Date posted: 5/11/2019 6 min read

The retirement income debate begins

First shots fired in long debate

In brief

  • Review into retirement income is underway and will release a discussion paper in November 2019
  • We can expect the review to look at future SG contribution rates
  • Will the family home above a particular threshold be included in the age pension asset tests?

The Australian Treasurer, Josh Frydenberg, announced a review of the retirement income system last September and we are expecting a discussion paper to be released sometime in November 2019.

The purpose of the review is not to make recommendations but rather to establish the role of each retirement income pillar (namely, the aged pension, compulsory super and voluntary savings).

The review had been suggested to the government by the Productivity Commission (PC) after it reviewed the efficiency and competitiveness of the superannuation industry. The PC considers the government should review the need for further compulsory employer super increases before the next Super Guarantee increase, due in July 2021.

A primary argument in the early 1990s for creating the SG was that national savings were insufficient and compulsory employer super would help to address this problem. We do not know how well it has worked.

While the total superannuation savings pool is large, we would be wrong to therefore conclude that this means it is an unmitigated success in that it has increased national savings.

Compulsory super was also meant to address concerns about population ageing, with people living longer, the number of retirees rising rapidly compared with those in the workforce, and an increasing number of workers seeking to retire as early as possible.

Has our population aged according to expectations and how have expectations for our future demographics changed over the past 25 years? Are older workers still moving into early retirement?

And we should investigate how much retirees actually spend in retirement. This data will be useful in determining the most suitable replacement rate, which then feeds into how much retirement savings is appropriate.

Some recent research seems to indicate that retirees spend less than they anticipated they would spend before retirement. It is not uncommon for full aged pension recipients to be wealthier at the time of death than when they first ceased full-time work – that is, they find a way to save. We do not have sufficient data to assume that this outcome is wrong.

The key point is that the system is not perfect – far from it. But before we make any changes, we need to make sure we understand what we have achieved and what problems we are now trying to solve. We can't assume the problems we were trying to solve in the early 1990s retain the same characteristics today. We need to bravely ask the hard questions and seek the right answers.

The Super Guarantee rate and who needs compulsory super should be examined. We should examine whether low to middle income earners actually need compulsory super, especially given it suppresses their take-home salary and also the current age pension offers a very good replacement option.

The aged pension

This brings us to the aged pension.

There are arguments from time to time that the family home should be included in Centrelink's age pension tests – the argument is essentially about equity: that people living in wealthier suburbs or cities shouldn't be able to access government benefits and then bequeath that asset to their survivors.

The Grattan Institute has long made this argument. More recently, The Australian newspaper reported that the government could save $6.3 billion if aged pensioners living in $1 million-plus houses had that property included in their asset test.

Economist Judith Sloan then responded with the following points:

  • We all need to live somewhere
  • Downsizing to a location far away from family, friends, community and services is very unappealing to many people
  • Family homes are purchased with after-tax money
  • Median house prices vary widely across the nation
  • People have planned their retirement based on a set of rules and any change could only be made with a long lead time of say 20 years.

In Australia, our idea of equity in relation to the government’s aged pension is that recipients shouldn’t receive one dollar more than their fair entitlement.

New Zealanders have a slightly different idea of equity – every eligible person deserves the same amount of government age pension from a particular age regardless of circumstances. And their government pension is taxed as ordinary income.

The benefit of the New Zealand system is firstly simplicity; second there’s no financial benefit in stopping work in all its forms; and third there are obvious cost savings for the government in lower administration and for individuals in planning, structuring and investment expenses seeking to maximise government benefits.

Any review of the Australian retirement income system should consider the pros and cons of the current system compared with implementing a universal aged pension. For example, how much does the government spend administering and enforcing the age pension income and assets tests and how much do retirees spend on seeking to maximise their age pension entitlement? Do the taper rates on our age pension assets test discourage savings and encourage retirees to spend money on their family home, holidays or some other way? Would a universal age pension be sustainable?

Conclusion

These and other arguments will increasingly dominate the airwaves.  What the government ultimately adopt will be fascinating to see.

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