Forget more compulsory super: here are five ways to actually boost retirement incomes

Australia’s retirement incomes system works well, but there are things that need fixing.

australian hundred dollar notes

Shutterstock Brendan Coates, Grattan Institute and Jonathan Nolan, Grattan Institute

This morning the Grattan Institute releases its submission to the government’s retirement incomes review, a review called in anticipation of five annual increases in compulsory superannuation contributions, scheduled to begin in July 2021.

Our research shows the super increases aren’t necessary. For most Australians, retirement incomes are already adequate. Since higher super contributions will come at the expense of wages, the scheduled increases should be abandoned.

But there are big problems the review will need to confront.

Here are five changes that would tackle them.

1. Boost rent assistance

While most Australians are comfortable in retirement, the system is failing too many poorer Australians, especially low-income women and retirees who rent.

Senior Australians who rent privately are more likely to suffer financial stress than homeowners or renters in public housing. And it will get worse because young Australians on lower incomes are less likely to own homes than in the past.

The government’s priority should be boosting rent assistance, which has not kept pace with rent increases. Raising rent assistance by 40 per cent, or roughly A$1400 a year for singles, would cost just $300 million a year if it applied to pensioners, and another $1 billion a year if extended to other renters.

A common concern is that boosting rent assistance would lead to higher rents. But that’s unlikely: households would not be required to spend any of the extra income on rent, and most would not.

2. Ease the age pension asset test

While retirement incomes are adequate for most retirees, the age pension assets test excessively penalises people who save more for their retirement.

Before January 1, 2017 retirees with assets above the threshold lost $1.50 of pension per fortnight for every $1000 of assets above the threshold. In 2017 the Coalition lifted the threshold but also lifted the withdrawal rate to $3 of pension per fortnight for each $1000 of assets.

The changes resulted in very high effective marginal tax rates on retirement savings, so much so that a typical worker who saves an extra $1000 at age 40 increases their retirement income by only $25 each year, or $658 over 26 years of retirement, which is a negative return on money saved for decades.


Read more: Why pensioners are cruising their way around budget changes


The age pension withdrawal rate should be cut to $2.25 per fortnight for each $1000 of assets above the threshold. This would cost the budget about $750 million a year.

For middle and high-income workers, this change would have a bigger impact on retirement incomes per government dollar expended than boosting compulsory super.

3. Boost Newstart

Newstart, together with the disability support pension, provides an important safety net for Australians who are unable to work right through to retirement age.

Yet while the age pension and disability support pension are indexed to wages, Newstart is not. It only climbs in line with inflation. It should be increased by $75 a week and then indexed to wages going forward.

This would cost a lot but it would help the growing legions of older Australians, many of them women, who find themselves among the long-term unemployed in the years leading up to retirement, or are forced to retire early. And it would lift many more younger Australians out of poverty.

4. Include the home in the pension assets test

Falling rates of home ownership mean we are at risk of creating an underclass of retirees who rent.

And our retirement incomes system makes this worse by favouring homeowners over renters. Once a person is retired, their home is treated differently to their other assets. Which is why $6 billion in pension payments go to people with homes worth more than $1 million.

It’s time for more of the value of the family home to be included in the pension assets test. Counting more of the home above some threshold (such as $500,000) would be fairer and would save the budget up to $2 billion a year.

No pensioner would be forced to leave their home. Pensioners with valuable homes could continue to stay at home and receive the pension under the Government’s pension loans scheme, which recovers debts only when homes are eventually sold.

5. Fix super tax breaks

Superannuation tax breaks cost a lot – tens of billions each year in foregone revenue, with half the benefits flowing to the top one fifth of income earners, who already have enough resources to fund their retirements.

And the costs are set to climb further as super balances climb. The cost of the earnings concessions alone is set to climb from $17.4 billion to $20.8 billion over the next four years.

Three reforms would keep them in check.

- Voluntary contributions from pretax income should be limited to $11,000 a year. This would save the budget about $1.7 billion a year.

- Contributions from post-tax income should be limited to $250,000 over a lifetime, or to $50,000 a year. It won’t save the budget much in the short term, but in the longer term it will plug a large hole in the tax system.

- Earnings in retirement – currently untaxed for people with superannuation balances less than $1.6 million – should be taxed at 15 per cent, the same as super earnings before retirement. Doing so would save the budget about $2 billion per year at first, and much more in future.

These changes to super taxes free up money to help Australians who need help without hurting the retirement prospects of middle Australians.

Australia’s retirement incomes system works well, but there are things that need fixing.

The reforms we propose would make retirement fairer, save taxpayers’ money, and ensure that all Australians can enjoy a comfortable retirement free from poverty.


Read more: Think superannuation comes from employers' pockets? It comes from yours The Conversation


Brendan Coates, Program Director, Household Finances, Grattan Institute and Jonathan Nolan, Associate, Grattan Institute

This article is republished from The Conversation under a Creative Commons license. Read the original article.

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    COMMENTS

    To make a comment, please register or login
    GD
    2nd Mar 2020
    10:37am
    4. Include the home in the pension assets test
    This is ridiculous. Now those who own homes in retirement must suffer because we scrimped and saved. And because of that the government wants us to go into debt for our children to pay down. Bloody bloody disgusting. Fryberg where is you head and heart at. Creeps doesn't affect the bludgers in the government sector.
    Discontented
    2nd Mar 2020
    11:39am
    Right with you GD
    Discontented
    2nd Mar 2020
    11:39am
    Right with you GD
    Laura52
    2nd Mar 2020
    11:43am
    I so agree GD. And the value of the home depends on the location you live in! I live with mum and dad, being a carer for the both them and the house is 52 year old, in a state of so much disrepair, cracked plastering, walls, mould, you name it...not a beautiful mansion at all, falling apart and we can't afford to move elsewhere or even rent. We certainly can't afford to repair the house, yet....due to the location, the house/land is worth a lot. I wonder whether Centrelink will do a physical inspection of a home to see how much a house is worth or is considered " a valuable home" ...don't think that will happen, right?
    Macheke
    2nd Mar 2020
    12:09pm
    I don't think its ridiculous at all. Why treat someone with a $1m home differently to someone with a $1m savings? Treat them the same and remove rent assistance and let them decide if they want to buy/rent, sell their home/keep their home/buy a home without affecting their pension in some way.
    hyperbole
    2nd Mar 2020
    12:53pm
    Agree...why should someone with $1m savings be treated different to someone with a $1m asset in a home.
    Laura52
    2nd Mar 2020
    1:25pm
    I certainly understand your points Macheke, but my 80 year old parents, ...they don't want to move and don't have much money in the bank...the falling apart house is all they have and it is home for them...if this was to go ahead, it should be looked at a case to case basis. I am wondering if this proposal would affect newly retired people or about to retire people or people who have been retired for 30 years or more and have been living in the same house for a while, like my parents for 50 years?
    Sceptic
    2nd Mar 2020
    2:12pm
    This is a submission by The Grattan institute, so why are you blaming Frydenberg?
    Farside
    2nd Mar 2020
    3:31pm
    Laura, your parents may not want to move but it is their only asset of note ... choices have consequences. I would have preferred to keep my old house of 25 years but it was either downsize and cash up or join the ranks of the cash poor. It's an easy choice.
    IndyLopos
    3rd Mar 2020
    7:27am
    I currently don't get an aged pension due to the unfair Assets test. However, the current exclusion of the family home really discourages downsizing, especially in Sydney.
    What would be a better system, would be to include the family home but increase the thresholds used in the assets test. These thresholds should either be based regionally or simply ensure that people living in a large percentage of Sydney homes still be eligible for an aged pension provided that they have a low income.
    90% of aged people living in Sydney, on low incomes, should be able to get an aged pension, especially if they have paid income taxes, in Australia, all of their adult lives.
    These days many people are in a second marriage, following divorce, and have 2 properties to avoid issues with children/stepchildren. Including the residential home but with a much higher assets threshold, would not only be fairer to many aged couples but could encourage downsizing.
    Rae
    3rd Mar 2020
    7:45am
    What is so fabulous about downsizing and moving to a region without amenities and medical services? Bugger moving over for the new chums to get ahead. Let them go west and build the communities like our ancestors had to.
    Laura52
    2nd Mar 2020
    10:47am
    I so agree GD. And the value of the home depends on the location you live in! I live with mum and dad, being a carer for the both them and the house is 52 year old, in a state of so much disrepair, cracked plastering, walls, mould, you name it...not a beautiful mansion at all, falling apart and we can't afford to move elsewhere or even rent. We certainly can't afford to repair the house, yet....due to the location, the house/land is worth a lot. I wonder whether Centrelink will do a physical inspection of a home to see how much a house is worth or is considered " a valuable home" ...don't think that will happen, right?
    Farside
    2nd Mar 2020
    3:40pm
    Laura, your parents may not want to move but it is their only asset of note so to be cash poor is their choice. They could reverse mortgage for repairs or use the pension loan scheme to increase pension if the choose but did not. Choices have consequences.

    There is no need for Centrelink to inspect the property as it will have been valued by the Valuer General for rating purposes.

    I would have preferred to keep my 80 year old house. It was 25 years since last renovation and was in need of extensive repairs that I could not afford. The property was only worth land value as most buyers would demolish (it was!). I would have preferred to keep it but it was either downsize and cash up or join the ranks of the cash poor. It's an easy choice.
    Laura52
    2nd Mar 2020
    3:54pm
    I so hear you, far side! I suggested downsizing to my parents but dealing with elderly Italian parents in their 80s who who don't understand and are so stubborn , not easy at all. I am not sure what you mean by reverse mortgage, as dad paid cash cash in hand for the house in 1967, so there was no loan.etc . You are correct, it is their choice. Dad wouldn't even consider a loan...very old school. I really appreciate your advice...another commenter said depreciation may be involved to work out the value...would that decrease the value of the house? It all sounds so complicated especially for people who don't understand financial issues. Thank you again.
    Farside
    3rd Mar 2020
    12:57am
    Laura, it seems to me your parents should be given an informed choice and understand they can improve their financial circumstances and quality of life by accessing the capital tied up in the house. The main downside is that the inheritance for you and your siblings might be a lesser amount depending how the money is spent. At their age the decisions are not hard and better taken sooner rather than later. There is good information on reverse mortgages https://moneysmart.gov.au/retirement-income/reverse-mortgage-and-home-equity-release

    You can get an idea of the market value of the property at https://www.realestate.com.au/property/ although this is not a substitute for an inspection and valuation by a qualified realtor or valuer.

    Don't be distracted by the wishful thinkers dreaming how they might like valuations determined if the primary residence is included in the assets test. If your parents are already in their 80s it is most likely a moot point, but the value will almost certainly be the valuer general's assessment with the state appeal process if unhappy. In any case it is not happening any time in the near future.
    Chris B T
    2nd Mar 2020
    12:30pm
    Last observation all Bills associated with Home Ownership have GST added which goes to States etc. Then there was the Purchase of Home Stamp Duty and Fees.
    It is not as if The Home was Gifted and no Expense incurred for most(some may have a minority). None the less continual costs with GST.
    Depending where you live could be $10000 to $15000 PA easily when you add all associated costs plus GST. (one gives Pension one takes with GST).
    Not really a Free Kick as Promoted.
    {;-(0)
    Mariner
    2nd Mar 2020
    4:27pm
    Right there Chris B T - and after a life time moving around paid stamp duty 8 times in different states, never even got the first home buyer's grant of $1500 in 1978 because I had some savings from working abroad.
    The Sheriff
    2nd Mar 2020
    12:37pm
    Any government which foolishly includes the family home in the Asset Pension Test is destined for oblivion.
    KSS
    2nd Mar 2020
    12:42pm
    "For most Australians, retirement incomes are already adequate."

    Seriously! We have been told for years that relying on the compulsorary super contributions would not be enough.

    I'd love to know their definition of 'adequate'.
    Mariner
    2nd Mar 2020
    3:49pm
    A can of baked beans a day, cup of tea, can of sardines and a Milo with Arnotts Bisquits that is what they reckon is adequate. People in Africa are worse off. Have a laugh at the Grattan Institute and tell them to p*ss off.
    Anonymous
    4th May 2020
    8:27pm
    If retirement incomes are adequate for most Australians, how come we have high rates of age poverty?
    Garry
    2nd Mar 2020
    12:53pm
    Here we go again. Am I missing something here when we talk about including the price of a home in the assets test.
    The topic of the article was boosting ones retirement income, but if the home is included, won't this increase the value of your assets and lower ones income due to the value of your assets being too high.
    Also, I also cannot understand why someone who has been retired for years and has procedures in place to provide income that suits their purposes, has to be inconvenienced but another change in policies. Surely any changes put in place must only relate to new retirees.
    As Humphry Applebee would have stated in Yes Minister, including the home value in the retirement process would be a " courageous move."
    I agree wholeheartedly with prior comments on this.
    Alexii
    3rd Mar 2020
    8:50am
    Yes, it's certainly "here we go again". How the hell can retirees ever feel safe and plan for the future when changes are made that inevitably reduce our income. It makes one wonder if it would be better to sell up and take all of one's assets to some other country where older people are treated better.
    Garry
    2nd Mar 2020
    12:53pm
    Here we go again. Am I missing something here when we talk about including the price of a home in the assets test.
    The topic of the article was boosting ones retirement income, but if the home is included, won't this increase the value of your assets and lower ones income due to the value of your assets being too high.
    Also, I also cannot understand why someone who has been retired for years and has procedures in place to provide income that suits their purposes, has to be inconvenienced but another change in policies. Surely any changes put in place must only relate to new retirees.
    As Humphry Applebee would have stated in Yes Minister, including the home value in the retirement process would be a " courageous move."
    I agree wholeheartedly with prior comments on this.
    Triss
    2nd Mar 2020
    7:27pm
    Yes, Garry, I raised my eyebrows when I read that.
    GrayComputing
    2nd Mar 2020
    1:11pm
    NO ASSET TEST FOR A PENSION EVER AGAIN!
    What our founding fathers said in parliament in 1908:
    Quote:_____

    We wish to honour the sentiments of the legislators who introduced the Age Pension in Parliament in 1908. When it became law, it was commended with the following words: “… it removes the idea of old-age pensions from any suggestion of a charitable allowance. An old man, who has done his duty as a citizen for 25 years (is) as much entitled to a pension as a commander-in-chief or a chief justice.”
    End Quote: _____

    The pension was a reward for service. It should still be considered in this light. It is not a handout.

    Therefore, a pension is not welfare.

    But modern politicians have stuffed it up completely

    It is time to kill off this insane hugely expensive pensioner whacking bureaucracy.

    It is time for all of us (yes that means you) to rant at our MPs and Senators daily to take action for human decency and a huge stress reduction for pensioners

    Most economist say we will save taxpayers money by dropping asset testing because of the massive overheads cost in running Centrelink and the 10,000 conflicting rules.

    Hiring more Centrelink staff will only increase taxpayer’s costs for processing the creeping insane red tape monster system politicians and well paid bureaucrats have created.

    Help scrap it now. Become a hero.

    Even the UK and poorer New Zealand has a NO ASSET pension, so it is cheaper and user friendly.

    Why worry that few million$ earners get it too. That is peanuts to them, not enough for a good vintage champagne.

    Do retired and retiring people really look forward and want 100++ visits to/from Centrelink and be hassled by their crazed robo-debt scam and then waste even more time in the 3 million people waiting queues and more lost calls?
    Sceptic
    2nd Mar 2020
    2:13pm
    It is now 2020, not 1908.
    Mariner
    2nd Mar 2020
    3:50pm
    Way we are going we might be there again soon enough.
    Captain
    2nd Mar 2020
    5:22pm
    Sceptic, the year makes no difference in this case. The Legislation was introduced in 1908 and has not been repealed.
    jaycee1
    3rd Mar 2020
    8:19am
    GrayComputing,
    I really wish you would do some research. THe UK pension PER MONTH is less than what we get PER FORTNIGHT - no wonder they don't have an asset test! If they did NO ONE would be getting much at all. Plus most pensioners in the UK live in Council houses/flats. Unless you have money most do NOT own their own homes.
    Not only that, but the UK pension is one of the WORST in the world.
    IndyLopos
    3rd Mar 2020
    9:15am
    While I agree, unfortunately, "NO ASSETS test" is a pipe dream that will never happen in Australia because it would affect the budget too much.
    And Labor or the Greens would use it even more and make things worse!
    Anonymous
    4th May 2020
    11:27am
    IndyLopos, research indicates that a correctly implemented universal OAP combined with a fair taxation system would cost much less than the current retirement system because it would encourage rather than punish saving and responsible living.

    The idea that we should punish people for buying a home and reward renters is nothing less than absurd, as well as being grossly unfair and discouraging responsible lifestyles. Really dumb policy. Some of the other recommendations make some sense, but certainly the assets test should be abolished.
    Rae
    2nd Mar 2020
    2:09pm
    All the costs of the home ownership would have to be subtracted including depreciation.

    Subtract the deposit, interest, buying price, rates, maintenance, insurances , corporate body fees and then work out if there is any actual wealth left after costs. I suspect that home ownership may become a dying activity if they do this considering the aged pension is worth around $1 million now if you had to save to buy it.
    Mariner
    2nd Mar 2020
    4:09pm
    Our joint is $375'000, cost $2200 rates, $2900 body corp. People down the road get rent assistance for a similar place. Wonder whether we would not be better off should that home assets test come in. The money would not even be large enough to impact the full pension and if a problem buy a new car after a good holiday. Are the people at Grattan's imbeciles?
    Rae
    3rd Mar 2020
    7:56am
    Yes Mariner. They have been on about the family home for ages now. The problem is the 50% increase in population since 2000 with not enough builds and all wanting to live in Sydney or Melbourne. And Rudd's opening housing to foreign investors.

    Grattan do not look at consequences unfortunately.

    There is another 20% increase in population coming this decade as well.

    The likes of Grattan have created a mess and now want us to clean it up for them.

    Would be better to slow immigration, visa workers etc and start building the hundreds of schools we need for the baby boom going on right now.

    Just leaving retirees alone for one year surely isn't a hard ask. Go play on some other demographic for a while. The changes to retirement are wearing most of us down. It's every bloody year!
    Farside
    2nd Mar 2020
    3:26pm
    yep, little to disagree with on these recommendations from Grattan
    Rae
    3rd Mar 2020
    7:57am
    Returning taxes to the levels of progression before Howard started the cuts would be fairer.
    Anonymous
    4th May 2020
    11:30am
    The LNP took a step toward that by changing the assets test, Rae. A mindless, stupid, backward step that was performed without even minimal consideration of the changed economic environment and the consequences of mindless reversal of a past change.
    MeC
    2nd Mar 2020
    4:07pm
    No reference at all to the items which would be of most benefit to those who are struggling on the pension or Centrelink payments. Self-interest is alive and well here.
    Aviatorman
    2nd Mar 2020
    5:24pm
    "Include the home in the Asset test"... Oh, here we go again. I wonder how this would affect the people peddling this idea. These jealous so and so's don't explain how it would affect them. Do they think they will receive more pension.? If they don't own a home, chances are they are already on a Full Pension.!! (yes/no.?)
    Rae
    3rd Mar 2020
    7:59am
    Yes and rental assistance as well.
    Anonymous
    4th May 2020
    11:28am
    Give the house to your kids and rent it back. You lose the pension for 5 years and then the gift is not counted anymore but you get rent assistance and a higher pension for life.
    skinner
    2nd Mar 2020
    8:39pm
    The family home should NEVER be included in the Asset test, nor should it ever be considered. ALL home owners have undergone much sacrifice to get where they are. They don't need any further possibility of a reduced pension/allowance.
    skinner
    2nd Mar 2020
    8:39pm
    The family home should NEVER be included in the Asset test, nor should it ever be considered. ALL home owners have undergone much sacrifice to get where they are. They don't need any further possibility of a reduced pension/allowance.
    Befair
    2nd Mar 2020
    11:14pm
    I have a better suggestion for retirees. Commit a series crime and enjoy all the fringe benefits prisoners get. Free accommodation, free meals, no gym fees, health insurance fees not required. I also suggest that current prisoners get punished and be made to cope as pensioners.
    Blossom
    3rd Mar 2020
    11:53pm
    Employers have to pay a % of your gross salary into superannuation. Therefore they pay your salary, superannuation and another % as Workcover.
    Increases in wages increases expensives for the business and possibility the inability to employ more people,

    4th Mar 2020
    2:44pm
    Why bother with super if those changes happen unless you are very wealthy? Draw it all out ASAP.
    kram
    14th Apr 2020
    1:58pm
    The house is already included as if you don't own a house, your thresholds are lower and you receive a larger handout.


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