Australia’s retirement system third best, but needs to fix pension

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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.

World's best retirement systems

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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Written by Leon Della Bosca

Leon Della Bosca is a voracious reader who loves words. You'll often find him spending time in galleries, writing, designing, painting, drawing, or photographing and documenting street art. He has a publishing and graphic design background and loves movies and music, but then, who doesn’t?

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25 Comments

Total Comments: 25
  1. 0
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    One solution that should be considered to assist retirees in a low interest rate environment (who are too risk averse to invest in shares etc.) is to allow them to purchase additional age pension. The government should be able to give an attractive rate as this is in their interest too.

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      How would that work? People cannot manage now and any debt would be counterproductive. This would only suit people who have something. Many people have nothing, no house, no super, no savings. That is the lot of renters. Single renters in particular need more so maybe juggle who gets what? Some on here seem to be getting the pension when they have a lot of money which I do not understand. I have said this before but maybe spend down to an emergency fund before getting any pension. More money could then be aimed at the poorest pensioners who are obviously the renters especially the single ones.
      Or, even better, close all tax loopholes and fund all poor people across the ages. This would cover everything. The same thing happens in the US. There would be even money to top up the wealthier pensioners. All elderly could have access to free medicine and health care. Such is the amount of money involved in tax avoidance.

  2. 0
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    Deeming rates on fixed term cash deposits is a Tax on Pensioners. The current interest rates are ripping off pensioners and part pensioners. The government are hypocrites when it comes to Deeming Rate on Cash Term Deposits. This tax impacts on over 600,000 pensioners and part pensioners and should be reviewed and rectified!

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      Deeming rates have nothing at all to do with cash deposits but are worked out on what many on the pension earn.

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      VCBB we have debated this issue before, you appear to not grasp the issue! Deeming rates are applied to cash deposits, the deeming rate is set by government, the true rate of the deeming rate does not reflect the true income earned on those deposits because government will not adjust the rate.Itis a Tax on pensioners and part pensioners. The rate needs to be reviewed and rectified. PS are u a bot!

    • 0
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      Read the Weekend Australian’s advert for La Trobe Financial (Page 25) offering 6.50% p.a. for a 4 year term. But also read the funny bit at the bottom explaining you could lose the whole bloody lot. Now would I go for that at my age? Mattress bank is better than that by a country mile.

    • 0
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      Tricky, deeming rates are not set by Cash Deposit rates, the gov looks at the whole market, shares, super, etc, there are plenty of pensioners earning more than the deeming rates.

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      McDaddy, Deeming Rates are set by the relevant minister after consulting SCOMO. The government has been critical of banks not passing on interest rate cuts, the hypocritical government in there wisdom do not pass these cuts onto the Deeming Rates for Cash Term Deposits. Pensioners Tax. This impact on over 600,000 pensioners and part pensioners. Whom invest in banks for the security of the investment. At our age we can’t afford risky investments nor do we have the ability to recover from such loses.

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      Income stream purchasers with non concessional amounts as high as 48% have this deemed as only 10% by Centrelink to dent a part pension and concessions to retirees who worked extremely hard and paid lots of tax as well.

      Of course we have to have a surplus so taking money where they can and especially from those pesky retired unionists seemed like a good idea at the time.

      Thus we had the cigars and champers celebration after they betrayed income stream buying retirees.

  3. 0
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    So, how much does a worker who is made redundant at age 55 and is on Newstart until 67? According to this article, he/she will get ¾ of Newstart. As to disallowing people getting a lump sum on retirement to do with whatever they want, isn’t that a bit Big Brother? The super funds belong to the person who has had them put aside, in their name, during their working life and as has been pointed out many times, a lot of the super payments were negotiated in lieu of a wage rise. Governments should never be allowed to tell its people how to spend their own hard-earned money.

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    Actually the above is incorrect, other LFC articles contradict this plus other sources stated australia’s retirement system is one of the worst. E.G other countries do not have the asset tests etc and just have a universal pension with the normal tax incremental levels applying.

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      “best” and “worst” depend upon the measure used … Australia’s scheme is third best when replacement rate to a cap of $75k is the measure, can you support claims that contradict that conclusion?

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      Quite correct, johnp, we have heard regularly from other studies how Australia is the worst in the OECD and in advanced countries with the way it means-tests Age Pension and does not have universal age pension. Mercer’s report is clearly out-of-touch, and they don’t even understand how Super is implemented here – for example, who are they to suggest either to block funds being drawn out of Super at will or to force a part of Super to be earmarked for an income stream (presumably held captive by Funds such as theirs to generate profits for them)? Super is part of the packaged Wages here (mostly as a result of being in lieu of other wage rises), fully earned by the people, and the Govt has NO rights to dictate how it is used. The Report authors may have come from another country where the systems are different, and they DO NOT understand the implementation of Super in this country.

  5. 0
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    Who in their right mind would put money into super if they couldn’t withdraw it when they retire?

  6. 0
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    I agree with Paddington on a few points re – this article, but disagree on at least one.

    1): Spending ” down ” to an emergency fund. How does that work & provide for pensioners when such a fund is exhausted? Doesn’t make sense.

    2): Paddy, you single out ” renters ” for special assistance. There would be millions of Aussies like me who own their home after decades of paying of their home loan & then are cash poor; ” I am definitely that ” through no fault of theirs.

    3): You say that many have lots of money & still getting the pension; that may be so, but their ( financial money pit ) may well be only providing a pitifully meagre return regardless of how they juggle it ” due to current downward spiralling interest rates towards negative territory. Then we’ll all be ” paying the banks ” for the privilege of keeping our hard-earned as securely as possible.

    4): I do fully agree on your last point. Close ” ALL TAX LOOPHOLES “.

    Specifically for politicians who rort the system & become insanely rich while ” supposedly ” serving their electorate, or leaving after a couple of terms with a big fat pension plan deliberately reserved only for politicians. Were all tax loopholes permanently closed & company tax levels lowered to, say 10% of Gross Income, then the bigwigs may well be more inclined to chuck their tax portion into Treasury coffers with little after thought cause, well after all is said & done, they are retaining 90% of their annual profit.

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      If you have something you are better off than others with nothing. A home has value so it is an improvement on having no home. If you have a home plus more then you are additionally better off. You have capital. And so on…
      The ‘Or’ means forget what comes before. Closing the tax loopholes is what I am talking about. That would cover everything comfortably. People with wealth are important because they can pay tax. But many do not, including companies.
      I don’t mind anyone having money so long as they pay tax. Politicians should be well paid. Compared to private enterprise they are not overpaid. $200,000 is not a huge amount of money for lost family time and being away from home and working long hours etc. Good politicians earn it for sure. They pay tax. I guess about a quarter of that? As one said to me when they changed jobs into private enterprise, they were working half as much for twice the money. I would not be a pollie for quids.
      That is beside the point. There are poor pensioners and there are well off pensioners. If you can get from pension day to pension day comfortably with a bit to spare you are doing alright. Share a thought for the ones who cannot!

  7. 0
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    Agreed. The asset test and superannuation is an oxy-moron because on the one hand they encourage you to save on super, which increases your asset test),but on the other they take away $3 × every $1k you may have over the skinny asset test.
    The solution is to:
    A. Increase the asset test
    B. Exempt the first $100 in super from the asset test
    C. Reverse Hockey’s measure to take 3, instead of 1 dollar x every $1k people have over the test.

    But, hullo. Is anyone listening out there?

  8. 0
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    Australia’s retirement system would have fared better if the LNP and Greens didn’t steal pensioners assets with the 2017 changes to the Pensioner Assets Test for the “budget emergency”

  9. 0
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    You mentioned the Netherlands pension system is based on benefits to workers from defined benefit plans on lifetime average earnings. All well and good! In this country we award pensions on residency qualifications alone. If you have never worked in your life (and we are going to have quite a few of them) they are entitled to a full pension after getting off new start. The people who put in and saved are asset tested and might get nothing from all their lives’ efforts. One reason to be in 3rd spot I am sure. This is indeed the best country on the planet for “King Take-it-Easy” people as the Govt (tax payers) is picking up the tap for everything. But still people are not happy, go figure.

  10. 0
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    They have been doing that since the 90s, from July it became available to max rate Pensioners as well, it’s called the Pension Loan Scheme.

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