Our retirement system: great, but room for improvement
Written on the 2 December 2019 by Janet Culpitt
You could be forgiven for thinking Australia's superannuation system is a mess. Depending who you talk to, fees are too high, super funds lack transparency and Governments of all political persuasions should stop tinkering.
Yet according to the latest global assessment, Australia's overall retirement system is not just super, it's top class.
According to the 11th annual 2019 Melbourne Mercer Global Pension Index, Australia's retirement system ranks third in the world from a field of 37 countries representing 63 per cent of the world's population. Only the Netherlands and Denmark rate higher.i
What we're getting right
Writing recently in The Australian, Mercer senior partner, David Knox said one of the reasons Australia rates so highly is our relatively generous Age Pension. "Expressed as a percentage of the average wage, it is higher than that of France, Germany, the Netherlands, the UK and the US."ii
As for super, we have a comparatively high level of coverage thanks to compulsory Superannuation Guarantee payments by employers which reduces reliance on the Age Pension. In fact, Knox says Australia is likely to have the lowest Government expenditure on pensions of any OECD country within the next 20 years.
Superannuation assets have skyrocketed over the last 20 years from 40 per cent of our gross domestic product (GDP) to 140 per cent. "A strong result as funds are being set aside for the future retirement benefits of Aussies," says Knox. Even so, on this count we lag Canada, Denmark, the Netherlands and the US.
Room for improvement
Raising the level of household saving and reducing household debt
Require retirees to take part of their super benefit as an income stream
Increase the participation rate of older workers as life expectancies rise
Increase Age Pension age as life expectancies rise.
Since 1 January 2017, the amount of Age Pension a person receives reduces by $3 a fortnight for every $1,000 in assets they own above a certain threshold (singles and couples combined).iii
Other suggested improvements, such as increasing the age at which retirees can access the Age Pension, present challenges as they would be deeply unpopular.
The Retirement Income Review
In recent years we have had the Productivity Commission review of superannuation, the banking Royal Commission which included scrutiny of super funds, and currently the Retirement Income Review.
The Retirement Income Review will focus on the current state of the system and how it will perform as we live longer. It will also consider incentives for people to self-fund their retirement, the role of the three pillars, the sustainability of the system and the level of support given to different groups in society.
The fourth pillar
Australia's retirement income system is built around the assumption that most people enter retirement with a home fully paid for, making it a de facto fourth pillar of our retirement system.
With house prices on the rise again in Sydney and Melbourne and falling levels of home ownership, there are growing calls for more assistance for retirees in the private rental market.
The big picture
If you would like to discuss your retirement income plan, give us a call.
Author: Janet Culpitt