Originally published in the Australian Financial Review on 26 May, 2015.
“Two decades of tweaking have created a complex retirement savings system that has strayed far from its originally designed purpose of providing for incomes in retirement”, writes CSRI executive director Patricia Pascuzzo.
The changes announced in the 2015/16 federal budget demonstrate the limitations of piecemeal changes to the retirement income system.
On the one hand, reducing the pension entitlement for those with higher assets could be argued to improve fairness through better targeting. The corollary however is that the changes risk some reduction in the incentive to save for retirement. This could have negative consequences for the adequacy of ultimate retirement savings.
While improved pension targeting is a worthwhile goal, there are also issues with post retirement arrangements that need to be addressed, as recommended by the Murray report. An even greater issue from the perspective of confidence and acceptance is the poor targeting of superannuation concessions, which go beyond compensation for compulsory saving and incentives for additional contributions.
Successive governments have used the retirement income system as a short-term budgetary and political tool rather than as a platform for encouraging long-term self-provision.
It might be argued that the system just needs tweaking but is otherwise basically on track. Twenty years of tweaking, however, have resulted in a highly complex system that has deviated from its primary purpose of providing incomes for retirement.
It might also be argued that Australians have lived with this situation for 20 years, so what difference will another term or two of government make? There are several reasons why persevering with the current flaws in the system is not a sustainable option.
The first is increasing longevity. Current life expectancy at age 60 for a woman is 29 years and for a man is 26 years. This represents a full 10 years longer for women than would have been expected in 1960, and 11 years longer for men. While this suggests that individuals will likely spend more of their lives in full or semi-retirement, the bigger challenge from a retirement planning perspective is the wide variation of individual life expectancy around these means.
The system is deficient in this respect, with only a narrow range of retirement solutions available to members and little requirement to use accumulated balances for retirement income purposes. This means many retirees are left to manage the risk that they outlive their savings. The limited financial literacy of the average retiree, coupled with the huge complexity of retirement decision-making leaves individuals vulnerable.
Third, member superannuation balances have risen dramatically over the past 20 years. While the average balance was $15,000 in 1996, by 2009 it had grown four-fold. Median personal balances at retirement of about $100,000 today are projected to more than double by 2020. Underlying these rising balances are sizable tax expenditures, raising the importance of ensuring these balances are not frittered away.
Finally, the current economic and financial environment of record low long-term nominal returns will test the limits of traditional retirement investment solutions. Those preparing for retirement will have to accept a lot more risk than previous generations to generate their desired flow of income. Obstacles to developing a broader range of retirement products need to be removed to ensure that individuals are better placed to manage longevity risk.
Postponement of a holistic reassessment of the system and delaying the implementation of reforms will only make the ultimate adjustment task more difficult.
Patricia Pascuzzo is executive director and founder of the Committee for Sustainable Retirement Incomes.