Can We Expect Our Nest Egg to be Redistributed?

After the G20 talkfest all the leaders appear to believe they now have purpose and direction. That’s good but is it the right purpose and the right direction?

More to the point if either is wrong will they change it or will they be politically stuck like they are with their bailout plans?

Social Economic theories are fast becoming the mainstream global world view. Capitalism is not dead. It has just been relegated to the back of the bus for now. Governments across the world only talk in terms of helping people, maintaining jobs and redistributing wealth.

Creating wealth and making profits seem to be dirty words right now.

Gone is the right “to seek work” and is replaced with the “right to be given work”. The mental process of people looking for work change from personal dependency to dependency on the state.

Life is a risk and you cannot legislate that risk away just as the bankers could not insure credit derivative risk away.

Well known Human Rights advocate (note – not activist) Geoffery Robertson said in this article in the Sydney Morning Herald,

“As well as the expected rights to be free of slavery, to receive a fair trial and to own property, Robertson has intentionally included a number of more controversial rights, such as the right to work and the right to a pristine and healthy environment.”

Is he for real?

Who is going to buy a house for each person that does not have one?

In my view this should read,

As well as the expected rights to be free of threats, physical force or coercion from any source including governments, to receive a fair trial and to have the right to be able to purchase property if they have the money to pay for it. In addition people should only be guaranteed the right to seek work not be entitled to a job per se.

What Geoffrey Robertson is advocating is full employment (a good thing) but if jobs cannot be found in the private sector obviously governments will create them. This means more taxes. The wages of these people will have to be paid for out of your taxes.

That will put your retirement nest egg in jeopardy.

I read today the Australian government public servants are reviewing the “inequities of the system” (tax).

These include Trusts, Superannuation, negative gearing and fringe benefits tax. Dr Henry is heading up this federal tax review. He said,

The trade-off between efficiency and equity in the system was “one of the most significant choices that society confronts”.

How does it affect Baby Boomers?

The Howard government made the superannuation payout’s tax free for people over 60. One reason for doing this was to get Baby Boomers to put a lot more of their salary into their retirement fund through tax incentives. You were running out of time to do this.

This was designed to try to ensure Baby Boomers would not be a burden on the pension system.

Many Baby Boomers did contribute much more to their superannuation fund over the last two years. Unfortunately many have lost a significant portion of that money with the stock market crash.

The problem is about 70% of retirees don’t have enough money in their superannuation to benefit from the tax-free status above the original tax free threshold.

So it is likely if a tax is imposed the threshold will be lowered or abolished.

There will be a tipping point were depending on how much super you have you might be better spending it as quickly as you can and going on a full pension. At least then you will get free health and medical benefits and many other free government services.

Dr Henry admitted he has changed his belief from basically free market economics to believing that economic inequalities in the system have to be addressed.

Dr Henry is a very smart person and I only mention him here because he works for the government and is charged with a review of the tax transfer system. So it is important to know what he is thinking in order to know if we need to protect our nest egg. Here is one of his statements.

“… the system should enhance the capabilities of people, because for example, capital market failures meant low income earners were unable to borrow to invest in their own human capital, despite the potential high private and social returns.”

I think we need to be very concerned about what he is saying.

I don’t know what he means by “capital market failures”. This happens in a capitalist society.

But haven’t governments around the world enjoyed massive tax takings from the capital market successes over the last few years? Governments capitalised on short term gains through taxes just like investment banker with their bonuses. Everyone else lost out including low income, middle income and baby boomers. That’s why they didn’t bother to investigate why tax revenues were in a bubble. They said nothing.

They could have used some of the billions in taxes to help the low-income earners then and probably no one would have said a thing. We all felt wealthy then. Now when everyone and especially Baby Boomers are scrambling to save their money from further losses, a government review may be looking for ways to tax our superannuation. (Note Costello did refund some of the taxes back to the people though)

There is no mention of public service superannuation or benefits or superannuation for politicians both current and retired in the tax review. I wonder why? Where is their contribution to the redistribution of wealth?

And what about all those people who are and will benefit from the old retirement funds based on “defined benefits”, AMP, QANTAS and others. These people can expect to enjoy fully indexed retirement payments to their dying day with no risk to themselves, even though many of these funds have millions of dollars in losses right now.

We “defined contribution” people have had to contribute to our own retirement fund and put that money at risk for 25 years under government decree to supposedly fund our retirement.

Banks and Fund Managers have got rich risking our retirement nest egg money to make their short term bonuses every quarter for 25 years.

“A broad review of the Australian tax system will start shortly and report progressively from July 2008 – Dec 2009. This review will look at Government and State taxes only. The GST and the tax-free super payments will not be part of this review.”

So it seems that the tax-free status of superannuation is not part of the review right now. I think it is more to do with ACTU and Union bosses who are baby boomers in transition to retirement, than belief in the benefits of no tax on superannuation.

Also there are 5 million baby boomers and if they become a voting block a government can be voted out at the next election. Hmmm! there’s an idea.

Dr Henry’s speech “How much inequity should we allow?” as reported by Peter Finch of the Melbourne Age newspaper is worth reading to understand the thinking and the mood in Canberra. My US subscribers note the US government is of the same mindset. It’s like government people around the world all woke up one morning and decided capitalism is out and redistribution of wealth is in.

The title alone should be of concern but here are some extracts from Dr Henry’s speech,

“But today — when this old workshop we’re in is a centre for high-tech research; and the blue collar jobs it once housed have gone; and many of the people who would have performed those jobs are now long-term unemployed or even on the DSP and perhaps living in public housing estates which offer few chances of improved wellbeing — our answer to inequity also needs to change. In my view, the answer should lie to a large extent in building up people’s capabilities. Investing in people.”

So I interpret that to mean we should be taxed in order to train those blue collar workers to take over the high tech jobs – even if they were not capable of doing it or did not want to do it.

“The tax-transfer system is the principal means of expressing societal choices about equity. The tax-transfer system is a reflection of the kind of society we aspire to be. As far as I’m aware, every major tax review conducted in modern times in any developed country has nominated equity as one of its two or three most important objectives.”

I don’t pay taxes for the money to be transferred to other people who don’t. I pay taxes for the police, the roads, the hospitals, the armed forces, the courts etc.. I expect some of my money to go to help the unemployed and the infirm but not to buy them a house, a job and a pristine environment.

“No one would have an incentive to work or save if the government were to fully redistribute the bounty of individual effort. (He got that right!) This leads to the relatively orthodox view that the degree of income inequity we should allow should be that sufficient to maintain incentives conducive to earning income.”

I interpret this to mean the government will take as much as it can from those that create wealth or work for a living to the point where the people might revolt. Since when was it’s governments roll to decide on the level of income equity or inequity? Wasn’t there a 70 year experiment tried to do just that and failed?

“Redistribution is also consistent with the practical notion that you shouldn’t be able to get out of paying your fair share through concessions or loopholes, including those mostly available to the wealthy. Many have claimed in submissions to the review and at public meetings that aspects of fringe benefits tax, and the use of trusts and negative gearing, can lead to people not paying their fair share.”

Laws are in place for these tax concessions and people legally use them. Tax shelters and avoiding tax are illegal and laws are in place for that.

Dr Henry does make some good points about the inequities in the welfare system that encourage people to stay on welfare or (in Australia) move to a disability pension because it pays higher benefits 😉

But all-in-all we are headed down the road of wealth redistribution in a big way. That means bigger government, and more people on the government payroll and purse through social security and pensions. It all has to be paid for along with up to $220 Billion in anticipated borrowed money over the next few years.

There is no way in my view that the $1.1 Trillion in Australian retirement funds will not be targeted in some way for a tax or through legislation to invest that money under government redirection into government projects. Look forward to your nest egg being redistributed soon.

So expect the government to once again change the rules to suit their own ends. It will be the people that will lose out and Baby Boomers are the most vulnerable since their timeline to earn money is much less.

The real danger for me in all of this is Dr Henry is heading up the tax review and one of his biggest mentors is Amartya Sen. Much of Sen’s work on poverty appears to be based on India where poverty really is an issue along with their caste system. (I need to read more before I say much more on this though – time is a problem here, but facts are more important). He says,

“Some of you would know that I have a deep respect for the writings of Amartya Sen. Sen argues that the true measure of human development is that a person has the ‘capabilities’ necessary to leading the kind of life they value and have reason to value.”

I know a lot of people with capabilities. But many of them don’t capitalise on them. They have to do that themselves, governments can’t make them.

Trying to change the tax system to “invest in people capabilities” to me means just giving them money they haven’t earned so they can go and “find themselves”.

It’s interesting to note that Armatya Sen has admitted, “I have not had any serious non-academic job.” Please go out and get a job in the real world and write another book of your experiences.

It makes good sense basing our Australian economic future on his writings doesn’t it?

2 Responses to “Can We Expect Our Nest Egg to be Redistributed?”

  1. Hearing stories like this makes me crazy. It is a terrible thing to lose your retirement. Especially when it can be avoided so easily. Every investor MUST learn to identify uptrends and downtrends and move to cash when the latter appears. There are a million ways to do it, pick one and stick to it for the rest of your life. I suggest using something based simply on price such as a long term moving average. Just take a look at a chart of the Dow Jones and plot a 200-day moving average. Buy when price is 1% above it, sell when 1% below. Look how you could have avoided getting killed in 2008. Now follow this system for the rest of your life and you are set. You never have to worry again!!

  2. admin says:

    I agree with your sentiment and your advice.

    Even if you don’t invest for yourself using the 200 day moving average to beat your financial planner over the head when they ignore reality is a good thing.
    In retirement its how much you can avoid losing during the bad times that is important.
    I just visited your web site James and I think it is really good with great short posts full of great advice and information. Tips is what it is about and it delivers.

    I recommend my subscribers to take a look at Investing for Life here;

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