New academic research has found that the franking credits on dividends boosts consumption in retirement by 5%-6% – the equivalent of a 8%-9% higher balance at retirement.
The paper What Dividend Imputation Means for Retirement Savers was written by three academics at the ANU. “Our results highlight that dividend imputation makes a significant difference to retirement savers, both in terms of how they might structure their portfolios, and the value that it generates.”
The researchers note Labor’s policy of stopping refunding excess franking credits, saying “such a policy change could potentially end, or at least limit, access to imputation credits for Australian retirees”. Though the research does not model Labor’s policy, instead taking a broader view look at franking credits.
They found that franking credits “can justify a significant bias towards Australian equities in retirement portfolios, largely at the expense of world equities”. So portfolios skewed to Australian listed shares “may be rational”.
However, “the finding that imputation credits are valuable to retirees must be pitched against the cost to the public budget and hence taxpayers of providing access to those credits”.
Accounting for the offset from the age pension, they estimate that the “total expected net cost per individual over their retirement phase is about $30,000 for retirees with a $100,000 balance at retirement, and around $80,000 for those with a $500,000 balance (in 2017-8 dollars)”.
But, “while this may seem relatively ‘expensive’, it also offers social benefits”. These benefits include that receiving franking credits either raises consumption in retirement, or reduces the amount that needs to be saved for retirement – boosting pre-retirement consumption.
“Access to imputation credits in retirement therefore helps address the issue of adequacy and reduces the need for a higher superannuation guarantee levy.”
Additionally the resulting bias towards Australian shares could increase the supply, or reduce the cost of, funding for Australian companies.
“Removal of full access to imputation credits in retirement could unwind the benefits mentioned above and would undoubtedly solicit significant political backlash from retirees.”
A Parliamentary inquiry looking into stopping refunding franking credits has been established.