More interest rate cuts are coming. That’s virtually guaranteed after Thursday’s speech by Reserve Bank governor Philip Lowe, that has economists tipping the RBA will go two-for-two and cut rates again at its July meeting. In a speech on “The Labour Market and Spare Capacity”, Lowe told his audience that it would be:
… unrealistic to expect that lowering interest rates by one quarter of a percentage point will materially shift the path we look to be on. The most recent data — including the GDP and labour market data — do not suggest we are making any inroads into the economy’s spare capacity. Given this, the possibility of lower interest rates remains on the table. It is not unrealistic to expect a further reduction in the cash rate as the board seeks to wind back spare capacity in the economy and deliver inflation outcomes in line with the medium-term target.
He also urged the government to provide more fiscal stimulus, “including through spending on infrastructure”.
Just take a step back for a minute and reflect on what Lowe is saying: interest rates have been at record lows for years; the federal government has been pumping money into the economy for more than a decade; and the central bank thinks further rate cuts and more fiscal stimulus are still needed.
But there’s one group that disagrees with Lowe, vehemently. With more interest rates will come more complaints from one of Australia’s most lavishly protected groups. In the wake of an election in which the self-interest of wealthy retirees won out over sensible tax policy, retirees are evidently feeling empowered to demand that the economic interests of the rest of Australia be further put aside to serve them. Or, at least, if you read the Financial Review, you’d be left with that impression.
Ever since the Reserve Bank began flagging that interest rates might come down, the AFR has told us over and over and over and over and over again how terrible low interest rates are for retirees. Indeed, this has been a staple of the AFR‘s interest rate coverage over the years — who can forget the AFR‘s dire warning in 2016 that a rate cut would mean retirees would have to slum it in Bali rather go to Europe for a holiday?
Some of the quotes in the latest coverage have been hilarious — although not quite as ridiculous as 7.30 taking seriously a retiree whining about franking credits from the back of his yacht during the election campaign. Martin North — he of the doom’n’gloom property shtick — claimed low interest rates were “creating an existential crisis” and that “savers have been hit over the head with a four-by-two”. A retiree fretted “falling interest rates will force him to cut back on luxuries”. Others complained they’d been forced to go and see financial advisers (actually, that’s fair enough, on reflection).
Liberal MP Tim Wilson, who ran a successful scare campaign against Labor’s efforts to end the franking credits scam, went further and attacked the whole idea of interest rate cuts, warning “with so much of the population depending on interest-bearing deposits for their income, it can actually reduce disposable income for those who can afford it least”. Wilson presumably supports jacking up interest rates as high as possible in order to increase disposable income, given “so much of the population” depends on deposits.
The logical thing for retirees to do, of course, is to abandon term deposits altogether and pile into shares, given the extraordinary tax advantages of franking credits for retirees that Wilson and his mates have widely advertised. No one’s going to take it away from them, ever. But it seems somehow appropriate that retirees and their cheerleaders don’t merely want to preserve the franking credit scam but demand that interest rates be kept up as well.
Fortunately, unlike the government, the Reserve Bank remains focused on the national interest, rather than serving vested interests like wealthy retirees who already benefit from a generous tax system.
I think we can be pretty sure that the retirees genuinely affected by low interest returns on bank savings are not “wealthy retirees” who already have shares and mostly wouldn’t even know (or care about) the interest rate on bank savings. Many are government-funded pensioners trying to supplement a meagre income. And many of them (especially women) are struggling with the rent (no, not every retiree owns their own home)- a contrast with the (increasingly tedious) “rich retiree” theme. To state the bleeding obvious: these are not people likely to contemplate a fling with the share market.
And, bear in mind that the majority of people do not have a mortgage: they either own their home or rent. An article such as this could easily be inverted to focus on how politicians obsess about the minority servicing a mortgage.
Part of the problem is, as was pointed out in the Age this morning, is that the government has an assumed deeming rate for term deposits which is far too high and hasn’t been reduced for three years. Pensioners are assumed to be earning too much from their interest bearing savings, reducing their pensions, so their income is actually decreasing over time.
The government (and the opposition) has been asked to review and adjust the deeming rate at least three monthly, but they’ve refused. It saves the government hundreds of millions of dollars yearly apparently.
It’s not a problem for me. I don’t get a pension, and I never will. The Seniors’ Card is the only perk I get for my senile old fartedness. Plus the tax free superannuation. Actually, I get a lot from the general taxpayer. Thanks.
I smell a CSS super fund recipient!
Pity those duped into swapping to PSS.
Advice from the old hands at the time (1995) was “if the government is trying to persuade you to do something related to money, don’t do it because it won’t be in your interest”.
Where’d you get that photo of those mean hombre’s?
The Grey Nomands 1% WC (Winnebago Club)
They look like 2GB listeners…
Yeah but they probably regard Rat Hately, the Poison Dwarf & the Caterwauling Catamite as pinko crypto types out to steal their hard won.
Same sort of faces that fronted up to the Minerals Council rent a crowd who protested against Labor’s attempt to get some tax out of the largely foreign owned mining companies.
Five star ageism from Bernie and Glen. Wait till you age there yourselves boys – then your tune will change.
Imagine a ‘millionaire’ retiree couple with own home and a cool $1 million of lifetime savings in the Bank.
They probably saw their investments shrink 25% in the GFC and decided that putting their hard earned at the risk of world capital markets and in the hands of ‘spivs’ including the fleas like the big four Banks was a bad idea.
So they put their cool million in a term deposit earning 2.5% or less. That pays them $25000 a year to live on – or less in the future.
Can ‘Bernie and his significant other’ live on $25000 per year and maintain a modest home, car and pay all the bills?
So these ‘rich’ retirees have to start eating their capital. If they want to have a ‘luxury’ lifestyle with a $75000 per year couple spend then they will eat $50000 out of their $1 million capital and it will be gone in 20 years. In fact less than 20 years as their capital will earn less income along the way (without a dramatic rise in interest rates) and they will eat more than $50000 a year out of it.
Without the actuarial tables to be exact – a $50000 a year lifestyle for John and Joan would probably eat their $1 million in about 20 years when they might still be alive for another 5-10 years.
$75K (tax free) is an awful lot when you dont have mortgage, work related expenses etc. Your theoretical couple will be fine drawing down a bit less. Plus rates wont stay this low forever.
Thanks flylindy for a fine example of the wrong thinking around these matters. Just to put it into perspective I’ll retire in the next few years with a good amount.
For a start the old GFC share plunge routine is 10 years old now and as usual shares rebounded after a couple of years. They plunged 20% just before last Christmas and are now at an 11 year high. A good friend got spooked and transferred all his super into fixed interest at that bottom. When shares go up or down you gain or lose only if you sell.
Retirement funds are intended to be drawn down over retirement. We now have a common mentality that you can live on the income and pass the capital to your heirs. That’s fine but not reasonable within the tax protected super system.
And our long term ? Keynes best quote IMO is “ in the long run we’re all dead. “
Well the good old GFC was 10 years ago, and when it hit, Babcock and Brown went with the Lehman Bros into the never never, taking a big chunk of our capital with it.
!0 years is not a long time to re-coup our lost capital as well as move forward towards our retirement.
It may have missed your notice, but, the economy has been moving with the speed and agility of the communist party in Australia, since the GFC.
It also has not gone without notice, that this current government decided in their wisdom to hand the Garrison contract (supply of all medical services to the military), to a foreign owned company, BUPA.
BUPA has been adversely sanctioned by the Aged Care Accreditation Authority for having such things as having a bedridden patient discovered with maggots in a head wound and has now come to a no fault agreement with the Tax Department to pay a minuscule amount rather than none at all.
Whilst the rest of “not profits” are filtered back to the 10 UK peerages, via the British Virgin Islands and the Isle of White.
I diverge, and yet we come back to retirement and ultimately death.
The problem, I find, is that people who have a guaranteed income stream, such as an indexed pension don’t seem to need to worry as much as the rest of us. This coupled with successive governments intent upon destroying the social security safety net, leave many of us wondering whether, in the long run, a cardboard box maybe it for accommodation.
Yes ratty, Income has come to be more important than Capital for us ordinary mortals, Quite an achievement for the Knights of Neo-liberalism.
Really! Any one with a ‘cool’ million lying around can easily make it pay an income of around $65K pa, while increasing the original amount. And that’s without trying too hard. If you had the energy and nous, you could do much better than that.
So don’t keep it to yourself. Where do we find these wondrous returns?
Cocaine futures?
The long term compounded ASX return over the last forty years is around 8% and similar for the S and P 500. I suggest looking at Warren Buffet on Youtube. Apart from that no sensible person offers investment advice on a public forum.
A relative just bought a 2 bedroom unit, a stone’s throw from the beach near Burleigh Heads for $445K, complex includes gardens, BBQ area and pool. Rents in the area are about $6-700/w. Times two and bob’s your uncle.
Then there is maintenance, unless the owner of the Mascot block is a role model.
Speaking about retirement, I wonder when the foolish miners handing out for barnaby and his other mates wake up that the adani and 5 other Carmichael mines, including Clives, open for business they will be fully automated with very few workers who can be imported from India due to agreements signed with Adani and much cheaper to run and will mean the closure of the labour intensive nsw hunter valley and the other old mines in queensland with the loss of around 10,000/14,000 jobs, there will be no benefit to queensland or nsw and devestate most rural towns effected in those areas, voters might understand why Clive was willing to blow $89million in the election, he`ll get that back in a month from his new chinese backed mine so might be time to stop persecuting the retirees that have forgone holidays and luxury items during their working lives to save for their retirement and start concentrating on the real issues but I understand that may be hard for some because judging by some comments intelligence is not a common gift for at least 45% of our increasingly dumbed down and scape goat seeking population.
Errm.., “With more interest rate CUTs will come more complaints…” – TFIFY, in lieu of a subbie.
But, how many times more is this same article going to be run?
BTW, it’s not just the wealthy but those with too much left over from selling the city family home and tree/sea changing – with deeming rates of 3.25% (instead 2.4% of current fixed terms available) just $140K will see the OAP reduced.
Break out the Pomagne!
7.30 did a piece on this the other night and featured a bloke whinging about how he’s finding his capital falling a bit short of providing sufficient income after he retired at 53. I was starting to wonder if it was a promo for Micallef and Mad as Hell
DF some thoughts on your post, nobody can draw their super at 53 and nobody whinged about drawing down their capital, they complained that their income is now below the aged pension levels but because of the compexity of the system its almost ompossible to get government assistance to compensate the difference, but you should remember one thing, if you keep voting for scomo and his crowd then by the time you retire, if you live that long under their trickle down health scheme you might be rifling thru garbage tins and living in the park, nobody thinks they`ll get old, most think pensioners werte born old, but with luck, you may get your turn to suffer. we can only pray you do.
What makes you think I voted LNP?
your comments give you away mate, timmy from altona by any chance.