Three of Australia’s leading superannuation and retirement experts have urged the federal government to give broad scope to its Australia’s retirement system as the current system has too many flaws.
In a report released by the Actuaries Institute Mercer’s David Knox, Rice Warner principal Michael Rice and UNSW associate professor Anthony Asher argue the current system is complex, intrusive, contains anomalies and produces perverse incentives.
“And, as an increasing proportion of the population move from the accumulation to the pension phase, problems that beset the system will become more apparent,” they said in the report.
According to the paper, retirees need access to a regular income stream, savings to cover unexpected expenses and protection against longevity, inflation and market risks.
“There should not be incentives to “game the system” and retirees should be able to make smart choices without the need for financial advice.”
Options for reform reviewed by the trio include simplifying the age pension, addressing anomalies created from exempting the family home from Age Pension means testing, embedding automatic adjustments in the super preservation age to reflect changes in longevity and setting targets for government expenditure for support in retirement.
Many of the reform options could be achieved by a simpler age pension means test, the report claimed.
The report’s authors also pointed to the perceived unfairness of the current system. “There are individual accounts, worth tens of millions of dollars that are taxed at the concessional rates for all superannuation of 15 per cent on investment income and 10 per cent on capital gains.”
They suggest the amount held in super be capped, or those individuals with large balances pay more tax.
“We would welcome a robust discussion of the options, said Knox following the release of the report on Wednesday. If the Retirement Incomes Review is to be successful, he went on to say, we need to canvass all the possible interactions between the Aged Pension and super.
Rice Warner chief executive, Andrew Boal also stressed that the way the superannuation system integrates with the Age Pension via the means tests is very important.
“For example, the current assets test has a taper rate of $3.00 which provides little (if any) reward for saving if you will be impacted by the assets test. Along with many others, we would support a reduction on the taper rate to $2.00 or $2.25.,” he said.
Also, he argued, over the past 15 years, the cost of private dwelling rental has increased at a much faster rate than the Age Pension. “As a result, there is a need to assist non-homeowners in retirement, for example by increasing rental assistance.”
However, these are both short-term fixes.
“We need to step back and take a holistic view of how we could better integrate the superannuation system with the Age Pension, including home ownership and Aged Care,” argued Boal, adding that 2028 projections show that more than $1 trillion of superannuation assets will be in the (post) retirement period.”
“Now is a great time to have this discussion, to make sure it is included in the terms of reference for the government’s intended review of Australia’s retirement income system.”
The report’s authors also argued that now was the time to start the debate around retirement, lest Australia falls behind.
“If it does not, Australians may lose the opportunity presented by the fiscal headroom of the declining age pension costs, and the lead time we have to prepare for known longer term changes, such as those to patterns of home ownership and work, longevity and growing health and aged care costs,” they said.
“Age Pension costs as a proportion of gross domestic product should fall, but long-term projections show aged care is the second fastest growing category of expenditure after the National Disability Insurance Scheme and likely to rise as longevity rates increase.”
The Actuaries Institute has called for the initial discussion of reform be kept at a high level to identify the options that have enough support to be further developed.
In urging the government to act, Actuaries Institute’s chief executive, Elayne Grace, said the best system would take an integrated view across all sources of income and expenses for retirees. This includes the age pension, superannuation, the family home, aged care and health costs.,
“The current system, though world-leading in some respects, falls well short of that.”