Australia’s superannuation system ranks highly when compared to other pension systems around the world, but some improvements are needed to better distribute its benefits and give it an ‘A’ rating alongside the very best, experts say.
Australia’s superannuation system is ranked 6th out of the 44 systems studied in the Mercer CFA Institute Global Pension Index, which ranks retirement income systems around the world. Australia’s system has a B+ rating, said David Knox, the lead author of the Index and senior partner and senior actuary at Mercer Australia.
Only Iceland, the Netherlands and Denmark got an A rating, Knox said, pointing to three areas of improvement, in particular, that would help Australia’s system into A-rating territory.
First there needs to be a stronger focus on retirement income above and beyond simply accumulation, Knox said, speaking on Conexus Financial’s Future of Super podcast, hosted by managing editor Julia Newbould, in a discussion about equity in super, particularly age equity, gender equity, income equity and intergenerational equity.
Second, the system needs broader coverage, particularly for the self-employed and thirdly, the super guarantee (SG) needs to be higher than its current level of 10.5 per cent, with the better systems at 12 per cent or even higher.
There is a significant gender gap in super, Knox said, caused by a range of factors boiling down to different employment patterns between men and women. On the positive side, the means-tested aged pension reduces this gap because more women get the age pension than men, and this gap is less consequential in a household situation where a couple are working together.
But there is clearly a gap and there are things that can be done to reduce it, Knox said, most notably SG paid on parental leave, but additionally a carer’s credit for people who are caring for babies and young children – who might take six or 12 months out of the workforce without any superannuation contributions.
“By having the child, they’re doing something very much for the benefit of the community longer term,” Knox said. “Therefore, their retirement years shouldn’t be sacrificed with that lower superannuation. So, what we’re arguing here is there should be a super baby bonus, if you like, given to the primary carer, and we’re suggesting something in the order of four-and-a-half to five thousand dollars.”
This figure is basically the SG rate times the minimum wage for a year and would be paid to everybody who is a primary carer as a credit to their future retirement benefit, he said.
There also remains a gap in the system for middle-income earners, Knox said. With the means-tested age pension targeted to low-to-middle income earners, and superannuation tax concessions mostly going to higher income earners, middle income earners enjoy less government support due to the way the assets test works and its exclusion of the family home.
Government support could be better balanced out by changing the taper rate on the assets test, Knox said, and he also questioned whether the family home should be left out of the assets test, while admitting this is a politically charged topic.
Also, speaking on the podcast was Deborah Ralston, experienced company director and professorial fellow at Monash University, and also a member of the Reserve Bank of Australia’s payments system board and the Future Fund board of guardians.
Ralston said the purpose of super is to make sure people enjoy a comparable standard of living in retirement to what they enjoyed during their working life. But equity is a particular point of focus due to poorer average outcomes for women, singles, renters, involuntary retirees, Aboriginal and Torres Strait Islanders, those with a disability, and potentially younger generations.
Super is becoming more equitable between the genders, Ralston said, with a greater focus on childcare helping women play a stronger role in the workforce. There have also been a range of other positive developments, she said.
“One was about disclosure of super balances in divorce proceedings,” Knox said. “Quite often there’s an inequitable distribution of assets because not everything is obvious, and that’s been addressed.”
The $450 per month threshold for SG payments was also a big issue for women who were often casual workers on lower incomes, and this has been addressed, she said. And the recent announcement that paid parental leave would be extended from 18 to 26 weeks will also help, she said.
However, areas for improvement remain, particular the significant incidence of poverty in retirement for those who don’t own homes, Ralston said, calling for much greater levels of funding for public housing.
“Because the cost of housing has gone up so much, the Commonwealth’s rent assistance really does not help very much at all,” Ralston said. “And even if you were to double that amount, it’s still not really meeting market rates.”
Greater assistance is also needed for people who are forced to retire early, as this cohort is also among the most likely to face poverty in retirement, Ralston said.
“We used to assist people who retired early due to ill health by giving them the disability pension which is considerably more beneficial than Newstart,” Ralston said. “But at the present time, there doesn’t seem to be much of an option to assist in that way.”