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Five ways the Retirement Review points to new policies

The Retirement Income Review has delivered far more than expected when it was commissioned. The fact that it does not include any firm recommendations is almost irrelevant. The Henry Tax Review contained 138 recommendations and most of them are still gathering dust. This time, former Treasury official Michael Callaghan's group can expect more policy consequences despite originally being asked only to:

“establish a fact base of the current retirement income system that will improve understanding of its operation and the outcomes”

That sounded like collecting statistics with a rather dry outcome, but it commendably confronts many of the arguments taking place in the superannuation industry. There’s a fine line between some of its statements and a policy recommendation.

For example, it makes arguments such as:

“Changes to superannuation earnings tax concessions would improve equity.”

“Extending earnings tax to the retirement phase could also simplify the system by enabling people to have a single superannuation account for life and would improve the sustainability of the system.”

“The weight of evidence suggests the majority of increases in the SG come at the expense of growth in take-home wages.”

“Replacement rates are the most appropriate metric for assessing whether the retirement income system maintains living standards in retirement.”

“Using superannuation assets more efficiently and accessing equity in the home can significantly boost retirement incomes without the need for additional contributions.”

It provides the Government with a blueprint for policies previously hinted at and subject to strong opposition, placing firmly on the agenda that:

  • Retirees must learn to live off their savings and the equity in their home, not only the earnings on their investments, and
  • Too much of the benefits of superannuation go to wealthier people.

Five highlights from the Review

1. Increases in super result in lower wages growth

Treasurer Josh Frydenberg would have enjoyed the line in the Review saying: “increases in the SG rate result in lower wages growth, and would affect living standards in working life.”

In the Media Conference releasing the Review, Frydenberg looked mightily pleased with the results, saying:

"It points out that people's early access to superannuation during the COVID crisis has been justified in that it sometimes is appropriate for people to access superannuation early and that this hasn't had a significant impact on people's retirement incomes ... I'll quote it (the Report), 'Maintaining the superannuation guarantee rate at 9.5% would allow for higher living standards in working life. Working life income for most people would be around 2% higher in the long run.' So the Report goes into some detail about the trade off between a working life income and people's wages and that with an increase in the superannuation guarantee, it points out that the most effective way for people to secure themselves in retirement is not necessarily an increase in the superannuation guarantee, but by more efficiently using the savings that they do have."

This is a major point of difference between the Liberals and the unions and industry funds, most vocally represented by Greg Combet, Chairman of Industry Super Australia and a former federal Labor minister. The Government now has the ammunition to ditch the legislated increase in the SG from 9.5% to 10% on 1 July 2021, and subsequent increases to 12%, claiming the money is better in workers' hands now. Combet argues that real wages have stagnated at a time when super has not increased. It is highly unlikely that if the SG is not increased by 0.5%, there will be a 0.5% increase in wages instead. Combet wrote in The Sydney Morning Herald of 26 November 2020:

"Analysis of more than 8,000 workplace agreements made following the last freeze in the super guarantee in 2013 found no evidence of compensating wage rises."

The Review finds many people are forced to reduce consumption in their working years, and often end up with more in retirement than they need. There should be a better balance between pre- and post-retirement needs:

“Saving for retirement involves forgoing consumption in working years. With voluntary saving, people decide on this trade-off. When there is compulsory superannuation, the rate should be set at a level that balances pre- and post-retirement living standards for middle-income earners. It is challenging to set a single SG rate that suits all Australians given the variety of people’s circumstances and experiences.

A rate of compulsory superannuation that would result in people having an increase in their living standards in retirement may involve an unacceptable reduction in living standards prior to retirement, particularly for lower-income earners.”

2. Retirees must learn to spend their capital not only live on their income

The Review makes many references to the capital in a superannuation fund financing retirement, not only the income. Superannuation should smooth income over work and retirement, not build a nest egg to leave to the next generation. It says:

“A major misunderstanding is the view that ‘retirement income’ involves the return from investing superannuation balances rather than drawing down those balances to fund living standards in retirement.”

The vital piece of research supporting this opinion is this:

“Data provided by a large superannuation fund found members who died left 90% of the balance they had at retirement. When retirees die, most leave the major­ity of the wealth they had at retirement as a bequest.”

In fact, so strong is the view that super should be run down, it is also used to justify leaving SG at 9.5%. Here, the Review argues if savings were more efficiently used (that is, run down), the 9.5% is sufficient to deliver a 65% to 75% replacement rate (of income prior to retiring) which is entirely adequate.

“More efficient use of savings in retirement can have a bigger impact on improving retirement income than increasing the SG. If the SG remained at 9.5 per cent, and retirement savings were used more efficiently, most people would achieve 65-75 per cent replacement rates. Most would also achieve higher replacement rates than with the SG at 12 per cent and drawing down balances at the legislated minimum rate.”

3. People with large super balances receive too much in tax concessions

In noting 11,000 people have over $5 million in superannuation, the Review states:

“While the age pension helps offset inequities in retirement outcomes, the design of superannuation tax concessions increases inequality in the system. Tax concessions provide greater benefit to people on higher incomes.”

The Review includes this chart which shows people with incomes in the 99th percentile receive more tax concessions both during their working lives and in retirement than any other grouping. The age pension makes up most of the government support for all groups up to the 50th income percentile, and it’s a material contribution even up to the 80th percentile.

Figure 1: Projected lifetime Government support from the retirement income system

Note: Values are in 2019-20 dollars, deflated using the review’s GDP deflator and uses review assumptions (see Appendix 6A. Detailed modelling methods and assumptions). Income percentiles are based on the incomes of individuals (whether they are single or in a couple). Source: Cameo modelling undertaken for the review.

Showing the ongoing role played by the age pension, as at June 2019, 71% of people aged 65 and over received some form of pension payment, and over 60% of these were on the maximum age pension rate.

4. The family home is a vital part of retirement planning

The Review makes the case for accessing home equity:

“One of this report’s themes is that a more optimal retirement income system would involve retirees more effectively drawing on all their assets, including the equity in their home, to fund their standard of living in retirement.”

It has little sympathy for the view that retirees need to preserve the equity in their home to pay for aged care. It describes the following statement as a common misunderstanding: “I need to preserve my assets in case I get sick or need aged care.”

Josh Frydenberg also embraced the finding that home ownership is key to an adequate retirement income. He said:

“Importantly, the Review provides confirmation of the policy direction being pursued by the Morrison Government with respect to the importance of increasing the efficiency of the superannuation system and lifting home ownership rates – both identified as key drivers of an adequate retirement income ... Additionally, given the importance of home ownership to the financial security and wellbeing of Australians in retirement, the Government will continue to support measures to allow more Australians to buy their first home sooner, including through our First Home Loan Deposit Scheme, First Home Super Saver Scheme and HomeBuilder.”

The Review clearly sees people who rent in retirement as vulnerable and the ones the social security system needs to protect. It says:

“The retirement income system does not appear to be delivering an appropriate standard of living for many retiree renters. Owning a home has a positive influence on a person’s standard of living in retirement. Whereas, in retirement, renters have higher levels of financial stress. A significant proportion of retiree households that rent are in income poverty, which is even higher for single retiree renters.”

The consequence of this retirement funding via home equity is profound. Instead of the heavy focus on superannuation in retirement, the family home will increasingly come into play, including how super money can be used to buy a home. As the chart below shows, the poverty rates in retirement are highest for single renters, couple renters and people forced into retirement early who have been unable to build their wealth. Home owners are least likely to live in poverty.

Figure 2: Income poverty rates of retirees

Note: Data relates to 2017-18 financial year. Elevated poverty rate defined as 5 percentage points above retiree average. Retirees are where household reference person is aged 65 and over. There is overlap between some categories, for example, early retired and renter categories. Early retired means aged 55-64 and not in the labour force. Housing costs includes the value of both principal and interest components of mortgage repayments. Source: Analysis of ABS Survey of Income and Housing Confidentialised Unit Record File, 2017-18.

5. The case to means test the family home

While the Review leans heavily towards policy suggestions in many other areas, it dare only hint at that most sacred of cows, the exemption of the family home from social security tests. However, the subject is not ignored:

“A key aspect of the retirement income system favouring home owners is that the principal residence is excluded from the assets test for the age pension. Regardless of the value of the house, a home owner can receive the same age pension as a renter, all other things being equal.

This suggests that wealthier retirees (in terms of the value of their homes), can receive the same Government assistance as those less wealthy (either retirees who rent or home owners with houses of lesser value).”

Renters who hold assets in a form other than their house will receive less in an age pension than a home owner with the same level of wealth. The worry is that a declining trend in home ownership will increase the number of retirees renting in future.

On this sensitive subject, the opinions are of ‘some stakeholders’ rather than the review team, although it's clear that home owners and renters are not treated equally in the retirement income system:

“Some stakeholders suggested that if a retiree’s principal residence was part of the age pension assets test, this would help equate the treatment of home owners and renters. If the home were included in the assets test, some home owners would no longer be eligible for the age pension. Others would receive less age pension. In response, home owners may be more inclined to access the equity in their home to fund their retirement.”

To illustrate how home owners benefit from this system, this chart shows many age pensioners own homes with a value above the pension cut off level (which for a single home owner is $578,250).

Figure 3: Distribution of home values among age pensioners who own their home

Note: Horizontal axis labels indicate home values up to that amount (e.g. $200,000 includes homes over $100,000 up to $200,000). Source: Department of Social Services analysis of payment data, June 2018.

Bringing it all together in an interactive system

The 650-page final report contains a wealth of information that will inform the superannuation debate for years to come. It highlights the major interactions of the welfare and government concession systems, such that certain people benefit from multiple benefits. The figure below is a useful summary bringing together these interactions.

Figure 4: Key retirement income system interactions

The Retirement Income Review goes much further than an innocent-sounding 'fact base'. If we thought the fight over franking credits at the last election was heated, we are likely to see even fiercer battlelines at the next election between unions (and industry funds) and the Coalition Government.


Graham Hand is Managing Editor of Firstlinks. The full Retirement Income Review is linked here. 


December 06, 2020

Home ownership - once the great Australian dream of the middle class to provider shelter and raise a family. That basic ideal has been replaced by more expansive desires that include a recreational venue (in-home gymnasium and cinema), an art gallery, a workplace, a library, a fine dining experience, an online entertainment venue, and to top it off it comes with its own inbuilt credit creation license and enjoys tax-exempt status. And for the next generation of home owners, it seems they will have to rely on it as their means of tax-free superannuation. That can only mean that successive Governments will continue to direct taxpayer funds towards policies that continue to prop up the real estate market in order to deliver on the next Australian dream - a financial secure retirement. Sounds like something that would have interested Charles Ponzi. Is there a Plan B?

Bill W
December 02, 2020

Rather than tax funds as they are placed into super, and then tax earnings on those funds, it may be fairer to make such funds and earnings tax-free, but tax withdrawals from the fund at normal (or a designated) rate. This would ensure that a larger nest egg would accumulate as the fund would not be depleted up front by the input and earnings tax.

As to means testing the family to some extent for pension payments, there may be some merit in such an idea, but it would be difficult politically.

Boyd Craig
November 30, 2020

Thank you, Jim Hennington for your precise references to the review in relation to deferred annuity type products. Much appreciated.

My question of when such products will become available to the public remains. They have been discussed for years in theory but they don't materialise in financial plans. I would like to see an article about this issue in First Links.

November 29, 2020

Touch the family home in any way whatsoever and you are dead meat.

December 03, 2020

Is the wedge already in as the family home is part of the assessment for entering a nursing home and is a consideration as to when a person can receive the pension

November 29, 2020

Quoted: "Data provided by a large superannuation fund found members who died left 90% of the balance they had at retirement. "
This is the numbers game. It leads you to think a large number of super fund members leave 90% of the their retirement assets when they die. Look closer people! It was just "one A large super fund" which found members (? how many) who died left 90% of the balance they had at retirement ( the balance at what stage? what age? did they die young? how much was left?)
This finding did not tell us much really but just wanted to lead us to believe there were a lot of people left a big sum of money in their super when they died.

November 29, 2020

"the numbers game":

+1. What is required is the mean and distribution of super assets (and % of total net worth) at death as % of same at retirement.

Jim Hennington
November 30, 2020

UNSW did a paper on this - using data from Centrelink

See: Asher, A., Meyricke, R., Thorp, S., & Wu, S. (2017). Age pensioner decumulation: Responses to incentives, uncertainty and family need. Australian Journal of Management, 42(4), 583–607

November 29, 2020

No tax on super drawdowns over 60 only benefits those with big incomes and drawdowns. Most people would be better off with the 15% tax offset. Before I turned 60 I paid less tax than I do now on the same income due to the 15% tax offset.

November 27, 2020

If only I knew when I will die, I would willingly run down my capital - maybe the wisdom of Government will help to polish the crystal ball!

Honey Rooke
November 26, 2020

So people that have been encouraged to save for their retirement are now going to be penalized because they have worked hard to have a decent retirement. Hardly fair for the majority of Australians. Whilst politicians have a 15% SG fund. Now you are going to give people 2% extra in there pay? Really? When they are gaining no interest on their savings and many are trying to make up savings through their Superannuation. Superannuation is for the people? Why should government be making decisions on individuals Superannuation.

Boyd Craig
November 26, 2020

When will deferred annuities be introduced to overcome the risk of outliving your money? Such products provide a less onerous solution than lifetime annuities as they don’t lock up so much capital. This is because they only pay out an income when a person reaches their life expectancy. It’s a relatively cheap insurance. Was there any mention of these products in the Review?

Jim Hennington
November 30, 2020

Yes - nearly all the Review's modelling and conclusions were on the basis that retirees put 5% of their super in one of those. See Table 6A-4 (page 502) which sets out the Central case assumptions used.

Table 6A-13 (page 523) goes on to explain that higher retirement income can be achieved (at the cost of reduced capital flexibility) by allocating more super to lifetime income products.

November 26, 2020

Not all self managed retirees are in the superannuation system. They are more likely to see their home as part of the funds available to support them. Furthermore, they are more likely to pay tax as their investments are not inside a sheltered super fund. A largely forgotten group. Until there is a universal pension there will be no equity in retirement income. If the family home becomes part of the pension assets test the ducking and diving will begin so people can keep the pension.

November 29, 2020

"Until there is a universal pension there will be no equity in retirement income.":

+1. Well, Age Pension for all age eligible.

Doable within current Commonwealth assistance for the aged budget at a 25% reduction in the rate with existing Superannuation Guarantee for minimum wage earners filling 'the gap'.

Tom the Tank
November 26, 2020

They will sacrifice the votes of the approx 12 % of age pensioners with houses over $1m.

November 26, 2020

The philosophy outlined, as summarised in your article, is way off the mark. Saving to provide income is a common sense approach irrespective of Superannuation. Its another way of describing financial independence.
Running down our capital in retirement is a recipe to drive us all to poverty, or at least to the pension -- that's not exactly the outcome desired is it?
Leaving an inheritance to children is not "evil" -- its the way the next generation often gets established -- or indeed establishes home equity.
Accessing home equity for retirement assumes a home can be acquired in the 1st place - its often the inheritance that facilitates getting the mortgage down to a reasonable level.
The question of the home asset forming the base for aged care was not answered, just dismissed.
The report, based on this summary, seems to be somewhat inconsistent.

November 27, 2020

When you sell equities you are selling the present value of future dividends. Thats what a share price represents. Its no different from receiving actual dividends. If you understand this, it should change your thinking. Running down capital should be expected when fixed income yields are 0% and div yields 2-3% on average across a diversified portfolio. Note you will pay 0% tax on capital gains. Transaction costs is the only obvious friction but can be minimised. Educate yourself. The system is not there for estate planning.

November 29, 2020

"The question of the home asset forming the base for aged care was not answered, just dismissed.":

The report mentioned retirees concerns about financing age care - it did not factor age care costs into capital requirements.

If retirees spend their capital, financial and housing, during retirement phase, who will pay for dying phase costs?

Makes the report near useless.

November 29, 2020

Crappy nursing home care is available for 85% of the aged pension if you have modest assets. That's not what most want and definitely what most fear. Hence, worry about high quality aged costs is very real. Whether the report is useless depends on whether Government(s) decides to provide unlimited aged care of a comparable quality to the best currently available for everyone at no more than 85% of the aged pension, with a water tight assurance, in return for requiring retirees to "eat their home".

November 26, 2020

I believe that pensions for people over the age of 60 should never have been made tax free with no limit. People with very large balances can be drawing down pensions of hundreds of thousands of dollars a year tax free. The CSS and PSS pensions are taxed after the age of 60 but a 10% tax offset is given which had a much greater impact on people receiving smaller pensions where it is needed and less so on more generous pensions.

November 26, 2020

What is CSS and PSS pensions?

November 26, 2020

CSS and PSS are old Public Service super schemes. The CSS was closed to new members in the early 1990s and superseded by the PSS but it too has closed to new members. They are generous in that they are defined benefits pensions and it was a condition of employment that 5% after tax contributions were deducted from my pay. I began contributing in 1978 at the age of 19. The government was supposed to also contribute but kicked that can down the road then realised they would have all these pensions to pay which hadn't been budgeted for so then set up the Future Fund.

November 29, 2020

" People with very large balances can be drawing down pensions of hundreds of thousands of dollars a year tax free.":

People with very large [bank] balances can be drawing down savings of hundreds of thousands of dollars a year tax free.

The difference is tax on earnings on the balances.

Warren Bird
December 03, 2020

Kate, if you have a large amount in super then it's most likely that you've contributed to the fund from after-tax earnings in the first place. There are limits on contributions from pre-tax earnings.

People who withdraw their after-tax contributions can and always should be able to do that tax-free! People who put money into a bank account aren't taxed when they take it out - why should an investment in super be any different?

Perhaps you're confusing the issue with earnings on investments held within pension accounts being tax free for those over 60. Well that only applies up to $1.6 mn, so your wild claim about 'no limit' is just not true.

For a broader discussion of this issue, see my article here:

December 04, 2020

I based my comment on what I has read regarding the former Chairman of BHP, Don Argus, and his 15 million dollar SMSF. My understanding is that as he over 75 years old age he is required to draw down 6% as a pension which is $900,000 per annum which I assume is tax free.

Peter C
December 05, 2020

Great reply Warren! I am nowhere near retirement but reading this article as with most articles on super makes me worry why I bother about putting money in. Most reviews come up with a conclusion that the “wealthiest” have the most to gain with a tax concession. But that will always be the case with those that pay the most tax! It says nothing about how the money was earnt and the effort and skill in earning more than average. That’s why I’m planning for retirement now so I can cut back to 40 hours a week when the government keeps change the rules.

December 04, 2020

Kate, you are quite right. Costello‘s super “reforms” were criticised at the time for being far too generous and unsustainable and this had been proven right by the $1.6m cap (would have made more sense to undo some of his mistakes, but that is not politically acceptable as it would be admitting to the error). Not only the tax free over 60 rule was wrong, but another was removing the need to convert your super to a pension at age pension age ie being able to leave your money in super indefinitely. This provides many of the estate planning options for the better off, which were mentioned in the report, but nothing was said as to why this became the norm for the better off. The current govt exacerbated this with the $1.6m rule as they made it compulsory to leave the excess in accumulation and therefore not be drawn down. The long term cost of Costello’s reforms were identified at the time and even the fact that the super concessions would exceed the age pension cost was predicted (I can’t remember who wrote the paper but it was an academic).

If you ask me age pension and aged care systems need a total overhaul as they discriminate heavily in favour of home owners (and yes, I am a homeowner). My aunt sold the house she used to live in, and for that reason alone saw her aged care fees more than double as the cash counted as an asset, but the house did not even though it was empty. Likewise all the tinkering with the super system has made it great for the totally self-funded (like me) and full of idiosyncrasies for many others. Not increasing the super contribution rate will not increase wages at all (as shown by past performance) and will increase dependence on the age pension.

November 26, 2020

The original super tax plan (Keating) was simple.

Your super gets taxed at 15% as it goes in, and 15% on the earnings (different rules for undeducted contributions which were returned to you tax free over your lifetime).

When you draw it out, it gets taxed. But because you already had tax deducted at 15%, you got that pre-paid tax back. The 15% on super was only ever meant to be a timing issue, not a permanent tax.


But more importantly equitable. If you had a huge super balance, you had to draw a large amount out each year, and although you got the advantage of the tax free threshold, you still paid some tax (if you withdrew more than a certain amount).

Then Costello changed the rules, he made all withdrawals from super (after 60) tax free. Great headline for the newspapers, no more tax.

But, it withdrew the equity in the system (the rich paid tax when they drew down on their super). Hence, the government put limits on the amount that you can have in super. If you just returned to the Keating tax scheme on super, all would be fair

Jon Kalkman
November 26, 2020

It looks simple but it isn't and it appears that the learned panel members are confused about tax-free super after 60.

You need to distinguish between the tax paid by the super fund and the tax paid by the member when withdrawing money from the fund. A super fund paying a pension (as long as it meets the minimum age-related pension payments in cash) has always been tax-exempt - before Keating and before Costello. But this is the tax the Review is now suggesting be changed after more than 30 years.

John is correct, before Costello, the pension (and lump sum) paid to a member was taxed at normal rates. It was entitled to a rebate of 15% to compensate for tax paid earlier. Combined with normal tax-free thresholds it represented a tax-free withdrawal for people with modest super balances. BUT and it is a big "But" the tax on the withdrawal only applied to the proportion (not the amount) of the fund that represented concessional contributions.

It meant that if you had $5 million in your fund, made up of mainly non-concessional (after-tax) contributions, the taxable (concessional) portion - the bit entitled to the 15% rebate was actually very small. The bit that represented your after-tax contributions was actually tax free to you as it was a return of you own money. So even people with very large super balances paid very little tax on any withdrawals.

As this was collecting very little tax anyway, Costello made it easy for everyone by making all withdrawals from super tax-free after 60. Incidentally, this tax arrangement still applies to anyone who access their super after their preservation but before age 60. More importantly it applies to any death benefit you leave to your adult children. The tax on the proportion of the fund that represents concessional contributions is 15% plus the medicare levy.

I explained this more fully in the franking credit debate here: in June 2018:

Costello did something else. Before 2007 there was no limit on after-tax contributions - that is why we still have some very large funds that just keep growing. He limited those contributions to $180,000 per year. They are now limited to $100,000.

In 2017, Treasurer Morrison limited the amount in tax-free super pension fund to $1.6million per member, thereby forcing most of the after-tax contributions of very large funds into a taxable area, albeit still only 15%. He also caped super balances so that no more after-tax contributions can be received once the super balance reaches $1.6 million.

Large super balances, and the tax concession they earn, are a legacy of a time that pre-date even Costello but overturning the tax arrangements that many of us accepted as a promise when we starting saving for our retirement in super 30 years ago would be a breach of trust.

November 26, 2020

This review demonstrates the complexity facing older Australians. The commentary contains minor inaccuracies when talking about home-owners vs non-home-owners (ie renters) in the Centrelink system. Let's hope the actual review got that right.
It's a pity that in Australia we have far too much political jealousy from the seeming have-nots to the seeming haves. We will never arrive at a simple and equitable solution while this continues. And while the full review may have raised some worthy issues to have conversations around, the entrenched vested interests will always have the last word.
Don't expect any satisfaction any time soon.

November 26, 2020

We can assume nothing will change about the family home, no politician dare even mention it, let along change it. Small targets before elections.

November 28, 2020

Isn't it crazy, in this country you can own a harbourside mansion worth 50,000,000 & technically have access to all the social security benefits !

November 29, 2020

In the country of New Zealand you can own many houses and businesses and have access to NZ Super - all taxable.


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