The federal government has appointed a panel to undertake a review of the three pillars of the Australian retirement income system: the age pension, the superannuation guarantee (SG) and voluntary contributions. Here are the key issues I believe the review panel should highlight for further attention.
I must admit that I am not convinced that the retirement income review will deal with anything that the Morrison government deems remotely problematic for its re-election prospects, such as the inclusion of at least a portion of the family home in the pension assets test, increasing the age pension eligibility age and increasing the superannuation guarantee (SG) beyond 9.5 per cent.
Lifting the SG gradually to 12 per cent, as proposed, would increase fund flows to industry super funds, whose values are aligned with those of the unions – a group whose influence this government would very much like to diminish.
Having said that, it must be acknowledged that this review is an opportunity to confirm the baseline information on which future policy decisions can be made to deliver a much-needed reset of aspects of our retirement income system.
I don’t pretend to have all the answers but I do know that the best way forward involves strong political leadership and industry consultation, which will hopefully follow this fact finding review. Here are some points I urge the review panel members to consider.
Shifting the focus from accumulation to draw down
The focus of the Australian superannuation system until now has been on the accumulation phase – and that has been successful. Recent research has shown more than half of Australians aged 66 are not accessing the aged pension at all because their assets and incomes are too high, and only 20 per cent are on a part pension.
Regardless, both self-funded retirees and those entitled to the age pension need support, education and appropriate retirement-income solutions. The focus now needs to shift to helping all Australians achieve their income needs and goals in retirement.
There are a number of obstacles that need to be removed, or at least addressed, in order to optimise superannuation savings for the average Australian such as housing affordability, wages growth and persistently low interest rates. There is also the issue of too many women still retiring with inadequate superannuation balances.
The first generation of contributors to our compulsory superannuation system is about to hit retirement. Super funds must be prepared to meet the retirement income needs of this group.
The age pension system is outdated
Since the Commonwealth age pension was introduced in Australia back in 1909, life expectancy has gone up 25 years for men, to 80.5 years, and 26 years for women, to 84.6 years. Yet the age pension eligibility age has increased by just one year for men and six years for women.
With many Australians now enjoying a good 30 years of retirement, clearly, something’s gotta give. The age pension framework has simply not kept pace with Australia’s changing lifestyles and demographics. Its original role as a safety net has been transformed. The age pension now primarily serves as a supplementary source of income to superannuation savings.
Improve incentives to keep seniors working longer
People are living longer and the age pension eligibility age is increasing, albeit far too slowly, but incentives to keep working are not developing quickly enough.
People aged over 65 are healthier than ever before and, increasingly, want to continue to work in some capacity. My experience with elderly people also has shown that they are generally happier and healthier when they are productively contributing to society so long as the work is not too stressful. But financial incentives such as the Pension Work Bonus need to be improved and employers’ attitudes towards older workers must change. Tax incentives to employers of seniors would also encourage them to employ older Australians or keep more retiree-age people in the workforce.
Strategies to increase the ratio of workers to people on welfare
As the Australian population continues to age, the ratio of workers to people dependent on welfare falls. The vast majority of welfare payments are made to age pensioners and people on disability pensions; a relatively small amount goes to unemployment benefits. This trend is largely due to the fact that people are living longer but also due to the natural phenomena that as societies become more affluent, their citizens have less children per capita. This trend is obviously unsustainable and needs to be reversed if possible.
A significant lever to correct this imbalance is immigration. There is never a shortage of people wanting to migrate to Australia, and generally migrants are young people (the median age in 2017-18 was 26), often with families, ready to work and spend and contribute to GDP growth.
Sadly, more recently, there has been populist rhetoric against immigration and, as a result, the number of migrants and people with temporary visas allowed into Australia has dropped significantly in the past few years.
I have no doubt that this is one of the factors causing our economy to slow. The most counter intuitive reason I have heard is that immigration puts strain on our infrastructure therefore we should slow it down for a while. This is an infrastructure problem not an immigration problem.
If some of the lifts in a building broke down, you would not stop new tenants moving in or existing tenants from hiring new staff until the owners got around to fixing the lifts. You would fix the lifts immediately, make do with what you have in the meantime so long as it was safe and allow business as usual. It is absurd to suggest that because our infrastructure needs to be enhanced we should reduce population growth. The very core of GDP growth is population growth.
With interest rates at record lows, now would be a great time to borrow to fund massive infrastructure enhancements, creating jobs and GDP growth. A new influx of immigrants could help do much of the work, and at the same time increase the ratio of workers to people on welfare.
Instead, the government has taken a populist approach and fought to keep our budget in surplus, potentially missing a once in a century opportunity to borrow money for next to nothing to fund much needed infrastructure enhancements.
Former political foes, Paul Keating and John Hewson, have both spoken about the opportunity for an infrastructure-led recovery. I hope the government takes notice rather than taking the road that secures the most votes in the short term.
Increase the superannuation guarantee
Labor introduced legislation in 2012 to increase the super guarantee to 12 per cent by this year. The timetable was subsequently changed by the Abbott government with the SG now set to hit 12 per cent by 1 July 2025.
However, the Morrison government is facing increasing pressure from its own MPs and senators to delay or abolish the planned increases. Those on the other side of the debate such as Rice Warner are saying that a higher SG would alleviate pressure on the age pension system and grow capital markets, which would benefit the entire economy.
In my view, any increase to the SG rate equates to money out of the economy in the short term. The government has said that the current precarious state of the Australian economy is the reason for delaying this.
However, I suspect that the real reason is that it would see more money flow into the coffers of industry super funds, some of which would inevitably find its way to the Labor Party.
Address housing affordability
Another major issue that directly impacts the pension system is housing affordability. Our retirement system was built on the assumption that most people would own their own home by the time they finished working. As it currently stands, an increasing number of Australians are likely to be paying rent in retirement, placing greater pressure on the pension system.
Recent modelling from the Grattan Institute found that the number of people aged over 65 who own their own home will fall from the current 76 per cent to 57 per cent by 2056. For low-income retirees, it will be well under half. The pension system, as it currently stands, is simply not equipped to manage these pressures. Rents have been outpacing the CPI-indexed government rent assistance payments for some time now, particularly in the major cities. There is a definite need to increase assistance for the growing number of retirees who do not own their own homes as well as thinking outside the box on housing affordability.
Treatment of the family home
Is it time for the high-value family homes to be included in the age pension assets test? Again, the likelihood is that no politician would touch this with a barge pole. Just look at what happened to Labor after it took the removal of franking credits to the last election.
Be that as it may, I don’t believe we should throw our hands in the air and give up on the implementation of big picture policy reform in this country. As Paul Keating recently remarked, large scale reform will be necessary to halt the increasing levels of inequality in our society.
There are clear anomalies with the current system. For example, a retired couple with a home worth $4 million and $245,000 in assets is eligible for a full pension, while a couple with a home valued at $500,000 and $860,000 in assets will receive no pension at all.
However, there are two sides to this issue. The above example shows an extreme situation that I am sure most would consider to be quite unfair to the second couple. Others would say that it is equally unfair that a couple who have lived their lives in an affluent area and are entrenched in that community, are forced to downsize to the point of having to move to where housing is more affordable.
So, this is certainly a tricky one. Innovation and competition in the home equity release product market may result in retirees being able to remain in their homes, but to cheaply and efficiently access some of the equity to top up their retirement incomes.
In any case, these changes are going to be unpopular. Whichever way you look at it, they will take money out of the pockets of elderly Australians, which are a large and growing portion of the voter base. However, the longer this issue is left, the worse it will become. Slow and steady change over the next 10 to 20 years will be much more palatable than large sudden shocks. This is also why we should look to employ other mechanisms such as migration to minimise the impacts on the elderly.
Eugene Ardino, chief executive, Lifespan Financial Planning
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