We must ask why our retirement income system is yet to be properly overhauled.
According to Treasury officials, 70 per cent of Australian retirees are currently receiving a full or part Age Pension. This is projected to decrease by only three per cent (to 67 per cent) by 2055. So clearly, for the foreseeable future (the next 30 years), most Australians will retire on some form of pension.
It is argued that a higher proportion of self-funded retirees is desirable and that our current superannuation system has been unsuccessful in reinforcing this shift to self-funding.
In fact, as noted in the Murray Financial Services Inquiry, our superannuation system is both ill-defined and poorly targeted. Why? Because, as frequently highlighted by think tanks, including the Grattan Institute, and per capita, the tax concessions on super favour the top 20 per cent of wealthy households at the expense of the broad mass of citizens.
Australian superannuants also pay the third-highest fees of all Organisation for Economic Co-operation and Development (OECD) nations, which equates to about $80,000 in eventual retirement income for a 50-year-old male.
Reviewing and changing these two critical inputs – tax concessions and fees on super – could ‘shift the needle’ considerably in terms of ultimate retirement savings for many ordinary Australians. But recent federal governments seem to possess little political will or interest in tackling these big issues.
Many not-for-profits and seniors’ associations have consistently highlighted the need for a comprehensive review of our retirement system that covers all aspects of the Age Pension, superannuation and retirement income–related tax. This call has been ignored, so the debate continues to fragment into disjointed demands for ‘part’ policies on each of these items. And, as such, in overlooking the ‘whole’, the debate has become ill-informed, partisan or both.
For instance, in Peter Martin’s ‘pop’ at the super industry – ‘Don’t fall for the super industry’s scare tactics’, The Sydney Morning Herald, 8 December 2015 – he claims that the Association of Super Funds of Australia’s (ASFA’s) estimation of income needed for a “comfortable” retirement as “absurdly high”.
Mr Martin’s selective list of household items could be seen to support his claim, but what he does not clearly state is that both “modest” and “comfortable” estimates are based on the assumption that the retiree fully owns their own house. In fact, Peter Martin states “… living costs plummet on retirement. Most retirees no longer face a mortgage, a saving of 30 per cent.”
Whilst that may have once been the case, the fact is that many baby boomer retirees are now entering retirement with debt, much of it mortgage-based, as reported by CPA Australia, which claims 37 per cent of retirees have a significant debt. It is simply wrong to assume the living costs of many retirees will “plummet” anytime soon.
A close reading of the ASFA living costs in retirement for those living a modest lifestyle reveals how truly straitened their circumstances are. For instance, a modest single is allocated $2.66 for weekly public transport, $20 per month for hairdressing and no expenditure at all on home repairs. What kind of planet would you live on where these amounts would cover your needs? I doubt Mr Martin would be happy if this was his lot.
Similarly, former senator Amanda Vanstone, who is enjoying an extremely generous parliamentary pension, also shares opinions on the lot of the poor and the need to tighten their entitlements, as witnessed in her recent diatribe on tax and super, which was simplistically selective in substantiation and bordered on an ideological rant (‘Our tax system is heading for trouble and tinkering won’t help’, The Age, 7 December 2015).
First up, Ms Vanstone’s alarming claims about the dependency ratio: the ratio of people of so-called ‘working age’ (15 – 65) to those aged over 65. Ms Vanstone claims that we are heading for “oops or oh-no” territory as this ratio changes from “7.3 people of working age for each person over 65” in the Whitlam era, to 4.5 today and “say” fewer than three in 40 years.
However, using age dependency as a measure is no longer valid, as many people over 65 are working, and with the Age Pension age currently increasing to 67 by 2023, perhaps 70 by 2030 if Abbott/Turnbull Government legislation is pursued, the ratios will automatically improve. But more importantly, as Dr Professor Katherine Betts has concluded, the dependency ratio in the boom years of the 60s – i.e. labour force participation – was much lower still, and the sky did not fall in.
Ms Vanstone’s all-too-easy (and discriminating) generalisations that “oldies” are causing all increases in health expenditure is also wrong, according to Treasury estimates in successive intergenerational reports. Much of the increase in health spending is caused by a rapidly increasing number of tests for Australians of all ages, not just “oldies”.
Ms Vanstone claims that demonising whole groups of people (because of their income) is infantile – yet she writes off 5.4 million baby boomers as a “demanding bunch” before concluding “it’s all gong pear-shaped”. Finally, she reaches her point, which supports Margaret Thatcher’s claim that you do not make less-wealthy people richer by making the rich less wealthy.
It is on this point, when applied to retirement income, that Ms Vanstone is really off the mark.
Our current retirement income system has two top-line numbers that we should all understand. Firstly, the Age Pension currently costs $48 billion per year – i.e. 2.9 per cent of Gross Domestic Product (GDP). Over the next 40 years, it is projected to increase by just 0.07 per cent (to 3.6 per cent). This has been described by academics as manageable – not a blow out. In fact, the percentage under Treasurer Peter Costello was higher still.
Secondly, the very generous superannuation tax breaks currently cost $45 billion, and are projected to overtake spending on the pension next year. The tax breaks, as stated, favour the top 20 per cent of households – ‘the rich’, as Ms Vanstone might describe them.
A relatively simple policy revision of these tax breaks and an adjustment to the inordinately high fees charged by super funds would go a long way toward ensuring a much more equitable retirement income system for all Australians, not just the wealthy households.
More spin has been offered by Assistant Treasurer, Kelly O’Dwyer, who is keen to push through legislation that has stalled in the Senate: in particular, a proposal for one-third of super fund directors to be independent and for funds to have an independent chair. This change, she maintains, will provide a baseline for improved governance of super funds.
Yet this same government has wilfully ignored repeated calls for a royal commission into financial advice, in the wake of what appears to be a white collar crime committed by advisors from financial planning divisions within just about every major bank, including the Commonwealth Bank, Macquarie, ANZ and Westpac.
How can this call for governance be serious when ordinary Australians are loath to trust planners employed by financial service organisations that manage the lion’s share of the wealth industry? And this reminds us exactly why we need to question the ‘super spin’ we are fed about retirement income on a regular basis. There is a narrow cluster of dominant voices that support the status quo. We must ask why – and for whose benefit it is that our retirement income system is yet to be properly overhauled.