For years I have argued that Australia’s retirement system – encompasing both the Aged Pension and superannuation – is unsustainable due to the huge numbers of baby boomers entering retirement.
I have also argued that the current retirement system is unfair because it provides too many benefits to the wealthy, either because it excludes one’s principal place of residence from the assets test for the Aged Pension or because the lion’s share of superannuation concessions flow to higher income earners.
For these reasons, I have regularly proposed five reforms to improve both the equity and sustainability of the retirement system, namely:
- 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.
Now a survey by YourLifeChoices of over 4,000 Aussies aged between 50 and 70 suggests that even baby boomers are sick of the inequities in the retirement system and want genuine reform. From The Canberra Times:
Australians approaching retirement age are braced for declining living standards under a system in which the rich have done better from superannuation rules, leaving the rest with insufficient savings or languishing on inadequate age pensions, a survey has found.
Many now back “root and branch” reform to address the problem, including calculating the family home in the age pension asset test and reducing the generous tax concessions for superannuation contributions by the well-off…
Among the findings is that 60 per cent of respondents either agreed or strongly agreed that a family home, if valued above $2.5 million, should not be excluded from the pension eligibility assets test…
…two-thirds of respondents believe reform of the superannuation system is required to wind back generous tax concessions, because they provide a disproportionate advantage to high income earners who are able to channel significant amounts of pre-tax income into their super accounts at a greatly discounted rate – thus costing the budget billions of dollars…
Sixty-seven per cent described changing the concessional rules on the accumulation phase of superannuation as something with which they either agreed or strongly agreed…
Underpinning the survey is a strong concern about the adequacy of the retirement system generally, with 82 per cent agreeing or strongly agreeing that the “root and branch” review is necessary.
Root-and-branch reform of Australia’s retirement system is inevitable. The huge baby boomer bulge, along with the declining relative share of workers – many of whom will never own a home and face huge tax increases – will eventually force politicians to confront the problem.
It’s just a pity that Australia’s politicians are too often reactive and rarely get out in font of issues before they get out of hand.
Australians are not dumb anti-reformers. But they need issues to be explained clearly, solutions proposed, and the building of a concensus. Unfortunately, this also requires proper policy processes – something that is in short supply, particularly among the Coalition, which too often prefers “captain’s calls”, policy on the run, and ceding to rent-seekers.
