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25 April 2024
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In September 2019, Treasurer Josh Frydenberg announced the Retirement Income Review, with a public consultation paper to be released in November 2019 and a final report to the Government by June 2020. One of the three panel members is Dr Deborah Ralston, who in her previous roles, has written several articles for Firstlinks.
As a general guide to what Dr Ralston may be thinking, we republish an article from 2013. At the time, she was Executive Director of the Australian Centre for Financial Studies (ACFS), which published the Pension Index in conjunction with Mercer. We have often republished past articles by leading authors, accepting that their thoughts may have developed further.
ACFS is now the Monash Centre for Financial Studies, which is part of Monash Business School. Coincidentally, the 2019 Melbourne Mercer Global Pension Index has just been released, linked here, ranking Australia third in the world, behind only The Netherlands and Denmark, as we were six years ago.
The release of the latest Melbourne Mercer Global Pension Index earlier this month once again confirmed Australia as having a world class retirement system, coming in third out of 20 countries behind Denmark and The Netherlands.
In the past, employees lucky enough to be in a defined benefit scheme (and the majority weren’t) were guaranteed a retirement pension traditionally linked to their years of service and salary. But with the advent of compulsory superannuation in 1992 and defined contribution schemes, the onus shifted to the individual to be responsible for their retirement income.
What do these retirees seek? The report identifies the ongoing financial needs of retirees as a 'trilemma' which includes:
Quite obviously, this combination of different needs facing individuals over the course of their retirement means there is no ideal solution. Even an indexed annuity will not meet every individual’s varying financial needs during their different stages of retirement.
This is indeed a complex problem and the best solution for any individual will depend on a range of factors including their total wealth, health and likely longevity, required standard of living, access to the age pension, etc. At the same time, the needs of individuals must be balanced with the public interest so that clear incentives are in place to encourage personal responsibility and avoid over-reliance on the public purse.
For the industry, legislators and administrators, how to solve the trilemma will be the issue in the coming years. So what’s required? The industry needs to provide the right products for an income stream – a portfolio of products that meet individual needs. This portfolio should include features such as:
People need to be educated about retirement, in particular the need to focus on consumption and not investment; it is a quite different phase to the accumulation stage. Research shows that people are typically happier in retirement, but in the immediate years preceding it worry about what will happen and, significantly, often fail to plan for it. The onus has to be on superannuation funds to invest more resources in educating their members about retirement – to literally change their mindsets.
For this to happen the government of the day has to articulate the main objectives of the retirement income system (including the role of the pension). It’s an issue that will encompass social, economic and tax policies and will require strong leadership, coupled with an energetic public debate, to ensure we get the policy architecture right.
Ideally, while the issue can’t be ignored, any policy changes regarding post-retirement income for DC funds will involve an inclusive public debate and a gradual introduction to allow those affected to adjust their expectations and make long-term plans.
Australia has an enormous opportunity to build a world-class decumulation system that gives individuals security and flexibility in retirement. But it will not be easy. The media furore and public angst that preceded the Labor Government’s April 5 statement this year when changes to the tax laws governing superannuation were being mooted highlights the political difficulties. But the longer we delay this debate, the harder it will get – politically, socially and economically.
At the time of writing this article in 2013, Professor Deborah Ralston was Executive Director of the Australian Centre for Financial Studies (now Monash Centre for Financial Studies, which is part of Monash Business School). It publishes the Global Pension Index in conjunction with Mercer. Prior to her appointment on the panel for the Retirement Income Review, Dr Ralston was Chair of the SMSF Association.
Just keep the government out of it and the majority of us will be fine!
Australia has an enormous opportunity to build a world-class decumulation system that gives individuals security and flexibility in retirement, but it's different from the accumulation phase.
Depending on personal circumstances, it may be time to rethink the bias to paying down housing debt over wealth accumulation in super. Do the sums and ask these four questions to plan for your future.
Life annuities is a product with theoretical appeal but it does not gather significant market acceptance. These behavioural reasons need to be addressed before substantial increases in sales occur.
The ATO has released all the superannuation rates and thresholds that will apply from 1 July 2024. Here's what’s changing and what’s not, and some key considerations and opportunities in the lead up to 30 June and beyond.
Life has radically shifted with my brain cancer, and I don’t know if it will ever be the same again. After decades of writing and a dozen years with Firstlinks, I still want to contribute, but exactly how and when I do that is unclear.
Australia will have 3.7 million more people in a decade's time, though the growth won't be evenly distributed. Over 85s will see the fastest growth, while the number of younger people will barely rise.
Being rich is having a high-paying job and accumulating fancy houses and cars, while being wealthy is owning assets that provide passive income, as well as freedom and flexibility. Knowing the difference can reframe your life.
Investor disgust, consolidation, de-listings, price discounts, activist investors entering - it’s what typically happens at business cycle troughs, and it’s happening to LICs now. That may present a potential opportunity.
The $3 million super tax will capture retired, and soon to retire, public servants and politicians who are members of defined benefit superannuation schemes. Lobbying efforts for exemptions to the tax are intensifying.
How useful are the retirement savings and spending targets put out by various groups such as ASFA? Not very, and it's reducing the ability of ordinary retirees to fully understand their retirement income options.
The US market has pummelled Australia's over the past 16 years and for good reason: it has some incredible businesses. Australia does too, but if you want to enjoy US-type returns, you need to know where to look.
As long as the banks have no desire to pay up for term deposit funding - which looks likely for a while yet - investors will continue to pay a premium for the higher yielding, but riskier hybrid instrument.
The rise of the Magnificent Seven and their large weighting in US indices has led to debate about concentration risk in markets. Whatever your view, the crowding into these stocks poses several challenges for global investors.
Money can bolster our joy in real ways. However, if we relentlessly chase wealth at the expense of other facets of well-being, history and science both teach us that it will lead to a hollowing out of life.
The copper market is barrelling towards a significant deficit and price surge over the next few decades that investors should not discount when looking at the potential for artificial intelligence and renewable energy.
Global REITs have been out of favour for some time. While office remains a concern, the rest of the sector is in good shape and offers compelling value, with many REITs trading below underlying asset replacement costs.