Independent review recommends overhaul of retirement income system

Last week, Federal Treasurer Josh Frydenberg released the findings of the independent Retirement Income Review Final Report, that was chaired by Michael Callaghan, which suggested that the entire Australian retirement system needs to be improved.

Mr Callaghan, Chair of the Aged Care Financing Authority, former Executive Board member of the International Monetary Fund (IMF), and Chief of Staff for former Treasurer, Peter Costello, handed this Review to the Federal Government in July and peak bodies have been calling for the Review to be released to the public since.

This Review was undertaken over ten months, looking into the three pillars of Australia’s retirement system – the age pension, compulsory superannuation and voluntary savings.

It found that the retirement income system works well, however, there is a lot of room for improvement. Additionally, the report doesn’t make any recommendations, only observations.

The report says, “The Australian retirement income system is effective, sound and its costs are broadly sustainable. This is reassuring in a time of economic uncertainty associated with the COVID-19 Pandemic. But the evidence suggests there are areas where the system can be improved.”

Key observations in the report include:

• A flaw of the retirement income system is that it is very complex, and it suggests that there needs to be a better understanding of the retirement income system among Australians.

• The Age Pension has been highlighted as working well for retirees along with other supports available to retirees. 

• There are groups that are disadvantaged on the Age Pension, including those who don’t own their own home and are renting.

• The home is an important component of voluntary savings, as it reduces housing costs for individuals and can be drawn on as an asset while in retirement.

• Compulsory superannuation works well and if it wasn’t because of the compulsory requirement, there would be fewer people entering retirement with adequate savings.

• Saving for retirement involves less consumption in working years, people need to decide on this trade-off.

• An increase to the Superannuation Guarantee (SG) rate would result in lower wages growth and affect living standards for those in their working life.

• Efficient use of savings in retirement can have a bigger impact on improving your retirement income than increasing the SG.

• Using super assets efficiently and accessing home equity can boost retirement income without needing additional contributions.

• Stakeholders have pointed out inequitable outcomes for various groups, including women, Aboriginal and Torres Strait Islander people, people with disability, and those no covered by the SG.

• Changes to improve the fairness of the system could include paying the SG on employer paid parental leave and Government’s Parental Leave Pay or having the SG include overtime payments.

• The superannuation tax concessions design increases inequality in the system, it provides greater benefit to people with higher incomes. People with large super balances receive very large tax concessions.

• Government spend on the Age Pension will fall over the next 40 years and higher superannuation balances will reduce the Age Pension cost. The superannuation tax concessions is also projected to grow and exceed the Age Pension expenditure. The SG increase to 12 percent will increase the cost of the system in the long term.

The Review also hosts snapshots of the retirement income system, including 71 percent of Australians who are over the age of 65 receive pension payments (full and part), 76 percent of people over 65 own their own home and 11,000 people have over $5 million in their superannuation account.

Mr Frydenberg says the Government will consider the observations in the Review, along with the recently proposed recommendations from the Royal Commission into Aged Care and the recommendations from the Productivity Commission’s report into superannuation.  

“The report is very comprehensive, and the report should give Australians confidence about the soundness and sustainability of Australia’s retirement income system,” says Mr Frydenberg.

A legislated increase to the SG of 9.5 percent to 12 percent is up for debate, the Federal Government is considering the report and the voices of others in the superannuation space, and will make a decision before the scheduled increase takes place.

Industry Super Australia (ISA) is backing the SG increase, saying they are concerned that the review panel is encouraging selling the family home or taking a reverse mortgage to fund retirement, whereas the SG increase would boost the average 30-year-old couple’s retirement balance by $200,000.

ISA has even suggested that the findings around the legislated SG increase seem “ill-founded” and say that the super rate has only increased by 0.5 percent over 18 years.

Chief Executive of ISA, Bernie Dean, says, “…We hope [the report] will not be used to ask Australians to sacrifice hundreds of thousands in guaranteed retirement savings for a vague promise of a wage increase that history shows will not occur.

“The two thirds of Australians who support the legislated and long-promised super increase would not take too kindly to politicians, who pocket 15 percent super on top of their generous salary, using this review to snatch away their retirement savings.

“This report’s findings must be used to support sensible reforms that will grow members’ savings, not cherry-picked to support pre-conceived policy ideas that will leave people and the nation worse off.” 

Council on the Ageing (COTA) Australia has welcomed the release of the Retirement Income Review, who wanted the Review released straight away in July. They believe the Review is the first step toward an objective public discussion around an effective, fair and sustainable retirement income system for older Australians.

Chief Executive of COTA, Ian Yates, says he hopes the Review will provide the basis for discussion and planning of appropriate reform.

“We welcome the confirmation that our retirement income system is doing well for most older Australians, but there are many who are slipping through the cracks. Many women and people in the private rental market are among those worst off in retirement,” says Mr Yates.

“There has been some unfortunate politicisation of retirement incomes issues, particularly around the level of the Superannuation Guarantee. This Review provides a basis for a more evidenced based discussion of that and many other issues must put this to rest so policymakers can get on with the job of ensuring older Australians have a sustainable, just and accessible retirement income system for the future.

“It is vital to emphasise that this Review was not just about compulsory superannuation, which is only one, albeit very important, part of a total retirement income system, in which the adequacy of the age pension and other public policy supports, such as health and housing, for all vulnerable retirees is also of paramount importance.”

To read the full report (648 pages long) visit the Treasury website, or there is report overview available.