The decision by the Hawke-Keating Government to introduce the superannuation system, which allowed the majority of workers to receive income to supplement the age pension, was visionary. It was not however led unilaterally by the Government but rather emerged from an extended process of engagement and consensus building.
Many critical elements of the system were far from ideal. The decision to apply tax at the contributions phase rather than only at the benefit phase was driven by the desire to bring forward revenue collections rather than effective tax design principles.
No overall grand design
Since that time the superannuation system has been subjected to frequent and significant changes such as annual changes to super contribution caps. These changes have not been part of a grand design (more often than not they have been in conflict), but rather were based on short-term budgetary or political circumstances. The frequency of the changes has created uncertainty and undermined confidence in the system.
It is hard to make and sustain good policy if there is confusion about the objectives of that policy. And in the case of the retirement income system, there is an unfortunate lack of clearly articulated goals and objectives that has contributed to a number of fundamental problems:
Poor targeting – whichever way you measure it, the value of super tax concessions favours high-income earners. Equally concerning is the availability of part pension payments, and associated health card in-kind entitlements, to retirees with substantial assets.
High complexity – The superannuation tax and pension systems have evolved largely independently without sufficient consideration given to their interactions. This was less of an issue in the past when the vast majority of retirees were either subject to the pension system or the tax system but not both. With the majority of retirees now being part-rate pensioners, the interactions between the systems takes on an added significance.
Waning community support – Most superannuation members are not highly engaged. This has been linked to low financial literacy and the difficulties of decision making within a highly complex system. Support for the system relies on engagement, certainty and stability all of which are lacking.
Limited sustainability – The cost of assistance to the aged has risen by more than 50% in the past decade outstripping real GDP growth. The cost of superannuation tax expenditures is also large and rising.
Poor longevity risk management – the system provides no incentive for lifetime annuities so that longevity risk is left to individuals to manage with the age pension acting as a minimum guarantee. As people live longer, there is a growing risk that they will exhaust their assets before they die or live overly frugally and (intentionally or unintentionally) leave unused superannuation savings to their estates.
The need for sustainable retirement income
The system has therefore evolved into what can be better characterised as a government-subsidised wealth generation vehicle. What we need is to refocus the system on the provision of sustainable income throughout the years of retirement.
Articulation of goals for the retirement income system which are broadly accepted, including for superannuation as recommended by the Murray Inquiry, would guide future policy development and ensure the coherence of the whole system. It would also help to counteract calls for using superannuation for other purposes – infrastructure, housing, and education - that undermine the system’s ability and stability to fulfill its fundamental purpose.
Australia’s public policy record shows that real reform can only be brought about through broader acceptance of the need for change and agreement on essential features of a reform programme. If we are to leave behind piecemeal changes and move towards a coherent retirement income system, greater agreement is needed among the Australian community on the reform agenda.
Instead, a comprehensive reform would encompass a balanced package, after considering all the following aspects of the retirement incomes system:
- Age of access to the age pension, and how income from part-time work might be assessed in future.
- Means testing, especially the deeming arrangements and whether and how pensioners' homes should be brought to account.
- The adequacy of the age pension and superannuation pensions when the present scheme matures, and the interaction with other elements of the welfare system including health, aged care and rental housing.
- The generosity, efficiency and fairness of the tax concessions for superannuation saving, much of which is compulsory.
- The extent to which it should be a requirement to use superannuation payments to generate a retirement income, and how the longevity risk of living longer than expected can be best handled.
With most people now spending 30 to 40 years in retirement, good policy is too important to leave to the vagaries of political cycles and short-termism.
Patricia Pascuzzo is the Executive Director and Founder of the Committee for Sustainable Retirement Incomes (CSRI). The CSRI is an independent platform bringing together government, industry, media and community leaders to debate retirement income issues and allow the alternative perspectives to be heard. The Committee for Sustainable Retirement Incomes Leadership Forum in Canberra on 2-3 June provides the first step in an informed and purposeful retirement income reform agenda for Australia. See www.csri.org.au.