Would a pension rate linked to an individual’s working life salary be better than total reform?
The government’s interim report on retirement income may have shone a brighter spotlight on superannuation, but one of the beneficiaries of this inquisition into Australia’s retirement income system could be the Age Pension, says Accountants Daily.
The consultation paper released last week by the three-person panel analysing the system highlighted Australia’s high rate of pension reliance, with 68 per cent of retirees on the pension compared to around 30 per cent in other OECD countries.
This number had declined from 80 per cent in 1999, with the number of those reliant on the full Age Pension dropping while part age pensioners remained roughly the same.
This decline in numbers may be related to the superannuation system coming closer to reaching maturity, with many newer retirees having the benefit of almost 30 years of compulsory superannuation contributions, as well having been the beneficiaries of the property boom and generous tax concessions.
However, the reviewers pointed out that intergenerational inequity is a potential issue in the retirement income system, saying that “when one generation is required to fund their own retirement as well as the retirement of a previous or future generation, they may view this as inequitable”.
“Age Pension expenditure is funded from government revenue, affecting the tax impost on working Australians. Australia’s ageing population means there will be a declining number of workers for every retiree. It is therefore important the retirement income system does not place an undue fiscal burden on future generations,” stated the paper.
It also highlighted how Australia’s system has a flat pension rate not linked to an individual’s previous salary, unlike those of markets including the US, Switzerland and Norway, making the system fairly unique among developed nations.
The way Australia’s pension system is structured means the rate of expenditure on Age Pensions compared to GDP is actually well below the OECD average. Australian public pension spending is 3.5 per cent of the GDP, which is half the OECD average of 7.9 per cent.
While a pension rate linked to a person’s working life income in their working life could be preferable to reform the pension system, the paper noted the complications of adopting such a system in Australia.
“A benchmark replacement rate in retirement could be set to allow an individual to maintain a similar lifestyle in retirement to that enjoyed pre-retirement. Given replacement rates are usually framed as a percentage of pre-retirement income or expenditure, they may allow individuals to calculate a retirement income goal for their own circumstances,” says the paper.
“A key weakness of system-wide measures of replacement rates is they need to be higher for individuals on low incomes to avoid the risk the replacement rate results in incomes associated with poverty. To avoid this outcome, a different replacement rate could be set for those on higher incomes to those on lower incomes.”
What do you think of this idea? Would you prefer this to a universal pension?
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