Is our retirement income system really broken?
To the man (and woman) on the street, our retirement income system seems fundamentally flawed but is it really as bad as we think? Professor John Piggott, Director, ARC Centre of Excellence in Population Ageing Research (CEPAR), shares his point of view by answering these five questions put to him by YourLifeChoices.
In the early 90s, the World Bank described Australia’s retirement income system as ‘world’s best practice’. A lot has happened since then, so how would you rank our retirement income system in 2016? i.e. has it stood the test of time?
On the whole, yes. We have a system which many countries envy. It is characterised by good governance, reasonable protection against old age poverty through a relatively low-cost Age Pension which is affluence-tested; a pre-funded superannuation scheme with high coverage, moving us towards income replacement, and sustainability in the face of an ageing demographic. Its repeated high ranking in the Mercer Global Pension Index reflects this.
What do you believe is the biggest challenge to most Australians’ ability to lead a dignified and productive life in retirement?
Many will be able to achieve this. But retirees (and those approaching retirement) have to make very complex choices that previous generations did not confront. Mistakes can be life-changing – retiring too early, investing poorly, mis-planning retirement consumption, and maintaining sufficient resources to manage aged care towards the end of life.
Does our current superannuation guarantee contributions system serve the majority of the population well? If not, how could it be improved?
Yes, on the whole. The Age Pension is still very important to most people at some stage in their lives, but the superannuation guarantee, a structure that is still evolving, supplements this, and has become very important for some. It could be improved through greater regulatory certainty, more independent advice, and support in developing relevant insurance products and markets.
Should the changes to superannuation in Budget 2016-2017 proceed?
Sure. A step in the right direction.
If you could change our overall retirement income system, which changes would you make? And why?
Its greatest weaknesses are a set of tax arrangements which invite ongoing tinkering, because they are not tied to the highly visible income tax, and an absence of any structure around drawdowns. Relatedly, we don’t have anything approaching comprehensive longevity insurance, especially for the wealthier half of the population. If we address these issues in a holistic way, with a view of purpose that emphasises an ongoing consumption stream, rather than wealth accumulation, we’d be number one in the Mercer rankings, not in the top three.
What do you think? Do you agree with Dr Piggott’s assessment of our retirement income system?
John Piggott is Director of the ARC Centre of Excellence in Population Ageing Research (CEPAR), at the University of New South Wales, Australia, where he is Scientia Professor of Economics. Dr Piggott has a long-standing interest in retirement and pension economics and finance. His publications include more than 100 academic journal articles and chapters in books. He has also co-authored two books, both published by Cambridge University Press.
He was a member of the Henry Tax Review Panel and served for several years on the Ministerial Superannuation Advisory Committee. Internationally, he has been a consultant to several foreign governments on pension issues, including Russia and Indonesia. In 2007 he was appointed Visiting Professor, Zhejiang University, China, and from 2008-2010 was Visiting Scholar with the Department of Insurance and Risk Management, Wharton School of Business, University of Pennsylvania.
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