In view of the forthcoming review of the retirement income system, it is necessary to think about the level of financial resources needed by Australians in retirement. So, what is the purpose of the system? Currently we do not have a clear objective.
The Financial System Inquiry in 2014 suggested that the primary objective of superannuation should be “to provide income in retirement to substitute or supplement the Age Pension.” But, is this the right objective and what does it really mean? And, super is only part of the retirement income system.
So, let’s begin with a high level perspective.
I suggest that the primary objective of our overall retirement income system should be to enable most Australians to maintain throughout their retirement, the living standard which they enjoyed during most of their employment years. In short, this means they can retire with dignity, in the knowledge that they will receive an appropriate level of income throughout retirement and have access to some capital for those unexpected expenses that occur during retirement.
We must also recognise there will be some individuals who have had limited employment and will therefore need to rely largely on the taxpayer-funded age pension. These individuals should also be able to live out their final years with dignity and not be subject to poverty.
The main sources of income available to meet the primary objective of the system are the age pension and related benefits; compulsory superannuation; and additional savings (both superannuation and non-super savings) arising from voluntary contributions. In other words, it is a multi-pillar system. This also means that most retirees will receive income from both the age pension and superannuation.
These different sources of retirement income should be complementary so there are no material disincentives for individuals and households to increase their self-reliance for retirement. In turn, this outcome will reduce future reliance on government resources. From an inter-generational perspective, it is also important that the costs of the age pension and taxation support for superannuation are sustainable over the longer term.
Although there have been many reviews of the super system in recent years, there has been very limited discussion on the role of each pillar. It is critical that the purposes or objectives of each source of income is clear and well accepted by the broader community.
The objective of the age pension and other Government benefits (or the safety net) should be to provide a modest level of income and housing security to those who have reached the qualifying pension age and do not have a sufficient level of financial resources to provide a minimum standard of living during retirement. That is, the level of the pension and the related benefits should ensure no older Australian lives in poverty.
The objective of compulsory superannuation should be to ensure that all working Australians set aside a proportion of their current income for retirement. Over a full working career, compulsory superannuation contributions should be sufficient to provide a level of retirement income, together with any age pension, that enables a living standard to be maintained throughout retirement that is broadly equivalent to their standard of living during most of their working years.
The objective of voluntary superannuation and other savings is to provide flexibility for individuals and couples to make additional contributions (as may be appropriate) that can improve their retirement lifestyle and thereby offset any shortcomings in their compulsory superannuation benefit. These could arise for a number of reasons including periods out of the workforce, improvements in community living standards, the need to retire early, increases in longevity and adverse market movements.
An agreed objective for the retirement system as a whole, together with complementary objectives for each pillar, will represent a really important step forward in laying down a long-term foundation for Australia’s retirement income system.