FNCE20003 Lecture 7: Aging Population Trends

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Questions and Answers

What is the projected ratio of working-age individuals to those over 65 by 2031?

2 to 1

5 to 1

3 to 1 (correct)

4 to 1

What percentage of men is expected to reach age 60?

Half

Eight out of ten

Seven out of ten

Nine out of ten (correct)

Which of the following risks is associated with longevity in retirement?

Longevity risk (correct)

Credit risk

Liquidity risk

Taxation risk

What challenge is posed by the reduced working-age population?

Reduced pension contributions Signup and view all the answers

How long is approximately 50% of the population expected to spend in retirement?

25 years Signup and view all the answers

What is the primary purpose of the Superannuation Guarantee Scheme (SGS)?

To ensure every employee contributes to an investment account for retirement Signup and view all the answers

Which of the following best describes Defined Benefit (DB) plans in superannuation?

Benefits are based on an employee's years in the scheme and final average salary Signup and view all the answers

What was the initial contribution rate mandated by the Superannuation Guarantee Scheme (SGS) established in 1992?

3% Signup and view all the answers

What is one key restriction placed on the funds in the investment accounts created by the SGS?

Funds cannot be accessed until genuine retirement Signup and view all the answers

What was the rationale behind introducing the Superannuation Guarantee Scheme according to Dr. Vince FitzGerald's study?

To ensure a stable income for retirees based on demographic trends Signup and view all the answers

What is the tax rate on contributions made to a complying superannuation fund?

15% Signup and view all the answers

Which of the following superannuation funds is taxed at a rate of 45%?

Non-complying super funds Signup and view all the answers

What is the maximum capital gains tax rate applied to earnings within a complying superannuation fund?

10% Signup and view all the answers

Which type of funds can be considered non-complying super funds?

A fund with a breach of SISA not pardoned Signup and view all the answers

What is the primary reason for the favorable tax treatment of complying superannuation funds?

Government incentives to encourage retirement savings Signup and view all the answers

What is one purpose of compulsory savings in relation to intergenerational tax inequity?

To avoid problems arising from intergenerational inequity Signup and view all the answers

How does the national savings scheme impact investment in Australia?

It provides an additional pool of funds for investment Signup and view all the answers

In what ways do super funds contribute to the economy's growth?

Through diverse investments in equities, bonds, property, and infrastructure Signup and view all the answers

What is the main characteristic of Tier 1 RIS provision?

It is a basic pension system, often means-tested Signup and view all the answers

What was a traditional issue in Australia's national savings?

Inadequate savings for desired investment and spending Signup and view all the answers

Which of the following best describes the role of social security in Tier 1 RIS?

It is a means-tested benefit available to qualifying individuals Signup and view all the answers

What demographic issue is addressed by government-sponsored savings schemes?

Managing the financial impact of an aging population Signup and view all the answers

What is the approximate value of the additional pool of compulsory savings provided by superannuation in Australia?

$3.85 trillion Signup and view all the answers

What is the maximum amount of concessional contributions allowed per year for individuals under 65 years old?

$30,000 Signup and view all the answers

Which of the following contributions is considered a non-concessional contribution?

After-tax contributions Signup and view all the answers

Which of the following best describes salary sacrifice contributions?

Pre-tax contributions that are limited to the concessional cap Signup and view all the answers

What condition must be met for individuals aged between 65 and 70 to make concessional contributions?

They must work at least 40 hours in a 30-day period Signup and view all the answers

What is the contributions tax rate applied to salary sacrifice contributions?

15% Signup and view all the answers

What additional contribution can be made if an individual has a gross salary of $90,000 and the compulsory contribution is $10,350?

$19,650 Signup and view all the answers

Which type of contribution is NOT allowed for a spouse aged over 69 years?

Concessional contributions Signup and view all the answers

Which of the following statements about acceptable concessional contributions is incorrect?

Contributions can come from both after-tax and pre-tax sources. Signup and view all the answers

What was the general concessional contributions cap before July 1, 2017?

$30,000 Signup and view all the answers

Study Notes

Population Aging and Longevity

Life expectancy for women is approximately 87.8 years; for 65-year-old men, it's 20.2 years.
Over 35% of women and 21% of men are expected to live to age 90 or older.
The working-age population (20-65 years) providing tax support for individuals over 65 is at its lowest and is expected to decline further.
Current ratio of working-age individuals to those over 65 is 5:1, projected to drop to less than 3:1 by 2031.

Longevity and Retirement Risks

Nine out of ten men are predicted to reach age 60; nine out of ten women to reach age 65.
Around 50% will spend at least 25 years in retirement, impacting financial planning.
Longevity risk: The danger of outliving retirement savings.
Inflation risk: Potential erosion of purchasing power over time due to inflation.

Funding Retirement & Taxation

Relying solely on taxation for retirement pensions could lead to increased tax burdens on working generations, termed as 'intergenerational tax inequity.'
Compulsory savings are suggested as a solution to counter intergenerational inequity.

Economic Necessity of National Savings Schemes

National savings in Australia have historically been insufficient to support required investment and spending.
The Superannuation scheme, with approximately $3.85 trillion in assets, provides an essential source of investment funds.

Investment Impact of Superannuation

Super funds significantly contribute to economic growth by investing in:
- Equities on the Australian Securities Exchange (ASX)
- Government and corporate bonds
- Property development and investment
- Infrastructure projects

Retirement Income Systems (RIS)

Two-tiered RIS structure common in many nations:
- Tier 1: Social security, e.g., Age Pension (means-tested).
- Tier 2: Supplementary private pension schemes supported by government initiatives.

Superannuation Guarantee Scheme (SGS)

Introduced in 1992 based on demographic studies highlighting the need for a coordinated retirement income strategy.
Mandates a fixed percentage (originally 3%) of employee salaries to be contributed to individual retirement accounts.

Retirement Benefits from Superannuation

Defined Benefit (DB) plans consider tenure and salary contributions, calculated as a multiple of 'Final Average Salary.'

Tax Benefits of Complying Super Funds (CSFs)

CSFs receive favorable tax treatment, including:
- Contributions taxed at 15% instead of marginal rates.
- Earnings, dividends, and capital gains taxed at 15% or lower.
- Withdrawals deriving from taxed sources incur zero tax.

Non-Complying Super Funds

Non-complying funds are taxed at 45% regardless of circumstances.
Includes non-resident funds and those breaching superannuation regulations (SISA).

Current Superannuation Landscape

As of March 2024, total superannuation investments stood at $3.85 trillion.
Contributions classified into concessional (pre-tax) and non-concessional (after-tax).

Contribution Guidelines

Concessional contributions can total a maximum of $30,000 annually.
Typical contributions include compulsory Superannuation Guarantee payments and salary sacrifice arrangements.

Salary Sacrifice Advantages

Allows employees to make additional pre-tax contributions, reducing taxable income.
Tax savings are retained within the super fund for future investment growth.

Acceptable Contributions Criteria

Contributions allowed for individuals aged under 65 without restrictions; specific conditions apply for those over 65.
Part-time employment is required to make contributions for ages 65-75.

Limitations on Contributions

Before July 2017, the concessional contributions cap was set at $30,000 per year, with subsequent adjustments to contribution limits.

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Description

This quiz covers key aspects of aging population statistics and the implications for pension systems. It discusses the life expectancy of different age groups and the shrinking tax base supporting retirees. Understanding these trends is crucial for addressing future economic challenges.