We all aspire to be healthy, wealthy and wise. Each generation is living longer than the last and being a tad wealthier is likely to lead to a healthier and longer life than the average. Meanwhile, low interest rates are likely to be with us for much longer than people might have thought, so we need to decide how best to manage through these years.
Younger people will need to be careful with how much debt they can safely digest as inflation won’t pay it off for them the way it did for baby-boomers. It’s problematic in the current housing climate of rising unaffordability. Retirees must ensure careful stewardship of their savings, so their money can outlast them over the extra years they may enjoy.
Governments will need to thoughtfully lift tax revenue yet encourage constructive behaviour in a low growth world that’s struggling under a growing population burden. As we utilise more robotics, people will toil more on socially harmonious endeavours than simply economic ones. We can also expect a steady shift from fossil fuels to renewables. Coal will feel the pinch first, then oil and gas as solar, battery and other technologies come to the fore.
In a slow growth world, index investing may be unrewarding if whole markets track sideways more than up. Picking trends and successful themes should be more rewarding because in a flat market, some stocks will fall and others rise – so careful selection is required.
Actuarial firm, Accurium reported last week that its research of 65,000 SMSFs showed that SMSF Trustees are healthier, wealthier, and living longer than the national average. Of course, a healthier lifestyle does seem more likely for those in wealthier circumstances. The Accurium research showed SMSF Trustee life expectancy for a 65-year-old woman is 91.8 years (2.7 years above average), while a male SMSF Trustee should to live to 90.2 years, (3.5 years more). However, extended life-expectancy means those trustees must invest prudently so they can support a long retirement.
Low interest rates seem to be here to stay for much longer than many expected. But it’s less certain how this will affect long term bond rates that depend on inflationary expectations. Perhaps Australia may follow the US and EU experience with monetary policy having little effect because zero is viewed as the realistic low point for central banks to cut interest rates.
However, Sweden now has rates at -0.25%, so its Central Bank charges Swedish banks for any money they leave invested at the Central Bank – the message being… loan it out to customers and grow the economy! Negative interest rates are becoming more common in European bond markets – paving new ground in economic management. Some banks offer negative yield loans, though bank charges still create an overall borrowing cost.
Why would anyone buy a bond with a negative yield, which is what might occur if they hold such a bond to maturity? They might do this if they believe a deflationary spiral lies ahead, to minimise their losses. Just as high inflation creates high bond yields, deflation pushes yields down and below zero if needed. But another deflationary option is cash and quality companies that can generate profit in most scenarios.
That said, the US has managed its sustained low rates and money printing policy (QE/Easy Money) to stimulate its economy and muddle through the post GFC so far. Their next step is to cope with interest rates rising again, which we may possibly see this September.
Tax changes in Super?
Despite the recent tax discussion paper about the inequality of current superannuation tax concessions, the May 12th Federal Budget won’t change current tax rules about super. Tony Abbott told the Australian Chamber of Commerce and Industry last week the Coalition will stick to its pre-election commitment not to make any adverse superannuation changes during this electoral term.
Even so, beyond this term we expect some change because Government revenues need to be improved if the electorate (via the Senate) does not accept reduced social amenity. Bill Shorten’s Labor opposition is applying some political pressure with their proposal to tax earnings above $75,000 p.a. in the pension phase at 15% (income below $75,000 p.a. would still be tax free). They also want to lower the $300,000 income threshold at which people pay 30% contributions tax instead of the normal 15%, down to a $250,000 threshold.
Though this would be difficult for super funds to administer, we expect some change in this direction in the next Federal election term from 2017. The thresholds will need to be indexed and more thought should be given to making its administration simpler. In any event, such change will draw more tax from higher income accumulators and wealthier superannuants. One consequence of such a shift in tax policy may be to trigger the taking of accumulated capital profits within super funds before the 2017 election.
The overarching need is for tax policy that encourages wealth creating behaviour within our nation whilst ensuring sensible social support in a manner that encourages responsibility.