A Sustainable Retirement Incomes System

Dr Michael Keating ACAny reform of our retirement incomes system must be measured against the key principles of fairness, equity, sustainability and efficiency, writes CSRI chairman Dr Michael Keating, a former senior public servant and secretary of the Department of Prime Minister and Cabinet.

The superannuation system has suffered from piecemeal change. What it needs is a major overhaul to be fair and efficient, as well as sustainable.

The cost of the age pension is projected to rise from 2.9 per cent of GDP to 3.6 per cent over the next 40 years if the present legislation is maintained. In addition, the superannuation tax concessions (as most commonly measured) are now estimated to cost more than $30 billion annually. This is expected to increase to nearly $50 billion in another three years, and probably even more in the future.

Perhaps not surprisingly – and especially given the competing pressures on the budget – these increasing costs have prompted questions about the sustainability of our retirement income system. But what does “sustainability” mean for the Australian system? How should we define it, and how can we decide whether the projected fiscal costs are sustainable or not?

The projected increase in the cost of Australia’s retirement income system is not of itself a conclusive test of future sustainability. Defenders of the system can legitimately argue that it would be sustainable if other government expenditures grew a little less than presently projected, or if government revenues rose a little faster.

On the other hand, the rapid growth of other government expenditures suggests that retirement income policies must also be scrutinised to improve their cost-effectiveness. Indeed the need for and acceptability of future government expenditure on retirement incomes may well depend on whether most people view the retirement incomes system as being fair, equitable and efficient. At the very least it is behoven on those of us seeking to ensure that the system is sustainable to first make sure that it meets those criteria of fair, equitable and efficient.

Piecemeal reforms, such as those recently proposed in the current policy debate, are unlikely to meet these criteria convincingly. What is needed is a comprehensive examination of the system against these criteria. Piecemeal reforms run too much risk of making better options more difficult later on, and of failing to achieve the overall balance needed to ensure the most equitable and efficient system.

Instead, a comprehensive reform would encompass a balanced package, after considering all the following aspects of the retirement incomes system:

● Age of access to the age pension, and how income from part-time work might be assessed in future.

● Means testing, especially the deeming arrangements and whether and how pensioners’ homes should be brought to account.

● The adequacy of the age pension and superannuation pensions when the present scheme matures, and the interaction with other elements of the welfare system such as health, aged care and rental housing.

● The generosity, efficiency and fairness of the tax concessions for superannuation saving, much of which is compulsory.

● The extent to which it should be a requirement to use superannuation payments to generate a retirement income, and how the longevity risk of living longer than expected can be best handled.

The Australian system for maintaining incomes in retirement is a lot more sustainable than those in many other advanced countries that we often compare ourselves with. Our system is different for two reasons:

First, the Australian age pension operates as a safety net, with means-tested flat rate benefits, and that limits the cost of the government’s future exposure. In other countries, social security pensions are related to each pensioner’s former salary. While these pensions are partly funded by past contributions, the contingent liability to the government’s budget is typically very much larger than in Australia.

Second, superannuation benefits in Australia are fully funded from the accumulated contributions of the superannuitant and the associated earnings on those contributions. That means that it is the superannuitant and not the government who bears all the risks regarding the future adequacy of these payments, whereas in other countries it is the government which bears these risks.

Dr Michael Keating is chair of the Committee for Sustainable Retirement Incomes and a former secretary of the Department of Prime Minister and Cabinet. This article originally appeared in The Australian Financial Review on 13 May, 2015

One thought on “A Sustainable Retirement Incomes System

  1. What about government-funded solar panels for retirees? Much of the current market for solar panels is in retirees and aged care facilities. This could help ease the pressure of power bills as a more indirect (and sustainable) method of funding retirement.

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