Research shows that even under a mature superannuation system decades from now, most Australians still won’t have saved enough to meet their aged-care costs and will have retirement income well below the level needed for a comfortable standard of living.
The Committee for Sustainable Retirement Incomes (CSRI) carried out a comprehensive review of the retirement income system, building on the findings of the Murray, Cooper and Henry reviews. Using the collective thoughts and feedback from industry leaders, consumers, government and academics, the aim was to develop long-term policies that would result in adequate and sustainable retirement incomes for all.
Founder of the CSRI Patricia Pascuzzo outlines the findings of the review, what they mean for ordinary Australians and what needs to be done in the short-term to secure long-term security for retirees
Given the increasing cost of aged care and a rising rate of people going into aged care facilities, a more effective use of all household assets will need to be made to maintain an adequate living standard.
The most direct way of improving retirement outcomes for ordinary people is to efficiently convert superannuation balances into sustainable income streams. This means building on the strengths of the fully-funded defined contribution system with outcomes similar to a defined benefits system.
Australian households have more wealth tied up in housing than any other asset. There is a growing need to find a way to encourage pensioners to access the equity in their homes to improve their retirement incomes.
Currently, there are significant obstacles to accessing home equity. In fact, the current reverse mortgage market in Australia fails to support retirement income – most loans are lump sums not income – and the average loan size is small and costly in terms of interest. Australian retirees own over $900 billion in home equity yet only $3.5 billion has been accessed through the current equity release market.
It would be counter-productive to improving adequacy if any funds released in this way were included in the Age Pension means test while housing is exempt. The value of the home is no different from any other asset and, in principle; it should be included in the Age Pension means test.
The difficulty is how to create a model where pensioners can access their home equity without reducing their cash income, especially as some pensioners own high value homes but are income poor. In order to effectively tap this home equity, the exemption limit below which home equity would not be subject to the means test would need to be set reasonably high: to ensure that no pensioner suffers a loss of cash income. This means that there should be enough equity remaining in the property to finance the release of equity and meet the requirements for accessing residential aged care in the future.
Providing an exemption to the $1.6m cap that can be transferred to the pension phase for people downsizing the family home does nothing to assist those retirees who are most in need.
Helping retirees tap the equity in their homes is a critical element of making Australia’s retirement income system more sustainable. But it is just one piece of the puzzle.
The Government is developing a framework for the pensions phase, drawing on the work of the 2014 Financial System Inquiry to promote ‘Comprehensive Income Products in Retirement’ (CIPRs). CIPRs are intended to offer more security by managing risks more efficiently through pooling funds, thereby offering higher retirement incomes.
Engagement by the Committee for Sustainable Retirement Incomes suggests that firmer guidance is needed to help super members at retirement. This would involve a system of ‘guided choices’ where the CIPRs offered by superannuation funds are pre-selected according to broad categories of members (age, gender, accumulation balance, age pension entitlement, and ability to access other savings).
Such guidance would preferably start from no later than age 50, involving iterative engagement with members as they consider when they intend to retire (or transition to retirement), and whether to vary their voluntary contributions to achieve their target retirement income. The approach recognises that most retirees do not seek personal financial planning advice and that this is not going to change quickly.
There are many challenges here, not only about product design but also about the obligations of trustees, and protections for trustees, the regulatory requirements for the product offers, and the degree of compulsion on funds to offer them. The process will only work well if tax and transfer settings in retirement complement the arrangements for superannuation in the accumulation phase, and are sufficiently stable for the purposes of planning and for decision-making at retirement.
Read the full report: CSRI Sustainable Retirement Income Integrated Reform Programme
Patricia Pascuzzo is the Managing Director and Founder of the Committee for Sustainable Retirement Incomes.