Although Australia’s structure for retirement incomes compares well internationally, it has been developed in a piecemeal manner with frequent changes made annually over the last 35 years.
As a result, there are obvious shortcomings.
At retirement, the system is complex, intrusive, contains anomalies, produces perverse incentives and it is sometimes unfair. Further, times are changing and the system needs to evolve to cope with ever-changing external factors. These include the loss of long-term trust and confidence in financial institutions, growing dispersion in wealth – which will require fine-tuning of tax concessions and government benefits – and growing aged care and health costs as more people live to advanced ages.
Further, there are reducing levels of home ownership which reduces security for retirees, changing life expectancy, requiring higher overall funding for retirement, and changing work patterns influencing contributions from wages.
The system’s shortcomings will become even more apparent as Australia's population ages, and an increasing number of people and member balances move from an accumulation phase to a pension phase.
The Treasurer Josh Frydenberg announced in this year’s Budget that the government would be reviewing Australia's retirement system.
Now is the time to think about what should be on the table.
If the review is successful in making the system fairer, Australia will have a world-leading system. It will take an integrated view across the major sources of income and expenses for retirees, including the Age Pension, superannuation and non-superannuation savings (including the family home), aged care and health costs (including pharmaceuticals).
We need to begin by considering what the objectives should be for Australia’s retirement system.
The Actuaries Institute believes the overarching objective should be to ensure that Australians can confidently live their retirement years in dignity. At a minimum, it will require better integration of the current disparate Age Pension and superannuation systems, but it can go much further and better integrate with our aged care and health care systems.
In assessing any proposals for reform against these objectives, the Institute has considered three guiding principles.
These are that Australian retirees should have financial security; the system should be efficient; and it must be fair.
Australians with adequate resources should be encouraged to be self-sufficient in retirement. Those who fall short should be provided with adequate safety nets.
If we can agree with these fundamental principles, it becomes easier to evaluate the current system and any suggestions for reform. Creating an efficient and fair system will require changes to current thinking, including tax and superannuation frameworks. As people don’t like radical change, any reforms will need to be introduced over lengthy periods. This will avoid unsettling existing retirees and provide time for planning.
As the Actuaries Institute’s research states, there are many options for reform.
One of these is to simplify the Age Pension, including changes to means testing, better targeting of benefits such as rental assistance and even potentially introducing some universal benefits.
The government must also address the anomalies and perverse incentives in the treatment of various forms of accommodation, including the family home. It should consider embedding automatic adjustments to reflect changes in longevity in both the superannuation Preservation Age and the Age Pension eligibility age.
Another option is to consider setting targets for government support in retirement in terms of government expenditure and addressing taxation and funding anomalies created by those maintaining unusually large concessionally-taxed superannuation balances, which can be distributed tax-free at end of life. Finally, the government must coordinate retirement, pension and age care policies, or calibrate social security benefits and living standards.
The Institute looks forward to the retirement review, which should generate a robust discussion involving all stakeholders. There will need to be transitional arrangements to address the issues dependent on the solution chosen and, as a general principle, changes should not disadvantage those who have already retired.
But if done well, there is an opportunity to deliver landmark reforms to provide a better quality of life to retirees in a way that is efficient and fair for all Australians.
Then we can truly lay claim to having the world’s leading retirement system.
The views expressed are those of the author and do not necessarily reflect those of the Westpac Group. The Actuaries Institute has prepared a Green Paper on improving Australia’s retirement system. The Paper was written by three actuaries, Anthony Asher, David Knox and Michael Rice. The paper outlines some design options for an integrated system of retirement provision, which the Actuaries Institute encourages Australians to debate boldly.
By Ben Young
Head of Fraud and Financial Crime Insights