Challenges to pensions and pensioners

Australia enjoys one of the world’s most successful and lucrative pension systems.

Right now, it faces one of its biggest challenges.

As do women, most of whom prior to the pandemic already faced the prospect of retiring with far less savings than men.

But Australia’s pension system is not alone on this ignominious situation.

The savings gap between retired men and women worldwide is set to widen further, even in some of the biggest pension systems.

Most women take more time out from the workforce to have children, resulting in fewer working years and reduced retirement savings.

The pandemic has decimated industries skewed towards employing women, such as air travel, tourism, retail and hospitality, according to the Organisation for Economic Cooperation and Development (OECD).

Federal policy response to the pandemic exacerbates the problem, says a Bloomberg report. It states that early access to retirement funds – a measure introduced in Australia, the US, Spain, Denmark and Canada – means that women, who outlive men on average, are further depleting their nest eggs.

“There is some indication that women could be more affected and that the pension gap would increase down the road,” says economist Maciej Lis.

“The crisis seems to worsen the labour market prospects of women more strongly than men because women tend to work in more affected sectors.”

Policymakers were already faced with the challenge of creating strategies for providing for ageing populations pre-pandemic.

Now, underlying flaws in pension systems designed to ensure financial security in retirement without being dependent on welfare have been exposed.

Australia’s pension system is ranked third best behind the Netherlands and Denmark. Yet Australian women will still retire with 40 per cent fewer savings than men.

This is similar to the European average, but even in the US, the shortfall is lower at 32 per cent.

The OECD says the problem with the Australian system is that it is linked to paid work and the threshold for compulsory contributions is a monthly income of $450.

As a result, many lower paid and casual workers miss out on superannuation.

“We have a very sophisticated retirement system that rewards those with an unbroken career track,” says chief executive of the Melbourne-based Health Employees Superannuation Trust Australia.

“The system doesn’t work for women who take time out of the workforce, women who work casually at times, part-time and it doesn’t put enough value on those years of unpaid work.”

And COVID-19 will further decrease women’s work prospects, says the OECD.

It is hoped the federal government’s Retirement Income Review might provide some solutions, including a removal of the $450 threshold and perhaps a super top-up for women who take time out to be family carers.

Countries such as Denmark and Sweden do this. And Denmark has a retirement income gap of about 8 per cent.

“Long before the pandemic, women already faced formidable challenges in saving and planning for retirement,” says Transamerica Centre for Retirement Studies chief Catherine Collinson.

“Any disruptions in employment, income and access to benefits for women are likely to widen the gap. Furthermore, given long-standing societal roles, women may find themselves more involved in home-schooling their children or being called upon to be a caregiver for an ageing parent or loved one.”

Women may also benefit from increased financial literacy, says a Fidelity International study.

Australian women worry about their financial future more than men, yet more than a third aren’t aware of how much they needed to retire, says the study.

While the Australian government decision to allow early super withdrawal of up to $20,000 will help them through the pandemic, the long-term effect on their retirement could be more catastrophic than any hardship caused by COVID-19.

According to data from super fund Hesta, women between the ages of 18 and 24 who claimed early release now have a median account balance of just $1049 – a 78 per cent reduction in retirement savings.

“Withdrawing $20,000 today could cost a woman anywhere between $63,000 to $200,000, depending on her current age, when she retires,” says FairVine Super executive chair Sangeeta Venkatesan.

“In comparison, the impact is a lot less for men.”

And though women face huge challenges, the Australian superannuation sector is facing the biggest challenge in its history.

Longer life expectancy and low interest rates are already putting pressure on the system.

Allowing workers early withdrawal of super has blown a $32 billion hole in the sector, says the Financial Times.

On top of this, the Coalition is signalling it may block the legislated increase in employer pension contributions, further dampening recovery for the system.

Supporters of the legislation theorise that the government may be trying to stymie the power of union-linked industry pension funds, which advocate on environmental, social and governance issues.

Some say the Coalition is using vulnerable workers and young people in lower-wage jobs to stimulate the economy, rather than relying on its own economic acumen to tackle the first recession in thirty years.

“This is grand theft Liberal party style,” says former PM and the creator of superannuation Paul Keating.

The Keating government introduced super in 1992 to support an ageing population and provide a fairer retirement system.

It has since grown to become the world’s third best pension system in terms of adequacy, sustainability and integrity.

Now there is a risk superannuation will be used as a staging ground for battle between conservatives and progressives for control of state institutions.

Pausing the increase to contributions at 10 per cent may be a short-term solution to help out an embattled economy and get businesses back on their feet.

But, according to the Financial Times, claims this will lead to increased wages should be treated with scepticism.

The last delay to increased employer contributions in 2014 was followed by a period of record low wage growth.

Debate around super will rage regardless. Until the publication of the Retirement Income Review, Mr Keating and those who share his ideology may go on assuming the government is planning to ambush the system for its own purposes.

Has your super held up during the pandemic? What do you think are the biggest challenges faced by current and future retirees?

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Written by Leon Della Bosca

Publisher of YourLifeChoices – Australia's most-trusted and longest-running retirement website. A trusted voice on Australia's retirement landscape, including retirement income and planning, government entitlements, lifestyle and news and information relevant to Australians over 50. Leon has worked in publishing for more than 25 years and is also a travel writer and editor, graphic designer and photographer.

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