- Uses extensive research to suggest Australia’s retirement income policy is over engineered
- Proposed a radical policy framework
- Criticism made of Grattan’s work has missed the mark
Last week the Grattan Institute released another report into Australia’s retirement income framework that builds on earlier work released over the last 5 years.
The Institute is well known for arguing that the Howard/Costello 2007 superannuation reforms were too generous to higher income earners and needed to be restructured to provide greater assistance to people lower down the income and wealth scales. As we know, the Turnbull Government agreed with this and made many changes to the super regime in 2017.
- Australians are saving enough for retirement – in fact they're probably saving too much
- There are four pillars to the Australian retirement system – compulsory savings, voluntary savings, age pension and family home
- The current cohort of retirees feel financially comfortable and feel less financial stress than those still working
- The ABS Household Expenditure Survey, which Grattan claims in more accurate than the Melbourne Institute' HILDA survey, and other research shows that in retirement we spend less than when we are working and throughout retirement progressively spend less especially when we reach about age 80 and beyond
- Grattan argues that the ASFA retirement income standards, especially the higher 'comfortable' standard, overstate how much income is needed for all retirees and is higher than what most working households spend
- "It seems that expectations of income required in retirement decrease as households get closer to retirement … research on psychology of ageing suggests people change their outlook as they age. Younger people tend to focus on achieving new exciting goals, but as they age the focus less on self-advancement and more on preserving the important things they already have. Many young people do not foresee this changing perspective. This suggests their expectations maybe an unreliable guide to how much income they will need in retirement." (p. 31)
- Most retirees manage to save some of their income throughout retirement and many reach the end of their lives with more assets than they had when they first retired
- Retirement savings should be used for that purpose not to provide a bequest which is currently likely to occur because of the constant saving by retirees
- Retiree renters, especially from the private sector, are at a real disadvantage and deserve further assistance
- The market value of the principal place of residence – above a certain threshold – should be included in the age pension and veteran affairs assets test; Grattan has proposed a threshold value of $500,000 given, they argue, that half of the government's age pension outlays are given to people with more than $500,000 in assets
- Alternatively more of the family home could be included in the assets test for aged care assistance
- Access to super monies and the aged pension should be restricted to those aged at least 70 with appropriate concessions for those who are unable to work to that age because of infirmity
- Index the age and veteran's pensions by consumer inflation not wages given retiree spending typically falls by about 15% between age 70 and 90. In addition, retiree spending does not increase in line with community living standards
- The superannuation pension minimum income amounts should be increased to ensure that retirees run out of money at their average life expectancy
- Do not increase the SG contribution rate from 9.5% to 12% - it reduces pre-retirement living standards and is not necessary to give retirees the lifestyle that most assume in retirement. A better solution would be ensuring super product fees are as low as possible and trustees are investing member money efficiently and effectively
- Super contribution thresholds should be drastically wound back given that most higher income earners will save anyway
Analysis of Grattan Research released to date
Clearly this is radical series of proposals and it hasn’t taken long for various interest groups to speak against them.
Arguably many of the criticisms of the latest Grattan research is underwhelming with some of it not addressing the fundamental issues raised.
Some failures in the Grattan research
It would seem the Grattan research seeks to make the case for radical change while failing to make any allowance for the ability for the political difficulties in implementing changes.
For example, earlier this year we published research that shows Australians and New Zealanders of all ages, genders, occupations, wealth and income levels were highly resistant to including any portion of the family home in age pension or NZ Super benefit assessments.
In fact overall there was a great deal of resistance to any further tinkering to our retirement income system which means Grattan’s policy prescriptions are useful but unlikely to be implemented. This does not mean however that political parties will not use some of Grattan’s policy ideas to justify making some unpleasant policy changes.
In addition compulsory superannuation is technically deferred salary and wages (not that many employees agree with this) and therefore it is reasonable that super assets could be used for a bequest.
Some people in the community have deliberately sought to be independent of the government in retirement.
The implication of the Grattan research is that these people are wasting their time trying the achieve this.
It is hard to agree with the proposition that assets set aside to provide retirement income should be deliberately run down given the volatility in nearly all asset price markets.
Further, the purpose behind the super tax concessions has always been compensation for the long term nature of the investment.
Finally Grattan does not seem acknowledge that many of its policy ideas noted above penalises those who save throughout their working lives while benefiting those who did not exercise this discipline.
Resistance to change – the conundrum of our ageing population
This future[inc] paper by Chartered Accountants Australia and New Zealand addresses the issue of population ageing in Australia and New Zealand.Read more