The Retirement Income Review has achieved many things. It has managed to make a complex system understandable. It used strong principles as its guide. It has achieved its mandate of establishing a fact base while leaving some clear policy direction, all without making any recommendations. Well done to those involved, especially Carolyn Kay, Deborah Ralston and Michael Callaghan (pictured).
We all know the the retirement system is highly complex and multi-dimensional: there are multiple sources of income, household circumstances vary and there is no agreed approach to assessing outcomes. For the review to be able to progress it needed to simplify the complex.
It achieved this by:
- Sticking to the three-pillar system of age pension, compulsory super and voluntary savings
- Creating three groups of households by income: low (bottom three deciles), middle (the next five) and high (the top two). These groups are used as mappings for cases such as people with disability
- Using replacement rates as the measure of outcome, thereby linking living standards across a person’s working life and retirement, while acknowledging that low income households should also meet a minimum income level. Income standards such as those produced by ASFA were placed aside.
Throughout, the four elements of adequacy, equity, sustainability and cohesion represented a strong set of lenses used to review the retirement system.
The review noted that an individual’s retirement largely reflects the extent of their engagement in the workforce, both income and years worked. Unsurprisingly, the low-income cohort faces a range of challenges.
The Review explored the Grattan Institute’s recommendation of rental support as a solution but found this doesn’t go far enough. The review didn’t identify any alternatives solutions and it wouldn’t surprise me to see a subsequent review focused on improving retirement outcomes for low income households.
Given the high-income cohort has sufficient earnings capacity such that superannuation represents tax-effective wealth management, it is the middle-income cohort which receives substantial focus. And here, the review didn’t shirk the big topics. Three issues were brought together to shape the major finding of the review:
- Increasing the superannuation guarantee will negatively impact wage growth, hence working life living standards. Here, Australian National University-commissioned research helped inform the review’s view
- Not drawing down accumulated savings effectively is identified as a major source of system inefficiency
- The ‘retirement trap’, whereby people with mid-high wealth living off derived income from superannuation lament that they have less income than age pensioners due to the high pension taper rate, is twisted around. The Review points out that the high taper rate provides great support for those who draw down their savings or experience market losses
In short, if accumulated savings are drawn down effectively then the middle cohort will experience good retirement outcomes. So strong is the implicit recommendation of this point that it is the starting assumption for most of the modelling and analysis. Indeed, the review demonstrates that efficiently drawing down with a 9.5 per cent SG will lead to better outcomes than the status quo applied to a 12 per cent SG.
Further, the review could keep housing up its sleeve: it details the optionality of drawing down additional income from housing while pointing out the age pension means test could treat housing more fairly.
Where does this leave industry?
Superannuation faces some interesting challenges. The implicit recommendations of the review will mean the following is likely:
- Retirement Income Covenant to proceed
- Funds will need to develop retirement solutions which provide protection but also accelerate the drawdown of accumulated savings
- Funds should prepare for the likelihood of SG remaining at 9.5 per cent
- Funds need to help the re-framing of superannuation as a retirement income stream through advice and guidance which provides their members with the confidence to drawdown
A review of this size will always have pockets of interesting findings. This review drew clear attention to the substantial tax concessions that go to a small part of the population. Another point of interest was early release of super. Here the Review considered limited access during COVID to be consistent with income smoothing at a critical point in life.
In summary, this is a clever review in more ways than one. It is clever in how it simplified a complex problem. It is clever in how creates a structured case for improving retirement outcomes to a good level by not increasing the SG. And it is ‘clever’ in saying all this without making any recommendations.