The Australian Government’s Retirement Income Review (RIR) is a large, comprehensive document, running to 638 pages and more than 238,000 words, including footnotes, bibliography etc.

Our view is that there is much to like about the whole document and we believe it will serve a useful purpose.

Media commentary to date

Much of the commentary to date has not accurately covered what is and is not in the document. On page 25 of the RIR is a significant sledge: “…the public debate over the retirement income system can be very intense. Many comments and statements (particularly in the media) about the way the system operates and the impact of possible changes can be more assertions than evidence based on considered assessments. Yet, they are often presented as if they were indisputable facts.”

It is certainly true that many observations in the media about the super sector do nothing more than cover commercial interests or other sectional interest.

It is highly unlikely that the RIR will change this because, as the saying goes, never let the truth get in the way of a good story.

History of the review

The idea came from the Productivity Commission’s report on the efficiency and competitiveness of the superannuation system. On pages 619-620, it said: “The Australian Government should also commission an independent public inquiry into the role of compulsory superannuation in national savings and the broader retirement incomes system, and including ahead of any increase in the Superannuation Guarantee rate above current levels. 

“This review should examine the net impact of compulsory super on private and public savings, as well as its distributional impacts across the population and over time. It should also holistically examine the role of superannuation in funding retirement (alongside the Age Pension, private savings, housing and aged care), and its impact on public finances (including tax concessions and Age Pension outlays). Further, the inquiry should examine the economic and distributional impacts of the non-indexed $450 a month contributions threshold. These public policy issues have not been subject to review since they were (partially) considered by The 1993 Fitzgerald Report into National Savings.

The 1993 Fitzgerald Report into National Savings

The published Fitzgerald Report sought to address four main issues:

• the factors affecting household saving over the medium term
• the ability of retirement incomes policy to further contribute to national saving
• the factors affecting the ability of the business sector to generate additional internal funds to help meet its investment needs
• the scope for the Commonwealth and State governments' fiscal strategies to provide an improved level of national saving.

One of the key points made in that report is that, “For households, which provide the bulk of private saving, the centrepiece of government policy to lift saving directly is the Superannuation Guarantee.  The ultimate aims of that policy should be clarified.  (Is one goal to make most Australians independent of the age pension, ultimately requiring total contributions of around 18% of earnings?)  Recognising the tension between achieving the best system and avoiding further change, a number of outstanding issues should be resolved as soon as possible, both to settle the Superannuation Guarantee system and ensure optimal interaction with the age pension over the long transition ahead.” (page xv)

The Fitzgerald Report also said that if retirement income policy, and superannuation in particular, was to add to national savings, then five specific policy options would need to be adopted. Interestingly only one of these suggestions has ever been fully implemented. The remaining policy suggestions have been ignored.

Mercer CFA Global Pension Index released in October 2019 and 2020 found a strong correlation between increases in overall household debt and increases in retirement savings.It will be left to others at some future date to examine if the national savings element remains imperative based on current economic circumstances and to determine if it is still a national imperative.

The Retirement Income Review's purpose

When the Treasurer established the RIR he asked that the panel identify:

•              how the retirement income system supports Australians in retirement
•              the role of each pillar in supporting Australians through retirement
•              distributional impacts across the population and over time
•              the impact of current policy settings on public finances.

The Treasurer specifically asked the Review panel not to make any recommendations.

You could argue that the first dot point above deals with Fitzgerald's plea to have the purpose of the SG clarified.  In another article we will provide some information on how well this might have been done.

But a review of the Fitzgerald Report, as suggested by the Productivity Commission, was not part of the equation.

Nevertheless, Chartered Accountants ANZ in its submission to the RIR suggested that the RIR should examine this issue and determine if it remains a national imperative.

Does superannuation add to national saving?

Fitzgerald in 1993 took the view that national savings would be increased by compulsory super and concluded that this was a worthwhile outcome. In 2007, in a report prepared for the Investment and Financial Services Association, Fitzgerald referred to a 2004 report prepared by two Reserve Bank of Australia researchers that found that compulsory super had added to household savings.

The RIR elected not to examine this issue. It referred to a 2011 report produced by Treasury that estimated national savings had increased and that this increase would grow because of expected superannuation guarantee increases to 12% of employees’ ordinary time earnings. Overall, this assumption presumes that compulsory super reduces other private savings by 30%.

However, the Mercer CFA Global Pension Index released in October 2019 and 2020 found a strong correlation between increases in overall household debt and increases in retirement savings. The October 2019 publication said: “There are likely to be several causes of this strong relationship but the well-known wealth effect is probably a major factor in many economies. That is, consumers feel more financially secure and confident as the wealth of their homes, investment portfolios or accrued pension benefits rise. In short, if your wealth increases, you are more willing to spend and/or enter into debt.”

Conclusion

It would appear that compulsory retirement savings is adding to national savings, which 25 years ago appeared to be an urgent preoccupation of government. That urgency has faded, especially in our post COVID-19 economic environment. It seems the RIR accepted the 2011 Treasury research as still valid (even though that research assumed compulsory super would increase to 12%) and that it was not necessary to re-examine this issue in the timeframe the RIR had to complete its work.

It will be left to others to examine if the national savings element remains imperative based on current economic circumstances and to determine if it is still a national imperative.