Improving the retirement system

Australia has a unique Age Pension system, which compares very well against the structures used in other countries. However, superannuation has developed in an ad-hoc way over the past 30 years, and there have been many changes around product structures and tax concessions/thresholds. This has made it difficult for people to plan their retirement. Yet, there is no sign of stability as we await the Government’s response to recommendations made in a Productivity Commission review and a royal commission into misconduct in the financial services industry.

Following this year’s Budget, Treasurer Josh Frydenberg announced a full review of the retirement income system, so there will be more changes on the way.

The Actuaries Institute has written a Green Paper that looks at ways to improve the system, including integrating superannuation, taxation, the Age Pension, equity in family homes and aged care. At present, all these structures operate independently and there is no umbrella national strategy for integration.

Our system of mandatory contributions on wages has provided stronger savings for all Australians (apart from the self-employed). The Superannuation Guarantee, now at 9.5 per cent of wages, has already led to good balances for many people retiring today. However, it has meant that many more people are subject to the means test for the Age Pension, and these rules have many anomalies.

Age Pension
First, the Age Pension is a great safety net for retirees. It is set at about 28 per cent of average earnings, giving $24,268 (including supplements) a year to a single pensioner and $36,582 (including supplements) to a couple. As retirees now live much longer than in past generations, the cost of providing the pension has grown. The present value for a single person retiring at 67 is now about $500,000 (slightly more for females who live longer on average). The value for a married couple is more than $800,000.

Clearly, the Age Pension is a valuable benefit, but (unlike most other countries) the Government uses means testing to keep its costs under control. 

Unfortunately, these tests are contentious and invasive, with many anomalies. For example, a couple owning their own home (let’s say worth $750,000) and with other assets of $1 million would not receive any Age Pension. People in this position have most of their money in a super account. As they draw it down, they will become eligible for a part-pension later in retirement.

Contrast this to a couple with a large home (say worth $3 million) but with little superannuation. If their assets are less than about $400,000, they will get a full Age Pension – even though, overall, they are worth twice as much as the aforementioned couple.

The situation is worse for renters. A couple with assets above $1,074,000 receive no pension, even though their wealth is much less than the homeowners cited.

The obvious solution is to include the family home in the assets test, but this would need to be explained very carefully. It could be done by increasing the thresholds in a way that most people are little affected, but those with very valuable homes would receive less. At the same time, the increased thresholds would give renters more pension income as they could hold more assets before being subject to the means test.

Now, some homeowners might be asset-rich and income-poor. In their case, they could make use of the Government’s Pension Loan Scheme or private sector equity release products. In that way, they can use their illiquid wealth without needing to sell up and move.

While the aforementioned system would be more equitable, it would not address the situation of those renters on the Age Pension who have little other income. These retirees currently get rental assistance, but the amount of $69 a week (paid fortnightly) for a single does not contribute much towards private rentals in Australian capital cities. This is an area where government support could be targeted much better.

Australia has a unique taxation system, where earnings on retirement incomes are tax free as are any withdrawals from these accounts. While it is common elsewhere not to tax the earnings of super funds, it is unusual not to treat pension withdrawals as personal taxable income.

The Government realised that this structure provided a windfall for those with very large superannuation accounts and it changed the rules from 2017 to cap the amount that could be transferred into a tax-free account ($1.6 million). That improved equity in the system, but the balance of large accounts is still taxed at only 15 per cent (or 10 per cent on capital gains), so there is scope to increase the rate above (say) $5 million to a higher tax rate in the range of 30-45 per cent.

Retirees with low incomes are eligible to receive a Senior Australians and Pensioners Tax Offset (SAPTO) up to $2230. Retirees also receive other benefits such as discounted rates, utility bills, public transport, motor registration and a Pensioner Concession Health Card. These are all designed to assist people on low incomes, but they are inequitable relative to those younger workers who also struggle to pay bills.

It would make more sense to provide a slightly higher Age Pension to needy pensioners, and to eliminate these benefits – many of which go to people with reasonable wealth.

Aged care
The aged care system needs reform. It has its own royal commission, which is finding poor levels of service despite the high fees that the elderly are charged for these facilities. Ideally, we should remove the Refundable Accommodation Deposits (RADs) and replace them with a weekly rent for accommodation.

As baby boomers age, we will need a lot more facilities, both for residential aged care and home care. It makes sense for the Government to subsidise the poor, but wealthier retirees should bear some of these costs.


While we have a great system for building people’s superannuation, we let them down in the retirement years. A better-structured social security system around retirement income, accommodation and aged care needs to be developed. And it must be easy to understand and fair. That should be one of the objectives of the retirement income review.

The Actuaries Institute has prepared a Green Paper on improving Australia’s retirement system. The paper was written by actuaries Anthony Asher, David Knox and Michael Rice. It outlines some design options for an integrated system of retirement provision, which the Actuaries Institute encourages Australians to debate boldly.

The Actuaries Institute is committed to promoting and maintaining a high standard of actuarial practice and represents and supports its members through education, establishing and maintaining strict professional and ethical standards and contributing to public policy through submissions, leadership and expert analysis.

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