Grandfathering Explained

There have been quite a few people who have tuned in to THIS thread at Whirlpool Forums and in a way THAT starts to prove Murray wrong, ie even though 84% of people are not confident in Retirement matters, at least they are TRYING.

So while I created a "fishing trip" to prove to myself that the Abbott govt would jump in with the same damage control methods as Abbott's mentor Howard, there are obviously some people out there that genuinely want to follow the issues here but are not able to interpret the graphs I supplied at my blog.

Of course as soon as it looked like some people were understanding what the govt DID with Grandfathering the thread was LOCKED, so for those that simply want to understand the numbers, please read on.

So I (we) will explain in words and numbers via a typical example, and I welcome any constructive input from those that "were sent" to ridicule me.  However let me explain that when I say I have done an analysis over 20 years, it is actually 21 as it goes from 65 to 85 inclusive, and by coincidence that is the exact same female life expectancy figure used by the Govt in the scenario we call "Grandfathered".

We use a single female (we call Agnes) with $400,000 in Super at 65 to align with the Murray Report example.  We add another $25,000 for car and contents and use a conservative 8% growth rate as well as a 3% "CPI Increase" as normally recommended "to keep up with inflation".

We then do two scenarios

Scenario 1.  Agnes applies for an Age Pension in Dec 2014

Scenario 2.  Agnes applies for an Age Pension in Jan 2015

Then we assume she gets advice from a financial planner (George) who is totally competent and can work with complex mathematics, AND is NON aligned to the Super Fund Agnes uses.

I will then start from the end result and work back to explain the result.

The result is Agnes loses $127,026 if she comes under Scenario 1.

The maths starts by explaining that the formula used in Scenario 1 takes the $400,000 Super, converted to an Account Based Pension and divides it by the Life Expectancy of Agnes which is 21.62, giving her an Income Test Free Amount (ITFA) of $18,501 pa.  In my submission this equation can have no other purpose by the govt than to spread the Super evenly over Agnes's expected life.

So Agnes asks George (in Dec 2014) to tell her just how much she needs to Drawdown in order to do that exact same thing, ie use up her Super in 20 years.  George tells her it is $31,624, escalating at 3% pa for her nominated CPI Increase.

He then explains that because her Drawdown is some $13,000 above the ITFA the Maximum Age Pension of $21,988 pa is reduced to $17,514, but he further explains that her Assets eclipse that and reduce the Age Pension to $13,263 which gives Agnes 60.3% of the Maximum Age Pension for Year #1.

George then explains that if she waits till Jan 2015 for her application the Asset Test will be the same $13,988.  He then explains that the Income Test will be totally different as the life expectancy formula will be replaced by Deeming, and that in any case the result of $17,435 is still well short of the Asset Test, "so no difference Agnes, apply when you like".

But as good as George is in his job he still only looks at one year at a time, so is unaware of how the maths works out as the years go by.  But we have the LOPS, a Cloud App that looks at the WHOLE picture and identifies the $127,026 loss to Agnes if she applies before 1 Jan 2015 (which she did).

Let's look at just one example to show why this happens ie at age 80.  The capital amount has reduced now to $217,219 so the Asset Test says $20,412 pa, ie about 93% of the Maximum Age Pension.  However the Drawdown is $49,269 pa so is more than double the ITFA, and the result is the Age Pension amount is just $8,691, ie less than 40% of the Maximum Age Pension.

The overall result over the 20 years is 49.63% of the Maximum.

If we then look at age 80 for Scenario 2, the Asset Test is of course the same at $20,412 BUT the Income Test is now at $20,633, almost the same, so Agnes is getting 93% at age 80 instead of 39%.

The 20 year result is now 77.15% of the Maximum Age Pension, ie $127,026 MORE over the 20 years.

This post does not attempt to determine if this is a deception or merely a mistake by those that drafted the Scenario 1 legislation.  The facts are that that legislation was REPEALED and there can surely be little argument about that, even though the Explanatory Memorandum did not EXPLAIN why as it is meant to do.

But the decision to allow the repealed legislation to "linger" via what is termed "Grandfathering" raises the most extreme questioning of the government's motives, and the fiddling with the Acts Interpretation Act (1901), the "Sister Act" to The Constitution, at the same time simply makes matters worse in my submission.

So, as I have already asked the government, please (anyone) show me that there are faults (of significance) in my maths above or show me an example where Grandfathering is beneficial to the Pensioner.  So far there has just been deadly silence.

That silence also extends to my estimate of the overall damage to the government of $10 Billion pa which I calculated on the conservative side.

But deception or mistake aside, the Sword of Damocles hanging over the government is that the $10 Billion pa can be restored to the Pensioners simply by knowing the facts and voting with their feet to "Throw Grandfather Overboard" to use the popular expression.  That is to say there is no need to mount an expensive Mabo type High Court challenge, as the solution is "built in" to the legislation simply by the Pensioner electing to "sweep" their existing Account Based Pension and starting a new one, free from Grandfathering.

Maybe it is the Georges of the system that need to explain this to their clients, now that they know the problem.

EDIT  It would be recalcitrant of me not to also do the maths for Robin as a Male, by changing Gender to M, we see that a Male would get an extra $106,550 over 20 years by switching to Non-Grandfathered, ie Grandfathering deprives a Female of $20,526 MORE than a Male, simply because the Sisterhood lives longer than the Brotherhood.

So once again it is easy to see WHY the govt was forced to REPEAL that formula, ie based on gender equity alone, and I don't think anyone could have any qualms about that 45 years after we were required to embrace Gender Equality.  The only issue is why allow repealed legislation to "linger"?