Treasurer, Josh Frydenberg

Treasurer Josh Frydenberg announced on Friday that former senior treasury official Mike Callaghan will lead the long-awaited independent review of Australia’s retirement income system.

The review, which was recommended by the Productivity Commission late last year, will examine the retirement income system’s “three pillars” – the age pension, superannuation and voluntary savings, including home ownership.

The Commission had urged Canberra to carry out the review before increasing the superannuation guarantee rate. The SG is scheduled to rise to 12 per cent by 2025.

Callaghan, who is a former executive director of the IMF, will chair the review with Carolyn Kay, who is a director of the $163 billion Future Fund.

The three-person panel will also include Deborah Ralston, professorial fellow in banking and finance at Monash University and a member of the central bank’s payments system board. She is also chair of the SMSF Association, but will step down while working on the review.

A consultation paper will be released in November and the final report provided to government by June 2020.

“The Coalition Government is continuing to ensure Australians are well-supported during their retirement by today commissioning an independent review of the retirement income system,” Frydenberg said in a release on Friday.

“It is important that the system allows Australians to achieve adequate retirement incomes, is fiscally sustainable and provides appropriate incentives for self-provision in retirement.”

Under the terms of reference, the review panel has been called upon to identify: how the retirement income system supports Australians in retirement; the role of each pillar in supporting Australians through retirement; distributional impacts across the population and over time; and the impact of current policy settings on the government’s budget.

The review will establish a fact base of the current system, but falls short of charging the panel with making policy recommendations.

Mercer’s David Knox said the terms of reference are high-level and broad and by including home ownership means the review will examine the plight of renters. “Traditionally, most retirees have owned their own home but since that will become less and less common in the years ahead, they will have to look at how people survive the private rental market,” he said. “That’s a good thing.”

Knox said he is keen to see the interaction between super and the age pension examined. “It is is definitely overdue,” he added.  “We know with the means test, the more super you have, the less pension you get.”

“Does the means test actually provide an incentive to save or is it a disincentive? Should we have one test or two,” he said, referencing the fact that unlike the rest of the world, Australia has an income test and an assets test. “It is very complicated and most people don’t understand how they work.”

Knox added that the government adjusted the deeming rate on the income test but not on the assets test and yet both tests are carried out in the same economic environment.

In his view, the three-person panel is independent and diverse and he thinks it will do a pretty good job. “Deborah Ralston is the closest to the industry so she brings that perspective. If these people are willing to be independent it could be a very worthwhile exercise.”

However, the retirement specialist is concerned about the very short time frame.  Since the consultation paper will be published in November and the panel must report by June 2020, they have just five months to consider a number of issues.

Importantly, Knox said the panel has been called upon to establish a ‘fact base’ of the current system, but he pointed out that the terms of reference say nothing about making any policy recommendations.

He also pointed to the lack of comment about ‘big picture’ items like aged care, which some had hoped the review might include.

Industry Super Australia chief executive Bernie Dean agreed that that sensible, and evidence-based reform is needed to improve the efficiency of the compulsory savings system and ensure that members get even more out of every dollar they’ve been promised.

“ISA welcomes the review’s intention to examine the distributional impacts across population and over time,” he said. “This is an opportunity to address some of the inadequacies in our current system, where we see lower income and vulnerable workers, those with interrupted work patterns and in particular women, retire with significantly less super than other Australians.

“While the review will seek to address some of the key issues facing Australia and its increasingly ageing population – which ISA welcomes – work must continue on other key priorities including tackling underperformance and ensuring workers are connected to a single, high-quality default account with good returns and low fees.”

The Financial Services Council stressed the importance of raising the SG to 12 per cent and said the superannuation laws should be simplified and red tape removed.

AIST chief executive, Eva Scheerlinck, said the review provides an important opportunity to evaluate how Australia’s retirement income system is tracking and what reforms may be needed to ensure the system is both equitable and sustainable over the long term. “Australia’s population is ageing, people are living longer and more people are entering retirement with debt or without the security of a home. The system needs to accommodate these challenges.”

Scheerlinck said while already legislated reforms, notably lifting the SG to 12 per cent in 2025, would significantly improve the adequacy of retirement incomes for all Australians, the review was an opportunity to examine how the current policy settings might be changed to deliver better outcomes for vulnerable Australians.

“While Australia’s retirement income system is delivering for most of us, many Australians are still retiring in poverty. We hope that the Review has a sharp focus on how we can improve retirement outcomes for the vulnerable, low income earners and women, who still retire with less than half the super of men,” she said.

Join the discussion