Mercer, in its submission to Treasury for the Retirement Income Review, has called for a universal age pension, scrapping the means tests and holding the superannuation guarantee (SG) steady at 9.5 per cent.
The recommendations stands out from the many submissions that have been registered by the industry since the Treasury first published the consultation paper in November.
The actuary said the means tests was the primary obstacle to an effective interaction between the three pillars of Australia’s retirement system – age pension, compulsory super and voluntary savings. Mercer partner, David Knox, said its original purpose was to ensure that those most in need had access to the age pension, alleviating poverty among senior citizens. Instead, it resulted in two-thirds of the age-eligible population accessing part or full pension.
The retirement specialist said a universal age pension, where all eligible individuals receive the pension regardless of wealth, had enormous benefits for retirees and households, as well as the economy and the superannuation industry. He said that with the right tax structures, it was also feasible without a substantial impact to the federal budget.
“Significantly, if the universal age pension was an important source of retirement income for all Australians together with superannuation, the superannuation guarantee rate need not rise to 12 per cent, while still providing the same living standard in retirement for average income earners,” he said.
“This would reduce the cost of projected superannuation taxation concessions, increase the level of take-home pay and increase taxation revenue.”
He added that if the pension remained means-tested, the SG would still have to rise to 12 per cent.
An increase in the SG has been the subject of intense debate and is considered crucial to the sustainability of many super funds, especially those with flat or negative inflows.
Mercer’s submission also suggested how the costs of a universal age pension could be funded. These include taxing the age pension for all those who receive it, which could be achieved by basing the tax rate on the balance of an individual’s tax-exempt pension accounts and modifying the tax arrangements for super, such as introducing a limited tax on the investment income generated in the pension phase.
Knox said a universal pension could re-frame the motivation of saving for retirement,
“With a universal age pension, Australians will have an incentive to save for retirement,” he said. “This isn’t the case today. While the age pension would be taxable, there would be a clear benefit to the individual for every extra dollar contributed into super.”
“While the universal age pension may not be a viable option in the current political environment, it is a compelling proposition for a simpler, more effective system with a clear objective that delivers stronger long-term retirement outcomes for older Australians,” he added.
David Bell of The Conexus Institute applauded Knox for his system-level thinking: “Many submissions, which are meant to assist the review build a fact-base for future reference, have failed to fully assess the retirement system across all its component parts,” he said.
“In our submission we, like others, highlight the lack of a system objective and the complexity of the system. A universal pension could significantly reduce complexity but the system would remain complex. For instance, the taxation and incentive structures across super, housing and other investments differ greatly, and households would remain exposed to many financial risks.”
Bell also cautioned that a solution shouldn’t define the objective.
“Best practice would be to establish an objective and then work towards the best system solution,” he said. “Nonetheless, I’m sure reducing complexity would be on everyone’s wish list.”
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