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Don’t expect too much from the Retirement Income Review

Australia has held plenty of official 'reviews' which have included superannuation in recent years, such as the Financial Systems Inquiry, the Productivity Commission reports and the Financial Services Royal Commission. Last week, Treasurer Josh Frydenberg commissioned a more-focussed ‘Retirement Income Review’, but with a relatively unambitious aim to “provide a fact base to inform policy development”. The Terms of Reference do not require any formal recommendations, and it will certainly have nothing like Kenneth Hayne’s interrogation powers.

While the Review is welcome, let’s not expect it to suddenly settle debates the superannuation industry has fought for many years. There are two significant questions:

  1. To what extent can a ‘fact base’ without recommendations push the Government to meaningful action?
  1. How can a ‘Review’ establish a set of definitive facts that everyone will accept as a framework for the future?  

Superannuation and its strong vested interests

Industry funds, retail funds and SMSFs are strong competitors, and they protect their turf in every superannuation debate, supported by peak bodies, consultants, media and a bevy of experts. It is noble aspiration that an independent body will develop a fact base, but the early indications of universal acceptance are not encouraging. There have already been calls for the appointment of Deborah Ralston to the Review panel to be reconsidered due to her lobbying for certain policies in her previous roles.

Disagreements among retirement income experts are a weekly event. In Firstlinks recently, for example, Mercer and Grattan reached opposite conclusions on living standards in retirement. Mercer said, “Grattan’s got it wrong” while Grattan said “Mercer misses the mark”. These arguments will not stop due to the Review’s fact base.

Yet the bar is already raised high on what the Review will achieve. It’s as if some undiscovered silver bullet for retirement income will be revealed by putting three eminent people in a room together for nine months. 

The aspirations for the Review

Writing in The Australian of 28 September 2019, Treasurer Josh Frydenberg identified three reasons for the Review:

  1. To inform Australians about the operation of the retirement system and empower them to make better decisions.
  1. To better understand the impact of a changing landscape, especially demographic shifts.
  1. To ensure the fiscal sustainability of our retirement income system.

Given Deborah Ralston has stood aside from her role as Chair of the SMSF Association, where she was also spokesperson for the Alliance for a Fairer Retirement System, it’s worth knowing the five issues they highlight for the Review:

  • How can the retirement income system ensure incentives are in place to encourage those who can save for an independent retirement to do so and avoid disincentives?
  • What is an adequate level of retirement income commensurate with their pre-retirement standard of living that older Australians should seek to attain?
  • What are the defined objectives of superannuation and the age pension and how should these two pillars work together to ensure intergenerational equity and the sustainability of the retirement income system?
  • How can retirement income policy settings ensure the maximum degree of certainty for those planning for retirement over decades?
  • Where are there gaps or issues that indicate a lack of fairness in terms of either horizontal (between people with similar circumstances) or vertical (between different generations) equity in the existing three-pillar retirement system?

Examples of contentious issues

Superannuation is intensely politicised and subject to regular rule-changing, and its complexity creates opportunities for both sides of an argument to present coherent cases. It’s not hard to find contentious issues that the Review will highlight, even ignoring the elephant in the room of the exclusion of the family home from the pension assets test.  

The best example is whether the already-legislated move in the super guarantee (SG) from the current 9.5% to 12% should go ahead. Parties with a vested interest in the larger size of super assets argue that future age pension costs can be reduced by superannuation funding more people in retirement. They cite the Intergenerational Report which shows that 40 years ago, there were 7.3 people of working age for every person aged over 65, but by 2045, this will fall to 2.7 people. Who will pay the taxes for age pensions, health, education, defence? The superannuation system must push people away from social welfare.

On the other hand, opponents of the SG increase argue super takes money out of the pockets of workers, places future consumption above current needs and is a drag on spending in the economy. They cite evidence that most retirees have a higher standard of living than when they were working without the need to go to 12%.

Another example of a divide is whether superannuation should be voluntary for lower income earners. Or the operation of the pension ‘taper rate’ where retirees have lower incomes when they have more assets, giving incentives that encourage retirees to spend money on their house or holidays to retain or gain access to the age pension.

It’s a major issue since it is estimated that the net present value of the age pension is about $800,000 for a couple currently in their 60s. However, if they own their own home and have $870,000 in other assets in retirement, they are not eligible for the age pension and related benefits.   

The superannuation industry cannot even agree on the definition of a ‘growth’ or ‘defensive’ asset, although these words are used in almost every piece of member correspondence. Some major super funds place assets such as infrastructure or other alternatives in a defensive allocation, which makes their funds seem balanced. Others say these are growth because their value is likely to move with the market, even if they are revalued infrequently.

It makes comparison of fund performance difficult. A fund may be ‘underperforming’ in the short term because it is protecting capital, but the trustees may believe this is in the best long-term interests of its members. The fund is criticised for bottom-quartile performance numbers when equity markets are strong, which may turn around completely in the face of a market fall. The industry is deeply divided on these definitions and the Review should try to resolve.  

It’s not a superannuation review

Some media commentators describe the Terms of Reference as ‘narrow’, but a wide range of issues is on the table due to the Government referencing the interaction of the following three pillars of the retirement income system:

  • a means-tested age pension
  • compulsory superannuation, and
  • voluntary savings, including home ownership.

These guidelines are far wider than superannuation, opening the door for the Government to step back from SG increases and recognise that non-super can also fund a retirement.

The fact that home ownership is specifically mentioned will prompt the Review to consider other ways home ownership affects retirement. Far fewer retirees will own their home in future, or at least enter retirement with a large mortgage, but the assumption of ownership is critical to the adequacy of the age pension with modest superannuation savings.

Market and demographic realities

Nothing in the Review's fact base will alter market and demographic realities, and building or retaining a retirement income is especially tricky at the moment due to:

  1. Investing in secure cash, deposits or bonds produces negative real returns. A portfolio cannot grow without taking risk, and most retirees are more concerned about protecting capital. This risk/return trade off is a major retirement income dilemma. 
  1. Nobody knows how long they will live and their future cash needs, and so Treasurer Frydenberg’s hope that the Review will allow Australians to “better determine how much they will need in retirement and how to make the most of their savings over their retirement” is wishful thinking. There are plenty of planning tools already available which make guesses on a range of variables but no amount of Review work removes the fact that they are guesses.
  1. Future market returns and volatilities are unknown. Investment markets are in unprecedented conditions, with $17 trillion of bonds at negative interest rates, globally uncertain experiments with monetary policies, geopolitical tensions including trade wars, and in the background, climate change and technology making comparisons with history fraught. The assumed returns built into retirement planning forecasts of around 7% are now highly optimistic, especially when defensive portfolios include bonds which could offer little protection as rates rise.

If it is possible to achieve, a common set of accepted facts would allow Australians to better discuss retirement income policies from an informed base. The inclusion of the three pillars should show how changing one parameter will affect others, and we need to better understand the interchange between the superannuation system, aged care, social welfare and home ownership.  

Beyond the simple requirement for 9.5% of salaries to be paid into a fund to finance retirement, the superannuation system has become incredibly complex. I have attended many conferences for SMSF and super experts, and the audience of market professionals is often bamboozled as case studies are presented. More must be done to improve simplicity and certainty.

If there’s one ‘fact’ everyone must accept, it is that the retirement income system should be designed for the best interests of members and clients, not the superannuation industry. 


Graham Hand is Managing Editor of Cuffelinks. This article is general information and does not consider the circumstances of any person. 

August 12, 2021

" It’s as if some undiscovered silver bullet for retirement income will be revealed by putting three eminent people in a room together for nine months"
FIRSTLY : The term "silver bullet" is not a panacea ! It is VERY specific ! It is used to KILL werewolves !
SECONDLY: The term "magic bullet" is what you probably meant to use ......and should have used !
[as in "Paul Ehrlich synthesized a series of specific antimicrobial drugs, the most famous example being arsphenamine (Salvarsan®), the first synthetic agent against syphilis Due to the huge success of this drug, Ehrlich was able to popularize his new concept of a ‘magic bullet' (‘Zauberkugel'), a drug specifically targeting a particular pathogen without affecting normal host cells."] .
THIRDLY :"Where are there gaps or issues that indicate a lack of fairness in terms of either horizontal (between people with similar circumstances) or vertical (between different generations) equity in the existing three-pillar retirement system? [ ENVY , GREED and IGNORANCE perhaps ? ]
“Since this is an era when many people are concerned about 'fairness' and 'social justice,'
what is your 'fair share' of what someone else has worked for?”? Thomas Sowell

Liam Shorte
October 08, 2019

Those earning less than $37,000 have their contributions tax refunded up to $500 so those earning less than $18,200 are not at a tax disadvantage

“Low income super tax offset

From 1 July 2017, the government introduced the low income super tax offset (LISTO) to assist low income earners to save for their retirement.

If you earn an adjusted taxable income up to $37,000 you may be eligible to receive a refund into your superannuation account of the tax paid on your eligible concessional superannuation contributions, up to a cap of $500.”

You don't need to apply for LISTO. If you're eligible and your fund has your tax file number (TFN), we will pay it to your fund account automatically.

Geoff Coates
October 04, 2019

the original thinking of compulsory superannuation was predicated on an aging population, a long history of inadequate savings in Australia and to reduce reliance on age pension. This has not changed. In fact household debt has increased and the outlook for real returns looks to have permanently reduced. The long obsession with property as an investment class (including maximising value of tax free principle residence) continues to add to debt and is aided by tax policies. Superannuation is not tax free. Tax is levied on contributions (except when made from after tax earnings!) , investment earnings and in some cases when funds are accessed. It is critical to continue to provide incentive to forego spending to provide for retirement income

October 03, 2019

An interesting read on retirement and the current government.

Having watched the current batch at work its pretty clear retirees of all manner are and have been targets for the last 6 years. I have to smile when this lot routinely talk about not bringing the family home into the assets test. That indicates they are softening up the public and WILL in time exactly that. Bank on it! They'll call that fair when its a massive assault on any retiree who owns a home and is only making a basic return on their retirement money. As intended!

I love the part where mentioned that this government is looking at the mix. Od course this is where one of the big rorts exists. Those who have rorted the legislation correctly receive a TAX FREE retirement income from their superannuation account. Huh???? I though they received a generous tax cut in the extended time they were accumulating their nest egg?

What the government should do is to count ALL income no matter from what source. It agitates me that some folk can draw an annual super payment and get the full pension. That is wrong.

As fixing the above will not impact the wealthy its clear the government we had to have will eventually fix this as no skin off their noses nor that of their wealthy supporters.

It would be nice of those of us who are NOT A BURDEN on taxpayers when we retire were treated more fairly rather than made targets of. Its a poor way of thinking people for not burdening existing taxpayers when a kick in the teeth is all that one can expect. That's what the current batch offer. Noting has changed in 6 years.

Please try to be a little critical when politicians lie like troupers and run a class war. There are too many politically correct journalists as it is and protecting that which is rotten does none of us any good.

October 03, 2019

The system must be designed to make as many people as possible self funded in retirement. Really, who wants the embarrassment of queuing up at Centrelink and answering all kinds of personal questions if it can be avoided.

October 03, 2019

" Notably, while the Government has already ruled out including the family home in the age pension assets test, there are references to both 'fiscal sustainability' and 'appropriate incentives for self-provision in retirement". "

Disappointing, clearly it's a political sacred cow, but how can one logically rule this out. Obviously it is an inappropriate incentive that discourages retirees to downsize and allows some highly asset rich people to collect the age pension. Surely the equitable approach is to include it in the assets test, at the same time adding to the theshold the median home price in each state's capital city. If one chooses to reside above the median then that is a choice and that incremental amount is a discretionary assets that could alternatively be put towards self-provision in retirement.

October 03, 2019

The politicking around the review already is appalling - as you say, the terms of reference are very narrow, with many things ruled out by Frydenberg. As to point 1 of the market realities, having just had a rate cut, and with near certainty of another one early next year, the "term deposit crowd" will be doing it hard indeed. As they search for yield, they will need to be aware of the risks associated with some of the higher rates on offer. The standard retreat of bank share dividends instead of term deposits have to be looking risky given the various realities post-RC and the continual, unrelenting beating up they get from politicians and media. Boom times ahead for sensible, long-view, long-existing LICs and the like, I suspect.

The "la la la" fingers in the ears, disengaged, "it's too hard!" approach to retirement savings & superannuation evident in a huge percentage of the population, which no amount of engagement effort, public discussion and publicity seems to budge will continue to cruel the retirement lifestyles of those who find themselves in that cohort.

As they say, "those who read the fine print get an education, those who don't get an experience." Not an experience they will enjoy, I suspect.

jeff o
October 04, 2019

the owner occupied home - a hybrid of accommodation and savings - maybe ruled out of the govt's aged pension by the Treasurer but he and others do not seem to understand
1. the Govt's revised pension loan scheme allows pensioners to unlock savings in the home - up to a limit connected to the govt's aged pension!!!
2. rich retirees can unlock such savings via leverage and increase their after tax retirement incomes
3. the bank of mum & dad - provide guarantees to their siblings - effectively backed by the family home et al savings


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