Our retirement savings system has many strengths but it is far from perfect. Key issues include a gender imbalance, tax concessions that favour those who least need them and poorly managed longevity risk.
The emerging industry consensus is that many of these issues can be resolved by taking a holistic approach to the system, setting clear goals and incorporating super, the age pension and tax in any reform.
But our political leaders over the years have opted for piecemeal change, short-termism and hyper-partisanship. The former prime minister’s refusal to consider any change to super tax arrangements this term or next was emblematic of this trend.
The good news is that the change in prime minister and treasurer provides the opportunity for a reset. There is great willingness on all sides for changes that articulate clear goals for the system, address inequities and rebuild public confidence
This process has been helped along by the formation this year of the Committee for Sustainable Retirement Incomes (CSRI), an independent, non-partisan group of public policy experts with expertise across a range of fields.
Many of the key arguments for reform were set out at the CSRI’s inaugural leadership forum in Canberra in June and taken at August’s National Reform Summit in Sydney convened by The Australian Financial Review and The Australian newspapers.
But if we are not to lose momentum, we will need the new leadership team in Canberra to change the pattern of incremental and often short-term change to more fundamental, wide-ranging reform in the community interest.
This is critical because piecemeal changes over the years – with little regard for how super, the pension and tax interact – have created a system that is highly complex and one that has moved away from its primary purpose of providing adequate retirement incomes.
- Tax Concessions
The lack of a clear goal for the system is evident in the unsustainable nature of superannuation tax concessions. These are supposedly aimed at lessening the reliance on the age pension, but 40 per cent accrue to the top 10 per cent of income earners.
These are people who would never be expected “to darken the door” of the local Centrelink office and who accumulate amounts that go beyond what they need for a comfortable retirement.
In contrast, those on the lowest incomes, who need support to improve the adequacy of their retirement incomes, actually face a punitive tax rate on their compulsory super contributions.
- Gender Imbalance
Reform of superannuation taxation is made all the more critical given the significant superannuation gender imbalance. Women retire, on average, with around half as much superannuation as men. And about 90 per cent of women will retire with inadequate savings to fund a comfortable lifestyle.
Recent research from the University of New South Wales shows that women have far worse experiences in retirement and that this poor adjustment and low sense of satisfaction are linked to low household income.
So measures that assist lower income earners to save for their retirement will inevitably benefit women the most.
- Revisiting Henry
Given the regressive nature of this regime, it makes sense to consider the Henry Report option of taxing superannuation contributions at the individuals’ marginal tax rate less a rebate of say 20 percentage points.
This also makes fiscal sense. The concessions are the fastest growing tax expenditure in the budget. They are also growing at four times the rate of the age pension and are set to exceed the cost of the pension in just four years.
In the meantime, the vast bulk of people who do not receive tax incentives to save are retiring with inadequate balances and are living overly frugally for fear of running down their savings
Consumption levels are modest even among wealthier pension households, and poorer pension households consume even less than the full pension payment.
- Retirement Income Products
Ensuring senior Australians can live comfortably without fear of outliving their savings points to the need for products that deliver retirement income streams and provide insurance against the risk of longevity.
The Treasury review of income stream products has been looking at removing obstacles in the tax system that hinder the take-up of these solutions. The Murray report also recognised these issues and recommended that trustees offer a comprehensive income product in retirement – a soft default option.
So with experts in agreement and recommendations in place, it really is time for policy action.
- What’s Next?
The first priority for the new-look government in Canberra should be to set clear, bipartisan objectives of the retirement income system as a whole, as called for by the Murray inquiry.
The system should not be about wealth creation but about ensuring people have adequate and secure incomes through all the years of their retirement.
Changes are also needed to ensure that all parts of the retirement system – the age pension, compulsory super and voluntary saving – are aligned with this objective. In this we need to be mindful of the interaction with other elements of the welfare system, including aged care and health.
Second, we need to ensure the system provides people with enough incentive to save and continue working (where they are in a position to), while targeting support to those who need it the most.
Third, we should look at how to handle longevity risk and the extent to which it should be a requirement to use super to generate an income stream.
Reform of this nature is never easy. As Machiavelli once noted, a reformer has enemies in all those who profit from the old order and only lukewarm defenders who would benefit from the new.
But that’s why we need to engage as widely as possible with people about this change. By doing so, we will identify common ground to give the government a stronger basis on which to mount a reform programme.
Let us know what you think.
Patricia Pascuzzo is founder and executive director of the Committee for Sustainable Retirement Incomes. http://www.csri.org.au