The means test. It's just not that mean Is there a better contender than Australia for the most generous middle-class welfare system in the world? One sacred and immutable law of business journalism is to bear in mind that nobody ever thought they were paid too much. This axiom, this universal truth, extends to perks, lurks and tax breaks, too. To be deprived of something you may not have deserved in the first place still hurts; even the talk of it rankles. This sounds suspiciously like taxpayers subsidising the retirement of rich people in mansions, perhaps helping out with a taxpayer-funded tennis court or two. The sense of entitlement to middle-class welfare is precisely one of these things. Yesterday's story canvassed research from actuary Geoff Dunsford. Dunsford had identified four ways in which middle-class retirees obtained a benefit from taxpayers; a benefit which was proportionately more generous for the executive than the clerk. Amid the avalanche of hip-pocket response which thundered in, Dunsford's findings were hardly challenged in specific terms. Rather, it was this writer's apparent failure to recognise how executives contributed in other ways to society - and the conclusion that Australia may have the most generous middle-class welfare system in the world thanks to superannuation "reforms" - which were the subject of disgruntlement. It was as if we had penned a diatribe begrudging the starving children of Africa a little maize and clean water; not a story about superannuation frills enjoyed by the upper echelons of one of the world's wealthiest nations near the peak of the greatest economic boom in its history. We heard from executives, east to west - we even received lessons on journalistic ethics from financial planners - but where have all the clerks gone? Can somebody write a song about it? Perhaps they have been outsourced to India. There was indignation, too, at the story's "extravagant" lack of balance in citing the case of a self-managed superannuant who picked up an annual cheque in the order of $400,000 from the government thanks to the surfeit of franking credits in his share portfolio. OK you champions of the executive perk, you have us down-cold on this one; hands in the air, surrendered. We used the most sensational example, the richest SMSF, we could find. Sorry, it's in the DNA. Maybe we were wrong to dig up an interesting instance like this. It may have been more "balanced" to dispense with the story altogether and simply publish a spreadsheet from the Australian Tax Office with our smiling mug-shot at the top of it. Though, as one accountant kindly pointed out - and fair enough, too - to get that sort of rebate ($400,000) you would require a portfolio of roughly $20 million, not $10 million as suggested in the story. He went on to say that most of his clients who enjoyed income for their excess franking credits received rebates in the order of $3500 to $35,000, certainly not $400,000. It was an unusual example of wealth, hardly representative of the run of the mill SMSF. Fair enough, once again. However, for the sake of example once again, and girding the loins for the inevitable backlash over lack of balance, let's extend Geoff Dunsford's research to the means test. The point of yesterday's executive versus clerk comparison was to portray the inequity in a retirement system which favoured the wealthier retiree, not just in overall terms but in relative terms. The most critical point of the ensuing example on the means test is to illustrate, again, not that the executive gets too much per se - let's not forget the hallowed doctrine that nobody can ever get too much! - but rather that the executive gets too much in comparison with the clerk -proportionately too much. Geoff Dunsford on the means test: Is middle-class welfare inherent in the means-testing rules? I assumed that the executive above would not receive any age pension. Is that right? Well, believe it or not, the $1,000,000 fund is within the upper assets test limit of $1,032,500 for a couple. And that test ignores the value of the home. Indeed, there is no limit on the value of the home for this purpose. So if one needed to spend some money on the home, using a bit of retirement money has the double benefit of improving both the value of the home and increasing the amount of age pension. How about the income test? Say to maintain a reasonable lifestyle in that first year after retirement the executive might draw down $100,000. Surely that would exceed the income test limit? The retiree is permitted to reduce this type of income for means test purposes by a "deductible amount." This is equal to the retirement benefit used to purchase the pension divided by his expectation of life; that is, $1,000,000/18.54 = $53,937. This allowance is an approximation to recognise that the return of the original $1,000,000 used to purchase super pension income should not be assessed. Thus the assessable income under this test is $100,000 - $53,937 = $46,063. This is well under the maximum for a part pension for a couple of $66,196. So provided the executive's wife had no assets, he could spend a little money on the house, claim that home contents and car weren't worth much, and receive a small part-age pension. Fringe benefits attaching include discounts on pharmaceuticals, and depending on the generosity of the state governments, part rebates for car registration, electricity and rates. Indeed, being well under the maximum income threshold before losing the age pension, he could even earn around $20,000 of director's fees and still receive these benefits! Perhaps that situation appears extreme. But consider a couple with a total of $500,000 in super on retirement. With their home paid off and no children to support, it might be suggested that a total annual drawdown of $50,000 should more than cover basic needs. Even so, under current means test rules, they could still qualify for age pensions totalling around $20,000 (plus fringe benefits). Age pensions cost around $37 billion annually. In the ageing population future the government might need to tighten the means test. Conclusions Just to extrapolate, and invite a backlash for the sake of debate, this sounds suspiciously like taxpayers subsidising the retirement of rich people in mansions, perhaps helping out with a taxpayer-funded tennis court or two. In reality, there may be a few, perhaps not too many, who have structured their affairs as acutely as this. The question is, should it be allowed? Is it fair, is it good policy? And . . . would it actually be possible to be on the pension and put in a backyard tennis court and pool complex? For perspective, it is not this writer's aim to discredit SMSF types and wealthy people as marauding bandits in search of franking credits to exploit the loopholes in the system, at the expense of the taxpayer and the hard-earned savings of the battling becardiganned clerks. Yes, it is more complex than that. The way super is structured throws up myriad options and variables. And yes, it may be that the executive delivers greater value to the economy through hours worked, and a lifetime of being highly taxed. Although, it is also clear from the Dunsford analysis that, in proportionate as well as absolute terms, the executive retiree is on a better deal than the clerk. Assorted governments, in their eagerness to design a super system to eliminate double taxation, have managed to eliminate, in some circumstances, taxation altogether. One question, apart from all the others, remains. Is there a better contender than Australia for the most generous middle-class welfare system in the world (higher income vis-a-vis lower income earners)? We are yet to hear of a viable international challenger.