Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 111

The need for retirement income reform

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.

RELATED ARTICLES

It’s time to do things differently in retirement policy

Minister Jane Hume on SMSFs and superannuation reform

Principles and rules to guide retirement strategies

banner

Most viewed in recent weeks

Unexpected results in our retirement income survey

Who knew? With some surprise results, the Government is on unexpected firm ground in asking people to draw on all their assets in retirement, although the comments show what feisty and informed readers we have.

Three all-time best tables for every adviser and investor

It's a remarkable statistic. In any year since 1875, if you had invested in the Australian stock index, turned away and come back eight years later, your average return would be 120% with no negative periods.

The looming excess of housing and why prices will fall

Never stand between Australian households and an uncapped government programme with $3 billion in ‘free money’ to build or renovate their homes. But excess supply is coming with an absence of net migration.

Five stocks that have worked well in our portfolios

Picking macro trends is difficult. What may seem logical and compelling one minute may completely change a few months later. There are better rewards from focussing on identifying the best companies at good prices.

Six COVID opportunist stocks prospering in adversity

Some high-quality companies have emerged even stronger since the onset of COVID and are well placed for outperformance. We call these the ‘COVID Opportunists’ as they are now dominating their specific sectors.

Let's make this clear again ... franking credits are fair

Critics of franking credits are missing the main point. The taxable income of shareholders/taxpayers must also include the company tax previously paid to the ATO before the dividend was distributed. It is fair.

Latest Updates

Retirement

10 reasons wealthy homeowners shouldn't receive welfare

The RBA Governor says rising house prices are due to "the design of our taxation and social security systems". The OECD says "the prolonged boom in house prices has inflated the wealth of many pensioners without impacting their pension eligibility." What's your view?

Interviews

Sean Fenton on marching to your own investment tune

Is it more difficult to find stocks to short in a rising market? What impact has central bank dominance had over stock selection? How do you combine income and growth in a portfolio? Where are the opportunities?

Compliance

D’oh! DDO rules turn some funds into a punching bag

The Design and Distribution Obligations (DDO) come into effect in two weeks. They will change the way banks promote products, force some small funds to close to new members and push issues into the listed space.

Shares

Dividends, disruption and star performers in FY21 wrap

Company results in FY21 were generally good with some standout results from those thriving in tough conditions. We highlight the companies that delivered some of the best results and our future  expectations.

Fixed interest

Coles no longer happy with the status quo

It used to be Down, Down for prices but the new status quo is Down Down for emissions. Until now, the realm of ESG has been mainly fund managers as 'responsible investors', but companies are now pushing credentials.

Investment strategies

Seven factors driving growth in Managed Accounts

As Managed Accounts surge through $100 billion for the first time, the line between retail, wholesale and institutional capabilities and portfolios continues to blur. Lower costs help with best interest duties.

Retirement

Reader Survey: home values in age pension asset test

Read our article on the family home in the age pension test, with the RBA Governor putting the onus on social security to address house prices and the OECD calling out wealthy pensioners. What is your view?

Sponsors

Alliances

© 2021 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.