ABC’s The Business aired an interesting segment last night on the widespread push by the wealth management industry for Australians to turn their retirement nest eggs into income streams so that they don’t run out of superannuation too early – either by burning through their retirement savings or living longer than expected.
The push follows criticism in August from CPA Australia, which argued that a significant number of baby boomers are running-up debts as they head towards retirement, and then withdrawing their super as a lump sum to pay off debts and, rather than invest for income, spending most of the remainder on consumer goods or a holiday before falling back on the aged pension.
Australia retirement system is indeed in need of reform. Allowing someone to retire at 60, withdraw their super tax free as a lump sum, use the money to pay down personal debts or consumption, and then go on the aged pension from 65 years of age is crazy. In such instances, the taxpayer is left wearing the cost of superannuation concessions throughout the individual’s working life, and then again once that same individual goes on the aged pension.
Many other nations do not allow such shenanigans. According to The Business’ report , the Dutch require all retirement savings to be taken as an annuity (income stream), whereas three quarters of retirement savings in the UK must be taken as an annuity.
However, a key problem in Australia is that there is a dearth of annuity-style products, and those that are available are typically inflexible or priced unattractively. Essentially, Australia’s superannuation system has been orientated around lump-sums, rather than providing a stable income stream in retirement, as it should.
Clearly, there is a role for Government. If the market is unable to provide suitable annuity-style options, then the Government should look to provide such a service, with the retiree handing over their funds for a guaranteed income stream. Such a system would likely be far more cost effective than having retirees blow their lump sums and then become reliant on the aged pension. A carrot-and-stick approach could also be adopted whereby superannuation lump sums are taxed, whereas annuities are concessionally treated.
The flat 15% tax on superannuation contributions also needs to be addressed to ensure that the system remains sustainable. Under the current arrangements, the amount of super concession rises as one moves up the income tax scale, resulting in a system where higher income earners receive the most super tax benefit, despite being the very people that are the least likely to rely on the aged pension in retirement.
Replacing the 15% flat tax with a flat 15% concession would improve the equity and sustainability of the system by: 1) providing all taxpayers with the same taxation concession; 2) boosting lower income earners’ super savings and thus reducing reliance on the aged pension; and 3) reducing costs to the budget.
With Australia’s population ageing fast, and the proportion of workers to non-workers set to decline significantly in the decades ahead, the Government will ultimately be forced to scale back entitlements as the tax base shrinks. Better, then, to begin reform of the retirement system now rather than waiting until the situation worsens.
