Australia’s retirement system rises through global rankings, but flaws in the system have been exposed.
Australia may have the third best retirement system in the world, but it still needs to loosen the limits on the Age Pension assets test and address the conflict between the pension and super, according to the Melbourne Mercer Global Pension Index (MMGPI).
The report states that allowing average workers greater income in retirement requires “moderating the asset test on the means-tested Age Pension to increase the net replacement rate for average-income earners”.
The ‘replacement rate’ is deemed as the annual income retirees will receive as a pension (e.g. a worker on $100,000 requires an annual income of $75,000 at a replacement rate of 75 per cent).
The MMGPI, to be released on Monday, rated Australia with the third-best-performing retirement system behind the Netherlands and Denmark – rising one position since 2018.
The Index rates retirement systems by adequacy, sustainability and integrity.
Adequacy meaning whether the system offers enough support in retirement; sustainability is the ability to provide adequate future support, and integrity refers to regulation cost efficiency.
The index exposed a number of deficiencies in Australia’s retirement system, including hampered access to the Age Pension for average-income earners.
It suggested that some nest eggs should be converted to income streams and called for measures that would help older workers stay employed for longer as life expectancies rise. It also suggested that the pension age should be raised as the population ages.
The index shone a light on Australia’s rising level of household debt and says that some larger super balances are creating a false sense of financial security, encouraging higher household spending instead of more household saving for retirement, to ensure less reliance on government support later in life.
It claims the assets test is too stringent and may be preventing asset rich, cash poor Australians from receiving a part pension.
“Australia has an assets test and an income test for the pension. I’d like to see that replaced with a new measure,” senior partner at Mercer and senior actuary for Australia, Dr David Knox told The New Daily.
While the Mercer index highlighted obvious flaws in the system, it also suggested solutions, such as providing a pension to the poor that better reflects a reasonable replacement rate based on a percentage of average earnings. The Netherlands, which again took the top spot in 2019, already has such a system where most workers benefit from defined benefit plans based on lifetime average earnings.
And, at least 60 per cent of superannuation should be earmarked for an income stream, meaning Australian standards would have to change to prevent members withdrawing lump sums upon retirement.
What do you think of this assessment? Do you agree with Mercer’s suggestions to fix the retirement income system?
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