Stability, integration the keys to improving retirement system

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Australia has a unique Age Pension system, which compares very well against the structures used in other countries. However, superannuation has developed in an ad-hoc way over the past 30 years, and there have been many changes around product structures and tax concessions/thresholds. This has made it difficult for people to plan their retirement. Yet, there is no sign of stability as we await the Government’s response to recommendations made in a Productivity Commission review and a royal commission into misconduct in the financial services industry.

Following this year’s Budget, Treasurer Josh Frydenberg announced a full review of the retirement income system, so there will be more changes on the way.

The Actuaries Institute has written a Green Paper that looks at ways to improve the system, including integrating superannuation, taxation, the Age Pension, equity in family homes and aged care. At present, all these structures operate independently and there is no umbrella national strategy for integration.

Our system of mandatory contributions on wages has provided stronger savings for all Australians (apart from the self-employed). The Superannuation Guarantee, now at 9.5 per cent of wages, has already led to good balances for many people retiring today. However, it has meant that many more people are subject to the means test for the Age Pension, and these rules have many anomalies.

Age Pension
First, the Age Pension is a great safety net for retirees. It is set at about 28 per cent of average earnings, giving $24,268 (including supplements) a year to a single pensioner and $36,582 (including supplements) to a couple. As retirees now live much longer than in past generations, the cost of providing the pension has grown. The present value for a single person retiring at 67 is now about $500,000 (slightly more for females who live longer on average). The value for a married couple is more than $800,000.

Clearly, the Age Pension is a valuable benefit, but (unlike most other countries) the Government uses means testing to keep its costs under control. 

Unfortunately, these tests are contentious and invasive, with many anomalies. For example, a couple owning their own home (let’s say worth $750,000) and with other assets of $1 million would not receive any Age Pension. People in this position have most of their money in a super account. As they draw it down, they will become eligible for a part-pension later in retirement.

Contrast this to a couple with a large home (say worth $3 million) but with little superannuation. If their assets are less than about $400,000, they will get a full Age Pension – even though, overall, they are worth twice as much as the aforementioned couple.

The situation is worse for renters. A couple with assets above $1,074,000 receive no pension, even though their wealth is much less than the homeowners cited.

The obvious solution is to include the family home in the assets test, but this would need to be explained very carefully. It could be done by increasing the thresholds in a way that most people are little affected, but those with very valuable homes would receive less. At the same time, the increased thresholds would give renters more pension income as they could hold more assets before being subject to the means test.

Now, some homeowners might be asset-rich and income-poor. In their case, they could make use of the Government’s Pension Loan Scheme or private sector equity release products. In that way, they can use their illiquid wealth without needing to sell up and move.

While the aforementioned system would be more equitable, it would not address the situation of those renters on the Age Pension who have little other income. These retirees currently get rental assistance, but the amount of $69 a week (paid fortnightly) for a single does not contribute much towards private rentals in Australian capital cities. This is an area where government support could be targeted much better.

Taxation
Australia has a unique taxation system, where earnings on retirement incomes are tax free as are any withdrawals from these accounts. While it is common elsewhere not to tax the earnings of super funds, it is unusual not to treat pension withdrawals as personal taxable income.

The Government realised that this structure provided a windfall for those with very large superannuation accounts and it changed the rules from 2017 to cap the amount that could be transferred into a tax-free account ($1.6 million). That improved equity in the system, but the balance of large accounts is still taxed at only 15 per cent (or 10 per cent on capital gains), so there is scope to increase the rate above (say) $5 million to a higher tax rate in the range of 30-45 per cent.

Retirees with low incomes are eligible to receive a Senior Australians and Pensioners Tax Offset (SAPTO) up to $2230. Retirees also receive other benefits such as discounted rates, utility bills, public transport, motor registration and a Pensioner Concession Health Card. These are all designed to assist people on low incomes, but they are inequitable relative to those younger workers who also struggle to pay bills.

It would make more sense to provide a slightly higher Age Pension to needy pensioners, and to eliminate these benefits – many of which go to people with reasonable wealth.

Aged care
The aged care system needs reform. It has its own royal commission, which is finding poor levels of service despite the high fees that the elderly are charged for these facilities. Ideally, we should remove the Refundable Accommodation Deposits (RADs) and replace them with a weekly rent for accommodation.

As baby boomers age, we will need a lot more facilities, both for residential aged care and home care. It makes sense for the Government to subsidise the poor, but wealthier retirees should bear some of these costs.

 Conclusion

While we have a great system for building people’s superannuation, we let them down in the retirement years. A better-structured social security system around retirement income, accommodation and aged care needs to be developed. And it must be easy to understand and fair. That should be one of the objectives of the retirement income review.

The Actuaries Institute has prepared a Green Paper on improving Australia’s retirement system. The paper was written by actuaries Anthony Asher, David Knox and Michael Rice. It outlines some design options for an integrated system of retirement provision, which the Actuaries Institute encourages Australians to debate boldly.

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The Actuaries Institute is committed to promoting and maintaining a high standard of actuarial practice and represents and supports its members through education, establishing and maintaining strict professional and ethical standards and contributing to public policy through submissions, leadership and expert analysis.

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Written by Michael Rice

72 Comments

Total Comments: 72
  1. 0
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    This analysis appears to be by some out-of-touch, wealthy, Liberal-oriented people who will never need the Age Pension themselves. Talking again about including the home (it is not just a house, as another YLC article today has noted) is a nasty attack on people who worked hard and sacrificed much (including with many ongoing expenses) to get a home – luckily the Treasurer has ruled it out, and Michael Rice / Actuaries need to butt out. The Govt would lose the next election if they went in the direction of nibbling at the family home.

    Far better to scrap ALL tests, except Age and Residency, and make it Universal Age Pension for ALL with taxes at marginal rate on all other income above a certain limited Cap on Super savings (say $500K instead of $1.6 Million per person). No Couples tests either. Also, scrap all politicians (and any other public servants) Special Defined Benefit pensions from the public purse as they can also qualify for UAP.

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      Also, stop picking winners, such as “needy pensioners” – disgusting description of people who worked hard their whole lives paying lots of taxes in this so-called rich country. Yes, sounds like out-of-touch people handing down favours to the hoi polloi!

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      When a government rules out something you can bet that it will happen. One example being “there will never ever be a gst under this government”

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      OJ21 Howard went to the election with the GST proposal and narrowly won another term. Do not like the tax but everyone in the world seems to have it; ours is benign by comparison (EU up to 21%, NZ 15% on every item) Switzerland is an exception (2.5% for food and necessaries, 8.5% for alcohol, smokes, restaurant meals, hotel accommodation etc.)

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      OJ21 or “there will be no carbon tax under a Government I lead”- Julia Gillard ALP.

  2. 0
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    Agree with GeorgeM. Make the system simpler, remove it from centrelink who would have to be the most unpleasant and nasty people to try to work with, and forget looking at the home. How did most people who have a nice home get there? Generally by working hard and saving money and investing in real estate, or like my ancient mother in law by buying a zillion years ago is a suburb that is now trendy. They are not the people to attack, just because they are an easy touch. A famous quote from Mahatma Gandhi springs to mind here: ‘the true measure of any society can be found in how it treats its most vulnerable members’. Well as we are right now, our society sucks.

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      Bundabergian – maybe an inheritance tax would help for people with houses that over the years have risen just by luck.
      Universal pensions overseas work pretty well, but then my late mother got the full pension without a medicare card, susidised medicines, cheap transport and also the tax-free threshold was not as generous and the whole age pension taxable with all the other assets. Her house was taxed as an asset as well, however my parents bought the house with full tax deductable interest rates, council costs and maintenance. Mum died early this year aged 96 and we were required to fill in her last tax forms after her passing. The bill arrived 7 days after her burial.

  3. 0
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    The assets test for age pension is interesting:
    “To qualify for a full Age Pension as a single person your assets must also be valued below $263,250 if you own your own home, or $473,750 if you don’t own your own home. You can still be eligible for a part Age Pension if your assets are worth up to $574,500 if you own your own home, or $785,000 if you don’t own your own home.

    For a couple your combined assets must be below $394,500 if you own your own home, or $605,000 if you don’t own your own home. You can still be eligible for a part Age Pension if your assets are worth up to $863,500 if you own your own home, or $1,074,000 if you don’t own your own home.”

    As can be seen, those who own their own home are already treated differently so the family home is included in the age pension. In addition, there is no subsidy for upkeep and rates although renters who don’t pay upkeep and rates get more money.

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      As I understand it all the Govt would have to do is widen the difference of assets between home-owner and non home-owner – from about $210’000 to $420’000 and Bingo – your home is part of your asset test. Simple really.

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      Horace, it would be fair to say that upkeep and rates are included in what the renter is charged, or the rent would be lower.

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      Lookafar, those things are also tax deductable for the landlord but not for homeowners.

      Homeowners are disadvantaged and treated differently already than those paying rent even though the annual extra outgoings for the homeowner could well equal or even exceed those of the renter.

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      Agree that family home has already been taking into consideration.
      The whole system was designed on a need basis. Those people (I believe that 99% of us here) who have worked hard and saved hard, can survive our retirement years without government support.
      Those who haven’t paid enough tax are the ones that need most.

  4. 0
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    It should be the same as the UK where everyone gets the age pension. No asset tests, rich or poor everyone gets it in full and enforce the law with employers paying super. To many don’t pay super regularly and there is no enforcement to make them pay.

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      Good post ozrog…. there are several models from different countries along these lines that the govt. could choose from. It’s really the only fair way to go.

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      yes yes yes. I just spent four years living in France where all my Pommy friends who had worked hard, saved and paid off their own house in UK were doing well, France house prices are so low that if they had enough cash they could buy something humble in France and keep the UK place too. Then they had UK pension plus whatever income they could get from part time jobs, rental of their UK houses etc. (Mind you it fell to $hit when the pound dropped due to Brexit and their UK pension became worth a lot less.)

      When I told them that in Aus we are means tested they thought that bizarre in the extreme.

  5. 0
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    The Aussie Old Age Pension model is such a ridiculously complicated barely fathomable system that very few fully understand it….. including Centrelink staff. Various govts. have fiddled and tweaked with it for years and just made it even more convoluted and proving just how out of touch they really are.
    There is a simple remedy.
    A Universal Pension.
    Under this model everyone, yes everyone would receive an income irrespective of their wealth, or lack thereof.
    No means test, no asset test, no cutting back income if you opt to continue working. If you choose to continue working you simply pay a higher rate of tax on your nominated income stream. Most opt for the pension as it’s usually going to be the lower. Stop and think for a minute about how many millions of dollars the govt. would save by simplifying and streamlining the pension thus. Unfortunately thousands of staff at Centrelink required to administer this clumsy systemwould no doubt dissapear. Bad for them but the govt. would rub their hands with glee at the prospect of such huge savings. The upside for pensioners would be a fair, simple and easy to understand system that would spare us much frustration and angst, and provide an incentive to keep working a bit longer if you wanted to.

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      All they have to do is create a HECS style debt with any pension received which is then payable from your estate.

      Another alternative is to give everyone over pension age all the benefits to stop all the downsizing which is really upsizing to get the benefits.

    • 0
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      Hear hear.

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      universal pension is in your dreams. its not sustainable. that would be a huge burden for future generations!

      A fair system is to looking after those below poverty line, meanwhile provide aged pension based on tax paid during ones working life.

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      Day Dreamer of course its sustainable as years ago everyone paid in for it as part of the tax system and the government decided we wont do that and they pocketed the money.

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      ozrog – you are right on the money. Universal pension is absolutely doable going back to the old system. Pay in for your working life and get a full pension after 65. People who do not reach 65 won’t obviously need it (widow and widowers will get their share but not the off- spring. At the moment the Superannuation is a vehicle for generational wealth accumulation. Quasi a life insurance policy for your life but not for others. Bring back the old idea and our problems are solved.

  6. 0
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    It would make more sense to provide a slightly higher Age Pension to needy pensioners, and to eliminate these benefits – many of which go to people with reasonable wealth.

    That makes a lot of sense to me as those not getting these benefits would pay less and this would help our young people considerably.

  7. 0
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    A self funded retiree couple need about $2 million to generate similar to the old aged pension. Assuming safe investments. That is discriminatory !! Universal pension is needed urgently !!

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      Nailed it johnp…. as soon as possible. We need to organise somehow to get a few Members of Parliament interested in this idea. I wrote to my local member and never even got a reply. You think they’d jump at it as it would save them millions

    • 0
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      vote him down Funkee!

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      Funkee, we need an institute. The Grattan Institute keeps grinding out so called surveys that they’ve done…lots telling people and media that screwing pensioners will save government and taxpayers much money…yet they don’t have an opposition institute. We have plenty of folk here who are cluey enough, we need to put our heads together and write our own story and send it to government and media.
      All over the world people are banding together and fighting back, if we don’t fight as well we’ll eventually starve.

    • 0
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      Thats not true 2 million will generate much more than the age pension. I do not think you know how much the age pension is,

    • 0
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      SFRs are supposed to use their money for the retirement not earn money from it just to leave the bulk to the kids. That is a problem Australians still have to come to terms with. There is no exchange past the grave so spend what you have in an orderly fashion and do not think you are missing out all the time.

    • 0
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      Can one post here anonymously? Did not know that.

  8. 0
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    As a single SFR with an ever deminishing savings account and 4 hectares of land I cant develop I have spent many hours in the Centrelink office to no avail other than ” your case is under review”! for three years! It occurred to me that the Centrelink is a giant absorber of monies that could otherwise have been disributed among thise who for years paid their way. I believe if one was to calculate the amount contributed for retirement over all those years a pension of a percentage (minus the theft by unaccountable governments!) may be an equitable solition. Close centrelink, tho this may cause massive unemployment! It worries me most that today anyone working works at least two days for a money hungry, minus value, unaccountable government bent on kicking the frail underdog and old to death

    • 0
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      See my post above.

    • 0
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      I never understood why the staff at centrelink have to be so bloody rude, unhelpful and obnoxious. It is as if it is their money to hand out and we are a drain on the system and do not deserve some respect. They have reduced me to tears of frustration, and even my big tough husband was close to it. And we are not trying to get anything that is not a genuine entitlement. We are literate intelligent people who have computers and mobile phones and still we struggle with dealing with them. How do those who do not have (or use) computers and mobile phones cope?

      We dread having to talk to anyone in there, but sometimes the on-line system does not fit our non-norm situation. How many offices do you see that have security guards and signs saying you must respect our staff. Well guys it works both ways.

      Argydubbaya try writing to the local and federal ministers. They are easy enough to find on line. That is the only way we got through the system – by being a pain in the bum and hassling these people for some help with the system to make a claim. Centrelink will not help at all. Maybe copy your email to your local TV station too.

    • 0
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      Bindabergian. It was with that dread that I stopped attending Centrelink. It cost me 160 km round trip,and at least two or three days in town visiting banks, the ato, an accountant with assurances I would get my entitlements. Rude,is an understatement. I felt like a “dole bludger” Then the letters “under review”
      I gave up trying and now live a very frugal life.
      It always annoyed me that many I worked with had piss ups every week end, and new cars every couple of years. But I bought a home for,my family and saved my money. Never a new car. Of course they are on the pension and I’m under review!

    • 0
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      I have always had a good response from centrelink both in office and on the phone they have always been polite and offered good advice. I regularly go in and see a financial counselor and they have always been helpful.

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      Agree with ozrog but then we have an office dealing with oldies and Medicare problems only, no job seekers and so on. Always very courteous people, friendly smiles. But then I am lucky I guess but I do have a 60 km roundtrip on the bus which I do not mind.

    • 0
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      Hey Argy (can I call you Argy for short?!) you need to start emailing. I did it to every man and his dog, explaining the troubles we were having and eventually someone from Human Services did call and help us. The minister is Stuart Robert and his email is [email protected]. You can even see him here…. https://www.mhs.gov.au/.

      Good luck, it worked for us. I think they try to make us normal folks give up, don’t let them win, get complaining (I did it all by email) and get what you are entitled to.

    • 0
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      Thank you, Bundabergian, Some have suggested I speak with my local Federal Member. Your info seems a good place to start.

  9. 0
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    NO ASSET TEST FOR A PENSION EVER AGAIN!
    A pension is not welfare.

    Now is the season for discontent, so do something about it!
    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 part of 3 million waiting queues and lost calls?

    We all (that means you) need to tell our MP and senators every day that these criminal asset tests for a pension must be dropped now.

    • 0
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      GrayComputing for PM!!!

      Seriously though we need to take some action, complaining here will change nothing. How do we action this????? Are there any effective pensioner welfare groups that can do some coordination and lobbying?

    • 0
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      I agree. GreyComputing and Triss,
      We need to stop,crawling around and asking “wtf happened” get ourselves together and camp on the grounds at government house. I want what I paid for. And thats not a plane flying around the Indian Pacific looking for a missing jetliner for an extended period.

    • 0
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      GrayComputing… well said my friend, well said. Plenty of us here of the same opinion and we’re all wondering the same thing….. how to best go about organising us into a collective with a united voice to put some real gray power pressure on the grubermint thieves?
      Maybe our friends at Your Life Choices might have some suggestions?????

    • 0
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      The article said one word sums it up but doesn’t seem to mention it!
      CENTRELINK.

    • 0
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      Yep, GreyConputing for PM, he is right on the money there, get rid of CLink have universal pension !!

  10. 0
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    I would like to assess our current position as a nation creating wealth through superannuation for the existing retirees and those about to retire and the proposal of a universal OAP like some of the European countries. The concept of wealth building through superannuation and that of universal OAP are excellent ideas on their own rights without considering the working of our economy, distribution of wealth through our tax system, and the size of the workforce in terms of our population.

    As of 2019, our superannuation has a total asset under management of $2.9 trillion, approximately 13.1 million in the workforce, and 1.9 million retirees, including pensioners. The average wealth per worker/retiree is about $193,333.33. It doesn’t need a mathematical genius to work out, it isn’t enough for the worker to retire or retiree to have a comfortable retirement. It is a wake-up call to examine our superannuation system and how the master wholesale funds operate. What is the benchmark for a reasonable return minus fees for Growth Fund, Balanced Fund, Capital Fund, and Cash Fund? How are all these funds work and tailored to those members of superannuation schemes? Superannuation is not just a scheme just to provide a comfortable retirement! it is a wealth-building mechanism as a
    national saving. This is a different perspective on superannuation.

    We need an inquiry into superannuation in conjunction with tax reform for the distribution of wealth to make it fair for an incentive to work hard, rewarding contributions to our economy, and protecting our vulnerable. One idea on its own never works in any economy.

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