Originally published in the Australian Financial Review on 26 Oct, 2015.
“The Turnbull government’s response to the Murray Report includes some useful first steps towards a more coherent, effective and sustainable retirement income system. But there is much more to be done.”
Fortunately, Turnbull’s recent positive language emphasising workforce participation, savings and investment, productivity and economic growth, rather than just gloom about the impact of the ageing population on social security costs, suggests real interest in a sensible package of measures over time.
The 2015 Melbourne Mercer Global Pension Index rates the Australian retirement income system as among the best in the world. Its strengths are its relatively generous means-tested age pension and its superannuation funding arrangements. But it has a serious weakness in that it does not deliver the sort of secure retirement income streams provided by other countries’ (mostly unfunded) benefits promise schemes.
Murray’s superannuation recommendations are aimed firmly at this weakness, and the government’s response is supportive, if with an excessive degree of caution.
- First, the government has agreed to enshrine in legislation the objective of the superannuation system, to ‘serve as a guide to policy-makers, regulators, industry and the community’ and to ‘provide a framework for important discussions Australia needs to have about fairness, adequacy and dignity in the superannuation system’.
This is not an empty gesture. Particularly in the absence of a comprehensive review of retirement incomes, it has the potential to stop further piecemeal measures and to promote much needed coherence across tax, social security and regulatory arrangements. It would be better, however, if the proposed objective referred to the whole retirement income system, not just to superannuation, focusing on overall adequacy, security and financial sustainability.
A clear objective, even if only for superannuation, should ensure that any public support is directed towards genuine retirement incomes not just wealth accumulation. It might also discourage excessive use of lump sums and imply that policy should promote regular and secure income streams.
- Secondly, the government has agreed to support the development of comprehensive income products for retirement (CIPRs).
This falls short of Murray’s recommendation to require trustees to preselect such a product for members, with the government only to facilitate trustees doing so, but it is still a first step towards ensuring retirees are properly protected against longevity risk. This risk cannot be managed by individuals but requires pooling of funds and, as Murray demonstrated, individuals who try to manage the risk on their own tend to unduly reduce their consumption, meaning their accumulated savings deliver less than adequate retirement incomes.
My strong suspicion is that Australia will in time need to go much further than Murray has proposed, not only to provide security but also to contain the extent to which people rely on the age pension for longevity insurance, even if they have substantial assets.
Offering CIPRs will not necessarily make them attractive, particularly if adverse selection makes them too expensive for most people. It would be better if CIPRs became the default product, though this would still not fully eliminate the problem given continued access to the age pension. Compulsion might eventually be needed to direct a proportion of accumulated savings into annuities or deferred annuities. This could make the system more secure and financially sustainable, and also simplify it for the majority of older people who do not wish to (and may not be sufficiently competent to) actively manage their superannuation assets personally.
The government’s reference to ‘fairness’ being promoted by legislating the objective is also welcome. Most obviously this supports the review of superannuation tax arrangements which the government has thankfully now agreed to.
Far too much attention, however, has been given recently to the Treasury ‘tax expenditure’ figure of around $30 billion (though I need to confess to being a co-author of the Social Security Department submission to the 1982 Parliamentary Inquiry into tax expenditures that identified the methodology that Treasury continues to use). Internationally, the orthodox approach to taxing superannuation is to exempt contributions and earnings and to tax benefits (EET), not the reverse (TTE) which Treasury uses to calculate the ‘tax expenditures’. EET may be too hard for us now, but the Henry Report may offer an approach that has a broadly similar effect. It would increase tax at higher incomes improving fairness but the revenue implications would be modest at best – depending on the detailed arrangements revenue gains are probably less than $5 billion a year.
Fairness also requires getting the means test right. Hopefully, the government will allow more discussion of this, including the possibility of amending its recent legislation to tighten the assets test from 2017, so as to ensure the interaction of tax and social security retains sufficient incentives to save (and to work).
A more coherent retirement income system is likely to require a range of measures including to increase superannuation savings (such as increasing the preservation age as well as improving competition in the industry to reduce fees as Murray proposes), to increase workforce participation (such as perhaps further increasing the age pension age as well as the preservation age, and investing in skills amongst the aged), to promote genuine and secure income stream products, and to contain costs through appropriate tax and social security arrangements.
Andrew Podger is ANU professor of public policy and a member of the Committee for Sustainable Retirement Incomes.