The proposed 0.5 per cent levy increase was announced in the federal budget on 9 May and will mean people “have less money in their pockets” from 2019 onwards, State Street Global Advisors head of investment solutions group for the Asia-Pacific region, Mark Wills, says.
“This means less economic activity,” Mr Wills told Nestegg.com.au.
He expects the prospect of an increased Medicare levy will affect Australians in the same way many seasonal trends affect broader economic activity.
“Most seasonal patterns are grounded in some type of cash flow. Tax refunds and lodgements, dividend payments, annual bonuses, festivals and weather are all drivers of cash flows. In the short term, people impound these cash flows into their thinking,” Mr Wills said.
He added that the new levy is akin to “an inverted version of cuts to the aged pension”.
“Many planners tell their younger clients that the government wants to phase out the aged pension and this is discussed in the entire edifice of the superannuation system. If people start to think they’re not going to get the pension, if they want to provide for their future [they] will invest more in super.
“The Medicare levy rise does exactly the same thing. I will have less in the future to spend so I will make the adjustment now.”
Mr Wills said this behaviour is not only “totally rational” but practical and even necessary for many Australians given the current low-returning investment environment.
“Our forecasted returns for a multi-asset portfolio have been falling for several years and unfortunately so have realised returns,” he said.
“The income for retirees is now lower and to make their nest egg last, they can either reduce their spending or plan to run out of money.”