, there always are. I would expect this system would continue to generate growing tax revenues until death and probably well after. I think this idea has merit for the long term planning and the future prosperity of this nation. The 21 year super start will mean massive compounding throughout the working life of each person/child. It is intelligent forward thinking that will over a period of years become more and more beneficial to the Tax base and budgets of future governments. I surmise that some will perceive it as a form of socialism until they understand it is a compounding play on investment designed to break the Federal cost of funding those requiring future pensions. Forgive me for not presenting a hoard of calculations and charts as if this idea is not immediately apparent to you then no chart or presentation would work either. I have added a simple excel sheet to this letter on basic compounding for 21 years and for a further 44 years of working life. It took me an hour at 3 in the morning and is very basic. I am sure there will be miscalculations and I seriously do not give a rats. You have the experts who can run these calculations and work out the forward estimates far better than I so it is the concept I seek to present. These are very big numbers using basic minimum wage calculations I would think that anyone who understands the benefits of compounding returns will embrace this. (and love it.) Finally it makes possible a government who makes future retirement money grow. I also consider if you work on a 60 to 70 year birth to retirement view it will become very apparent how powerful this compounding retirement idea is and can be. I would assume it will mean a difference of millions of dollars to an individual when retiring, and trillions of dollars to future tax revenue. The numbers I get are nothing short of incredible. As a simple Australian I have given you what I believe to be an exceptional beneficial change to Australia’s future retiree’s (yet born) and a way for this and future governments to steer the responsibility of funding individual retirements back to the individual once they become an adult with little pain to federal funds on the way thru.. You get to care for their future, by the government, helping them start this needed nest egg whilst they are children and letting them grow it with their super when they can understand how much difference it will make to them in later years.
I can think of no area of politics who could argue this is not in the future national interest and it greatly assists those who will never get a good start to be secure in their futures and not be a burden on the nation thru age pensions. I would consider those most benefitted would be our wonderful women whose working lives are so disrupted by life’s endeavours such as raising children. I also understand how tough it is for a single parent to raise a child and who would be horrified at the loss of endowment money to live/subsist on. This area I leave to you. The super start plan will leave money on the table as it matures. How this is used is up to you. My intention is to elevate the idea in the national interest. Carriage of policy I entrust to beaurecrats. They, I am sure will be able to provide the massive numbers that 300000 infant investors will give this country each and every year and the massive payback treasury will gain in taxing the returns these minors will gain thru the whole of their lives. This will continue each year until the 21 year mark is reached. ( This I base on a 15% tax rate where the mature fund would be self- funding for all children who are born after the 21st year of operation. IE the tax generated by the earning of the fund pays for those children yet to be born and join the fund. My assumption only as the zeros start getting huge when working it out. I got well into the billions.) I am also positive that the wizards in all our financial institutions will applaud very loudly when they get a grip on how much extra money their institutions will get to manage in the future when the 21st year is reached and individual funds leave the central fund to individual super funds. I am also amazed that they have never suggested this as a solid long term strategy for the country. My generation got tin Commonwealth Bank saving boxes. I am sure our generation can provide a much better start to those who will be born. Some Additional Notes. I would consider the expenditure of Federal Funds would require some increase to get this plan underway. First ten years at most and this cost will be returned with future tax earnings of the fund. This would also include a reduced continuation of Family Benefits/endowment to those most in need. I also believe that taxes returned on the fund could help assist those most in need and vulnerable, ie Single mothers and those with disabilities. I firmly believe the operation of the fund will become a financial boon to the country in less than ten years. I also believe that if such a fund existed that after 21 years it will be seriously cost positive to federal tax reserves in the billions of dollars whilst still maintaining self-perpetuation of the fund and fully paying for any new entries/children born.
For example 300000 new entries per year(children born) to the fund for 21 years is 6,300,000 members. At an average of approx. $17000 (average of all ages 0 -21 years fund balances as per excel spread sheet) per fund individual this equates to a fund of $107 Billion. At 10% ROI the fund would grow by plus 10 billion less 15% tax. Revenue to Treasury of $1.5 billion. Cost of the next 300000 entrants (New borns year 22) to the fund is approx $300 million. This leaves a lot on the table and it will be there every year and it will also continue with those moving out of the fund to their own super funds which will pay tax on future earnings from the superannuation industry funds. It is understood that there is considerable cost to get this birth to working life super fund off the ground. I estimate after 16 years the government will need to input 4.8 billion to maintain the fund. It is also noted that the return on this government investment in future generations will reward future governments with far greater tax revenues once the fund is fully matured. The calculation on the excel spread sheet are for individuals. I have not worked out married calculations. Everybody is even until age 21. Life intervenes after that. I am neither capable enough nor patient enough to crack an excel spread sheet that can work out this calculation for tax revenue to retirement. It is huge and in the trillions of dollars. I send my most humble apologies in advance to any of your staff tasked with this calculation. It is incredibly difficult to predict accurately. The political ramifications of a plan/vision/policy such as this can be immense. I would guess this would be the first test this plan would face. Your ability to show financial insight, monetary responsibility and long term planning as well as ROI speak for themselves. As an election platform it is unbeatable policy. I will leave it with your spin doctors to work out.
As a plan it has been done before with the current future fund, I just think we the people didn’t look at it hard enough and really plan ahead rather than just solve a coming future problem for public employees super payouts. We should have gone further and fixed the whole car not just the flat tyre. This idea is based on a continuing funding cost index of 1% of the federal budget or $3+ billion when the fund reaches its 16th year. There will be a catch up period of approximately 10 to 15 years before the tax returns equal the funding cost and then exceed it there on. At year 55 onwards the full benefit of the funds takes form when those leaving the workforce do so without the need of assisted or old age pensions. I would hesitate to guess how much this would save the taxpayer but I am guessing its huge.. This is a very long term game plan but it is undeniable that it will succeed and do so within one generational change and that is the children of Gen Z. There is no gamble or risk other than political.
I would also anticipate that 10% of salary as a super contribution would be the acceptable highest level paid once entering the workforce with this fund. Moving contributions to a higher level will erode our commercial capacity to compete internationally in the long term and the compounding of their returns is already at work and equal or more than their first years super contributions when joining the workforce. My thoughts only as a business owner.
In conclusion. Everything starts with an idea, this is mine and was brought to life by discussing the holes in current super and compounding returns with my business partner Nev Sherlock. I am not in a position to promote or action it. I freely give this in with the trust that it will be read, absorbed, investigated and perhaps acted upon. It is a great game plan and nation changer. Even if it never sees the light of day it may lead to something better that will invigorate our nation and let future generations look at us and say we were responsible forebears who have left a wonderful legacy behind. I would also salute Scott Pape, Mike and the exceptionally ethical team at Barefoot Investor and The Blueprint. This idea would never have launched without his continued weekly provocations of my financial thoughts over the last three years that have goaded me to this and other rewarding actions. Finally and apologies for my simplicity, I’ll sign off with a Sam Kekovitch quote” It makes sense.”
Thank you for reading this far. The excel spread sheet figures are very rough but enlightening, you should look at them.