Federal government talk of scrapping the compulsory super guarantee and implementing a ‘death tax’ on drawdowns on deceased estates have sparked renewed calls for a universal pension.
National Seniors Australia chief advocate Ian Henschke wants a universal pension scheme that isn’t means tested.
“Review after review complains about older people failing to spend down their capital; they don’t blame the system, they blame the retiree. And then they wonder why no one’s listening,” he told Savings.com.au.
“By setting income and asset limits which restrict you from, first, getting a pension, and second, limiting your entitlement, it punishes you for having more.”
Mr Henschke’s suggestions come on the heels of Superannuation Minister Jane Hume’s call to scrap the legislated increase in the superannuation guarantee. The minister says such increases would only serve to encourage retirees to hoard instead of spend.
“Australians are retiring with more savings than ever, largely because of our compulsory super system that quarantines nearly $1 in $10 of earnings,” she wrote in the Australian Financial Review.
“And the super guarantee (SG) is legislated to rise by 0.5 per cent every year for the next five years, taking more money away from your standard of living today so you can retire with a higher balance in the future.”
The senator claims Australians should be making the most of assets during working and retired life. However, she said the government’s retirement income review revealed a common trend of frugality in retirement, with retirees choosing to live only on earnings, rather than effectively using retirement savings.
“The review found that many retirees are hesitant to draw from the capital amount of their superannuation, instead drawing only the return from the investment,” she wrote.
The challenge for policymakers, “beyond the structural pillars of our retirement income system, is how to improve the confidence of retirees to use their savings more efficiently to enjoy a better standard of living”.
She added: “The tendency to under-consume in retirement may be driven partly by a desire to leave a bequest, but we shouldn’t underestimate the fear of outliving savings, or the anxiety about paying for future health and aged care costs.”
Public Service Commissioner Andrew Podger wants government legislation to ensure retirees draw down on their savings through annuities and home equity release programs targeting deductions from deceased estates.
Some have described these draw-downs on deceased estates as a ‘death tax’.
“When you have a system that relies so much on so many moving parts, it’s no wonder retirees are not confident and hold on to their money rather than spend it as they head towards the end of their lives,” said Mr Henschke.
“And remember no one knows when that will be. It could tomorrow or in 25 years.
“If every year, you worry whether the market will give you enough or not, you have little choice but to be conservative.
“I’m sure many retirees feel this way, having lived through two of the biggest market downturns in recent history. It’s a terrifying financial rollercoaster you really don’t want to get on.”
The top two pension systems in the world – in The Netherlands and Denmark – both have defined benefits schemes, or universal basic pensions, in place.
Australia’s refusal to implement such a scheme hampers retiree confidence to go out and spend, instead of hoarding cash and assets, says Mr Henschke.
“That’s the beauty of a properly designed universal pension. It takes away the year-on-year risk, but ensures it is fiscally sustainable and fair,” he said.
A universal basic income could, over time, also be good for the government’s bottom line, as it would eliminate the need for massive administration costs.
“It would get rid of the pension assets and income tests, doing away with the need for unfair taper rates, deeming rates and work restrictions, and end the need to engage with Centrelink,” Mr Henschke said in May last year.
“If everyone of pension age received a pension, retirees could just add this to their other income and pay tax. Means testing is costly to administer and leads to perverse outcomes, which are more apparent in the current crisis.
“Asset taper rates unfairly penalise those who save more for their retirement. Income tests undermine ongoing workforce participation and lead to ongoing anger over deeming rates.”
Melbourne Mercer Global Pension Index lead author David Knox says the Danish approach to the Age Pension, which is paid as taxable income with the balance paid on an income-tested basis, is a fairer system for all.
“The universal pension would include provision of the health card, thereby removing the current incentive for many retirees to deliberately rearrange their affairs to receive a part pension and therefore the health card,” he explained.
“Such an outcome would encourage all retirees to maximise their assets and income.
“The introduction of the universal pension would improve the retirement income for the average income earner, but would have a reduced effect at higher incomes as it would represent a fixed payment in dollar terms.”
Would you like to see a universal basic pension introduced in Australia? What do you think of increasing the compulsory superannuation guarantee contributions?
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