The Actuaries Institute has weighed into the retirement policy debate with a new paper, entitled “For Richer, For Poorer”, which proposes a range of reforms to Australia’s retirement system to make it more equitable and sustainable.
The report warns that the annual cost of the Aged Pension and tax concessions for superannuation could cost the Budget some $80 billion in four year’s time, comprising $50 billion in Aged Pension costs (currently $41 billion) and circa $30 billion in superannuation tax concessions.
It also showed that despite the superannuation system reaching maturity, most Australians would continue to rely on the Aged Pension to fund a significant share of their retirements as life expectancy continues to rise.
Even wealthy retirees would receive significant taxpayer assistance under current arrangements, with the Institute forecasting that a 60-year old couple in the top quartile of the income distribution would receive 16-18% of their retirement income from the Age Pension over their lifetime, compared with 44% of retirement income received from the Pension by a middle-income, 60-year old couple.
Moreover, a middle-income couple who are currently 30 could still expected to receive 36% of their retirement income from the Age Pension, despite a life time of compulsory superannuation contributions.
The Institute’s recommendations to improve the retirement system include:
- Including one’s principal place of residence in the assets test for the Aged Pension;
- Reducing superannuation concessions, including by placing a $2.5 million lifetime cap on the amount of super one can contribute and receive tax concessions;
- Raising the superannuation guarantee (compulsory super) progressively from 9.5% currently to 12%;
- Providing incentives for retirees to take retirement benefits predominantly as an income stream;
- Removing legislative barriers preventing innovation in products, such as deferred annuities;
- Increasing the retirement age and linking it to longevity trends; and
- Taxing bequests.
While it is good to see the Actuaries Institute speak out about Australia’s busted retirement system, which will increasingly unsustainable and inequitable as the baby boomer generation retires, here is my blueprint for reform, which is centred on five pillars:
- Including one’s principal place of residence in the means test for the Aged Pension. 80% of retirees are home owners (around 60% fully-owned), and excluding what for many is their biggest asset from their ability to fund their own retirement makes little sense. It makes even less sense when home ownership amongst the younger generations – those that being called upon to fund the Aged Pension – is plummeting.
- Extending the government’s Pension Loans Scheme – a state-run reverse mortgage scheme that allows eligible retirees to borrow against their homes to receive payments from the government equivalent to the full Aged Pension – to all retirees. The interest rate through the Pension Loans Scheme is only around 5%, repayable from the estate or sale of the property, and home owner retirees could continue to live in their home as they do now. For all intents and purposes, they would experience no change in their living standards, but with less long-term drain on the Budget.
- Changing the superannuation contribution/earnings system so that everyone receives the same concession, such as marginal tax rate less 15% or 20%. This way, lower paid workers, who are currently penalised under the 15% flat tax system, would receive greater benefit, whereas higher income earners (e.g. those earning between $180,000 and $300,000, who receive a 30% concession currently) would receive less benefit. Put simply, the current concession system needs to be made progressive.
- Re-instating the 15% tax on superannuation earnings for those aged over 60, bringing it back into line with those aged under 60. After all, why should a retiree earning $100,000 through their superannuation investments pay zero tax, whilst those aged under 60 and earning $100,000 via their salary pay around $25,000 in tax?
- Placing a lifetime cap on the amount of super that one can contribute and still receive tax concessions. Superannuation must be used as a genuine retirement savings scheme, not a tax shelter.
My only area of disagreement with the Actuaries Institute is their call to raise the superannuation guarantee to 12%. As explained in detail previously, such an approach would unnecessarily penalise lower paid workers by lowering their disposable income. It could also raise costs to the Budget and heighten inequities already present under the current system.
Regardless, with the Abbott Government shutting the door on superannuation reform, the discussion is largely academic at this stage, which is a great shame.
