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Are you caught in the ‘retirement trap’?

Two primary goals of Australia’s retirement savings system are to encourage financial independence and to reduce reliance on the age pension. However, for some retirees, the system works against these goals. For retirees caught in this trap, saving and investing more can actually result in a lower income in retirement.

The ‘Retirement Trap’ anomaly results from the progressive reduction of age pension entitlements as assets and income in retirement increase above certain thresholds. This trap affects retirees with superannuation balances between ~$350,000 and ~$600,000. It creates a bias towards short-term spending or directing resources into exempt assets such as the home, ahead of using assets to generate long-term additional income.

The current retirement system

Australia’s retirement system relies on retirees drawing income from the ‘three pillars’, a combination of superannuation, the age pension and external assets. The pension is means tested, with the level of entitlement calculated using an income test and an assets test. As assets and income levels increase, pension entitlements are phased out. Above certain levels, all pension (and other entitlements) cease.

For an individual, there is an income range between $174 and $2,026 per fortnight where for every additional dollar earned, the pension is reduced by 50 cents. This effectively halves the value of additional earnings for retirees in this range.

On the assets side, for individual homeowners whose assessable assets are above $263,250, the pension is reduced by three dollars a fortnight (or $78 per year) for every additional $1,000 in assets. To offset this reduction, each $1,000, if invested, must generate an annual return above 7.8%.

Our work focuses on ‘retirement age’ using age 67, which will be the age at which Australians are eligible for the age pension in 2023, with savings of between ~$350,000 and ~$600,000. Increasing their savings may result in their income decreasing, and the effect also termed the ‘Pensioner Taper Trap’, has been illustrated and modelled by other researchers, such as National Seniors here and here.

Reductions in income can occur because such savings increases are unlikely to generate enough additional income to offset the pension entitlements that are lost.

The Retirement Trap

To illustrate the Retirement Trap, BetaShares introduced the concept of a pension multiplier. This is a number (greater than or equal to 1) which represents the current or future income stream a retiree can expect relative to the age pension. For example, a pension multiplier of 1.5 means that income of one and a half times the government pension can be expected in retirement. The Simulation of Uncertainty for Pension Analysis (SUPA) model, developed at CSIRO Data61’s RiskLab, is used to calculate the resulting pension multiplier expected from various investment strategies.

The SUPA model is a statistical tool which uses the behaviour of economic factors such as inflation, interest rates and asset returns to generate long-term forecasts. Around 100,000 forecasts for each investment strategy were used to generate the results shown below.

Five different investment strategies, ranging from 30% to 100% allocations to growth assets – Conservative, Moderate, Balanced, Growth and High Growth – were tested. Under all these strategies, the Retirement Trap can be observed in the graph below.

Source: CSIRO

The chart shows that retirees with a superannuation balance of between ~$350,000 and ~$600,00 see their pension multiplier decrease as their superannuation balance increases.

The system therefore implicitly encourages these retirees to spend additional savings or redirect them towards exempt assets like their homes, instead of choosing to invest them to generate income.

If a retiree in this scenario does invest their additional savings, they must generate returns that are well in excess of 7.8% per annum to exceed the pension entitlements that are lost. This is likely to entail a level of risk which is well beyond what is normally recommended for retirees.

The analysis illustrates that Australian retirees currently can escape the Retirement Trap only if they can accumulate well over half a million dollars. Above this point increased savings will lead to increased income.

Retirement Income Review

In September 2019, the Federal Treasurer announced a review into the retirement income system with the following intentions:

“The review will cover the current state of the system and how it will perform in the future as Australians live longer and the population ages.

The review will consider the incentives for people to self-fund their retirement, the fiscal sustainability of the system, the role of the three pillars of the retirement income system, and the level of support provided to different cohorts across time.”

The consultation period for the Government’s Retirement Income Review has just finished.

BetaShares made a submission to the Review Panel outlining the Retirement Trap anomaly, and proposing a new model for the retirement system where the age pension would become universal, with the means and assets tests discarded.

Compulsory superannuation contributions would be streamed into defined benefit schemes (to fund the universal pension) and defined contribution schemes (much the same as those which currently exist). This streaming would be based on age, income, asset balances and other factors. Where a retiree has not fully funded their pension through their defined benefit contributions, the shortfall would be funded by the Government. Within defined contribution schemes, individuals would still have flexibility and choice as to where their contributions are directed and how they are invested.

It would mean Australian retirees can choose to spend or save additional income or assets based on their personal circumstances, without that choice being distorted by the structure of the system.

BetaShares acknowledged that such significant changes to the superannuation system would be controversial, but argued that the proposed model would not only remove the distortions that discourage a certain group of retirees from increasing their financial independence, it would also reduce the financial burden on the Government.

The current structure of Australia’s retirement income system can produce unintended and undesirable outcomes for certain retirees, due to the interaction between the eligibility for pension entitlements and the assets and income tests.


Dr Roger Cohen is the Senior Investment Specialist at leading ETF provider, BetaShares, a sponsor of Firstlinks. This article is general information and does not consider the circumstances of any investor.

The full BetaShares study provided to the retirement Income Review can be found here. For more articles and papers from BetaShares, please click here.


Rudolf Ruyter
February 17, 2020

This discussion is about the financial interests & needs of our retirement section of our society.....
Similar problems apply to many other groups within our we have the poverty side of society where people & kids (for many varied reasons) live below the poverty line and do without life's basics.
There is a very easy solution to ALL these problems.
In my opinion it is the governments 1st & main priority to look after AUSTRALIANS.....
Not as they do now in 1st looking after Australia.
I also agree that to fund our lives we should sell our own personal unnecessary assets.....
Well ...we all have an unnecessary asset to sell which the government already sells for us.....our RESOURCES.
The royalties from these assets should 1st go back to the a weekly income ….from birth to death.
(and probably over 50% of Australians already receive such a handout in various forms of pensions, and benefits)
If from birth we are paid $1000-/year, increasing by $1000-/year to the age of 25 then we do not need any other govt handouts for the rest of our lives.....whether we work, are retired, are unemployed, have disabilities etc etc.
Royalties from resources can easily fund such basic social wages for all matter what their income is.....and leave buckets full for public investments.
If then someone wishes more for better than a very basic life style.....yes get a job.
Furthermore, then a boss will not need to pay wages from poverty & starvation level upwards.
Plus, during gradual implementation over say 20 years, it can take care of much needed wage increases by reducing award wages by 50 cents for every $ of the resources royalty funded basic social wage....which will reduce Australia's payroll costs massively and make us more internationally $$$ competitive....and the 1st $25 K would then be tax exempt....
Then we would NOT need to cut company taxes as I am sure that every employer would gladly vote for reduced payroll instead.
And as one of our prime ministers promised many years Australian child would be living in poverty.
Superannuation would continue to provide boosted income during retirement....and 20% of super should be invested in major money making Australian infrastructure....and the interest we normally pay for borrowing such funds overseas paid to superfunds tax exempt, which, when we spend it some day, will return GST back to the Govt....which current interest going overseas does not......At the current $3 trillion in super, it would provide a massive infrastructure fund, and then who would care how much some of our high flyers put into their super.
The above plan is only a basic of what I would do....lots of fine tuning would be needed....but you get the idea....
IT WOULD SOLVE MANY MANY MANY MANY PROBLEMS.....including proper retirement funding.

February 17, 2020

There are things that people will do when confronted with what appears to be "inequity" in the system.

In a low interest rate environment that looks like continuing for a very long time I wonder that people aren't incentivised to "spend" a large amount of their super/other money as soon as they can, but it fact squirrel it away into a safety deposit box / under the mattress / tin in the garden.

Illegal I know, and takes a degree of forethought and a few years to execute, but I don't doubt that there are people doing it already. An extra $10-15K a year on your pension, if you are otherwise set up well, probably makes all the difference. Funded by disappearing $500K over time. You're not spending so much that it would attract the attention of anyone.

February 16, 2020

To avoid creating a 'Taper Trap' the Taper Rate must be less than or equal to the Deeming Rate (Taper Rate <= Deeming Rate) for all values of assets. Currently the Deeming rate is 3% and the Age Pension for couple is $1,407 per fortnight x 26 = $36,582 annually.

Example 1: Taper rate = 3% pa of assets, deeming rate = 3% pa of assets.
Commencing tapering from $0 assets to $1,219,400 ($36,582 / 3%) assets results in:
- Assets $0: $36,582 [pension] + (3% x $0) [yield]: total income = $36,582 pa.
- Assets $1,219,400: $0 [pension] + (3% x $1,219,400) [yield]: total income = $36,582 pa.
Discretionary drawdown of capital would supply additional expendable cash as required = an incentive to be wealthier.

Example 2: Taper rate to $1,600,000 ($36,582 / $1,600,000) = 2.286375% pa of assets, deeming rate = 3% pa of assets.
Commencing tapering from $0 assets to $1,600,000 assets results in:
- Assets $0: $36,582 [pension] + (3% x $0) [yield]: total income = $36,582 pa
- Assets $1,600,000: $0 [pension] + (3% x $1,600,000) = $48,000 [yield]: total income = $48,000 pa.
Both increased income with increased assets and discretionary drawdown of capital would increase expendable cash = a greater incentive to be wealthier.

An alternative to avoid the Taper Trap, without taper rates, is to not pay the age pension to anyone with assets. Then most would aspire to pre-age pension destitution to be eligible for age pension.

Another alternative is age pension for all age qualified - including those who paid for the age pension.

George K
February 14, 2020

How much would your new model cost?

To buy a lifetime stream of income equal to the maximum single-rate pension at age 66, an initial capital of about 450k is needed. Do I understand correctly that your proposed streaming would leave the majority of retirees (those with super balances below 450k) worse off, being on full age pension (about 23k annually) with no other income from superannuation (since their balance would be used to pay for the pension)?

As for the saving disincentive due to the means testing, yes, theoretically, the existing means testing represents a saving disincentive but for only about 30% of elderly population on part pension. More importantly, in practice many of these part pensioners don't spend their super to qualify for more pension but rather draw it down gradually in retirement.

What our pension system needs is the stability and not these types of radical reform proposals.

Kim Wilkinson
February 13, 2020

What about retirees who have no superannuation, but have investments outside of it. Does the "retirement trap" still occur and it so, is it in the same range of assets?

February 13, 2020

I believe so Kim.
For Centrelink it is no different whether inside or outside super. Super is mainly a tax avoidance strategy when in distribution phase after retirement age which is no longer accumulation. 

February 13, 2020

Agree with most of the info here. One comment though.
If a self funded retiree couple with over I think about $863K in super account and being drawn down. If and once the capital drops below that higher threshold this couple could find themselves returning to centrelink incrementally on a regular basis. Firstly to claim a minimal aged pension and then secondly continuing to return to centrelink on a regular basis to adjust the aged pension as the capital reduces. This is highly undesirable from any point of view. Theoretical but still a possibility; as it assumes super is not generating growth and returns to exceed the draw downs.

Evelyn Hartmann
February 13, 2020

I immigrated to Australia 22 years ago, aged 48, as a widow with 3 children. I am still working in the nursing profession aged almost 70. I have been salary sacrificing at least half of my wages for 20 years in order to accumulate a decent balance in my Super account. I am now falling into this $350000-$600000 bracket (I realize that this is the amount for a couple, and that the bracket is lower for a single homeowner). I have lived a very modest lifestyle to be in this position. I have many friends who retired at 65 with far lower Super balances than mine due to them having had a lavish lifestyle whilst working. Doing the sums, due to the 'retirement trap', they are all better than I will be when I retire. Being a single homeowner, my everyday expences such as home maintainence and utilities, car maintainence etc are not that much less than that of a couple. In hindsight, I wish that I had been less frugal. With the government constantly changing the goalposts it is very difficult to know what to do.

February 13, 2020

I fully agree with the universal pension approach, with stringent criteria of long-term residency to be eligible for it. The current system is full of inequities and unintended gaming. Not to mention the distortions of the main residence exemption from asset testing / CGT, etc. If the intention is to look after and respect our elderly, just give the same to everyone is fairest, rather than pretending to have a needs-based system that in reality is not, and as usual discriminates against the people stuck in the middle (especially if they are not inclined to re-arrange their affairs to extract maximum benefit from the system).

February 13, 2020

Interesting argument and a debate worth having, but I also read this some time ago which presents a different view:


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