The federal government is on a mission to get retirees to spend.
Its Retirement Income Review (RIR), released late last year, states that by 2060, one in every three dollars paid out of the superannuation system will be an inheritance rather than retirement income. The superannuation system currently holds $3.04 trillion in national savings. You can do the maths.
The RIR notes that 29 years after the introduction of compulsory superannuation, the retirement phase of superannuation remains underdeveloped. “There is substantial room for improvement in how the superannuation system delivers adequate incomes in retirement,” it says.
Accordingly, in a Commonwealth Treasury position paper released on Monday, it asks super funds to develop a strategy to make it easier for members to take money out of their super in retirement. And spend it. In fact, it wants us to draw down our full super balances in retirement. Don’t even think about leaving an inheritance!
The strategy would be in place from 1 July 2022.
The problem is an age-old one. We’re encouraged to save throughout our working lives. Spending without earning can then be a difficult adjustment and no-one knows how long they will live and what health and other issues might be lying in wait. And that’s not to mention the cost of aged care – either in the home or in residential care. Crystal ball required.
The RIR also found that a large proportion of Australians do not believe the Age Pension will exist when they reach retirement. It says that based on surveys, only 48 per cent of all respondents and 37 per cent of those aged under 55 believe the Age Pension will exist when they reach retirement.
The Treasury position paper says that retirees struggle with the concept that superannuation is to be consumed to fund their retirement “partly because they have only ever been primed to save as large a lump sum as possible”.
“Because retirees struggle to develop effective retirement income strategies on their own, much of the savings accrued by members through the superannuation system are not used to provide retirement income.”
Brendan Coates, economic policy director at the Grattan Institute, says “most retirees could afford to spend substantially more than they do”.
“Many retirees seem reluctant to draw down on their capital, and instead live solely on the income their savings generate.”
The position paper, which seeks input by email to [email protected] by 6 August 2021, is the latest attempt by the federal government to tackle the issue.
The summary says: “The government intends to introduce a retirement income covenant in the Superannuation Industry (Supervision) Act 1993, outlining a fundamental obligation of trustees to formulate, review regularly and give effect to a retirement income strategy.
“The strategy will be a strategic document developed by the trustee, outlining their plan to assist their members to achieve and balance the following objectives:
- maximise their retirement income
- manage risks to the sustainability and stability of their retirement income; and
- have some flexible access to savings during retirement.”
The Australian Financial Review reports that the government previously considered requiring all super funds to offer members a comprehensive income product for retirement (CIPR), after a recommendation in David Murray’s Financial System Inquiry in 2014.
“The product, which is a form of annuity, would provide retirees with an income for life, no matter how long they lived,” explains Michael Read, an AFR reporter who was an economist at the Reserve Bank of Australia and at UBS.
“However, Treasury’s position paper suggests the government has backtracked on this one-size-fits-all approach, and instead said funds should develop a strategy that suited the particular needs of their members.”
The paper says: “The retirement income needs of members, and the plan to service those needs, may be different from fund to fund, or from cohort to cohort within a fund.”
The Australian Institute of Superannuation Trustees (AIST) chief executive Eva Scheerlinck told the AFR she was “pleased the position paper doesn’t propose mandating particular products, such as annuities or the previously proposed CIPRs”.
“It would not have made sense to mandate a superannuation longevity product, for example, for a member who is likely to retire with $250,000 or less in super, when the Age Pension will give that member longevity income protection.”
Mr Coates also cautioned policymakers to “proceed carefully on CIPRs since such products are not well understood by most Australians”.
Can you envisage spending all your super while still feeling confident about having a comfortable retirement? How would that work? Why not share your views in the comments section below?
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