24th Aug 2016

Is our retirement income system really broken?

FONT SIZE: A+ A-
Is our retirement income system really broken?
John Piggott

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.

 

Related articles:
Retirement: the risk is all yours
Why pension age should vary





COMMENTS

To make a comment, please register or login
BILL5131
25th Aug 2016
11:02am
I suggest Professor Piggot include in his studies measurements of the level of difficulties people have with their government pension providers. Centrelink at times seems hell bent on harassing the most vulnerable in the community. For example: a friend at 75 on the OAP had it cancelled 2 days after leaving Australia for a 10 day trip. Apparently he needed to tell them. Do the French, Brits or Dutch treat their pensioners like this? I think not! At the same time the superannuation system is allowed to be used for tax dodges by the super rich. We are a rich country, we should be also a caring and just country.
Joan
25th Aug 2016
11:19am
I agree with you Bill.
Anonymous
25th Aug 2016
11:21am
Do NOT believe anyone, especially at Centrelink, that they don't have to be informed of you leaving the country no matter how short a time you will be gone. Always inform them (phone 13 2300) before you go (get a reference number for your call) AND when you return. Your phone call "should" be confirmed by a letter with the reference number.
Old Geezer
25th Aug 2016
6:09pm
Fair enough for people to inform Centrelink if they are leaving the country

Don't forget to tell your bank as well as they may freeze your accounts if unusual transactions start appearing in your accounts.

25th Aug 2016
11:15am
ANY system which tries to penalise me for the money which I have had to work hard for throughout my life in order to have an enjoyable retirement IS broken, unfair, stuffed, and undemocratic!
Old Geezer
25th Aug 2016
6:11pm
The OAP is welfare and has nothing to dowith hw hard your worked or even if you worked. It is simply welfare so that old people do not live in poverty.
Anonymous
25th Aug 2016
8:37pm
OG, you know very little about the system as your comment shows.
Anonymous
25th Aug 2016
8:38pm
and, your comments below further confirm that.
Old Geezer
25th Aug 2016
9:11pm
If you thought that you could rely on welfare to fund your retirement then you must have got a big shock when you realised it didn't. I have know that is wouldn't for over 50 years now so planned to provide for my own retirement instead.
Rainey
28th Aug 2016
3:49pm
Fast Eddie is right. It's a very DUMB government that rewards people for being irresponsible and punishes those who do what is necessary for the country to prosper. To suggest that people should be able to be self-sufficient is naïve and ignorant. Many planned very well and saved as much as they possibly could, but economic downturns have crippled them. Others faced trauma or crisis that was beyond their control and not able to be reasonably anticipated or budgeted for.

The system IS broken, badly. It favours the well-to-do with obscene tax concessions that cost the nation far too much, and it bashes the hard working battlers who made this nation what it is.

So you were privileged to be ABLE to provide for your own retirement, Old Geezer. Lucky you. Sad that you are too arrogant and lacking in human decency to recognize that not everyone enjoyed such a privileged life.
Kactus
25th Aug 2016
11:59am
I think it would be far better if the superannuation guarantee was collected as tax, so that "small business" doesn't see it as such an impost.
It could be split across various different taxes - GST, payroll, income etc.
The other terrifying problem, since the GFC, is where to invest your capital and still receive a return that is both "inflation proof' and reasonable.
bob
25th Aug 2016
3:26pm
Do not forget Kactus that the government is still collecting the pension tax but it is now in general revenue and they do their best to see that you get as little back as possible.Remember when our registration used to pay for main roads?
Kactus
25th Aug 2016
4:40pm
Yes, not much point in being in politics unless you are very adept with a "pea and thimble".
Old Geezer
25th Aug 2016
6:12pm
I disagree it the superannuation guarantee is your money that you gave away a pay rise to get and you should be able to keep it not have it put in general revenue.
Golden Oldie
26th Aug 2016
1:29am
The superannuation guarantee should be paid into your superannuation account, not to the tax department. When I worked for a few years on a part time basis after retiring from full time work, I used to check my super account on a regular basis to ensure that it had been paid into my account.
Rainey
28th Aug 2016
3:51pm
So the well off who can afford to put plenty into super should be allowed to keep THEIR money, but the struggling retired who saved as much as they were able but couldn't put $1.5 million aside so they could be self-sufficient in spite of economic downturn should have to SPEND their money to live and should NOT be able to keep THEIR money. Double standards, Old Geezer. That's called being a HYPOCRITE.
Rae
25th Aug 2016
4:20pm
I do believe that self employed, contractors and business owners should also have to deposit 9% of income up to the maximum amount into super, for use after retirement, the same as PAYG employees do. That many more would be self funded.
It seems wrong that these people can spend all and still get the aged pension when PAYG workers are forced to save out of their wages and salaries.
Old Geezer
25th Aug 2016
6:15pm
I disagree.
Rae
26th Aug 2016
9:30am
Why though OG? Seems it would ensure all had some retirement funds not just PAYG workers.

I know business people getting the OAP now who earned three times what I did and squandered it all on fancy living, private school fees, etc.

Why do they get an aged pension when a retired police officer has to live on a self funded pension and gave up almost 40% of income to do so.
Rainey
28th Aug 2016
3:53pm
I agree, Rae. Most of the old age pensioners I know earned three or four times what I earned and lived the high life. But they now get a full pension while I get nothing because I saved a modest amount - but nowhere near enough to meet the expenses I will incur in old age.
MD
25th Aug 2016
4:42pm
What a breath of fresh air just to read the learned Professori's comment. My , but isn't it a welcome change from the usual on-site 'poor me' negativity associated with this subject.
The piecemeal approach by successive factions of Government have created a veritable minefield of opportunities & loopholes that will continue to be exploited by bower birds having the necessary impetus to grab a few dollars more.

As regards the existing value for aged pension: I sometimes wonder just how much would be enough to satisfy some of the regulars herein. Conversely, dare I suggest that regardless of perceived qualifications, hardship, illness, entitlement expectations, rights, living arrangements or any other purported justification; that all retirees accept the status quo, get on with enjoying the little life left in em & quitcherbellyakin. We may even find subject matter to discuss that's conducive to our happiness. Gawd knows we already get more than enough of the daily lamentations.
Old Geezer
25th Aug 2016
6:16pm
OAP is welfare and it was never meant to provide people with a luxury retirement. It's purpose is so old people do not live in poverty. If you want more then it is up to you to save it for you retirement.
Rainey
28th Aug 2016
3:55pm
Crap, OG. It is NOT welfare. Other countries don't treat their aged with such vile disrespect. A lot of people DID save for retirement, but had their plans wiped out by inept governments that plunged us into economic disaster, or by illness or accident or natural disaster.

Stop being so arrogant and cruel and have some respect for others. Your egomaniacal comments do you no credit.
Rainey
28th Aug 2016
3:57pm
PS. OG. Why don't you read history. Study some of the declarations made by past politicians who declared the old age pension should NEVER be regarded as ''welfare'', because to regard it so was to show contempt and ingratitude to our older citizens.
ex PS
29th Aug 2016
1:03pm
Rainey, I don't mean to be critical but I have to say it. O.G has a fire in his /her belly about the Pension and Welfare, he/she is obviously obsessed for some reason, to the point of being boring and predictable. The fire needs to be put out, the best way of doing so is to starve it of oxygen. He/she is obviously making these outlandish statements in order to gain attention, so let's starve the internal fire by ignoring such comments until he/she gets bored and gives up.

Never have I seen so much time and energy wasted on such a trivial and meaningless subject ( The definition of the Pension not the entitlement itself), I also take some of the blame as I have fallen into the trap of taking this subject seriously and commenting on it.
Most thinking people know what the pension represents buying into OG's argument only serves to trivialize an important social entitlement.
Phil1943
25th Aug 2016
5:52pm
It's really simple. He's not taking into account that for most retired Australians there's no big income to tax. All we have is our homes, and make no mistake - the bastards in power at all levels want to get their hooks into housing values. Just wait for the Broad-based Property Tax to come. It's on its way and there's no escaping it. Can't pay? Don't worry; we'll just let the amount accrue and when your home is sold we'll take a big slice, probably with interest. As for the pension, my wife and I have saved up and now have too much to ever expect to receive a pension, even if our income falls to bugger all as interest rates and dividends collapse. And so Professor Piggott, our system as designed might once have been okay but it's been tinkered with for so long and so often it's now leaving most retirees wondering if they can afford to keep going without selling the family home. And once that's done, where do we live? Our retirement system is indeed broken and will continue to be so as long as those in power want to keep their greedy and grubby hands in our pockets after we stop working.
Old Geezer
25th Aug 2016
6:30pm
Our retirement system is not broken but is still way too generous. Even though you are not entitled to the OAP you still have the pension safety net in place if you draw down your capital enough to qualify. If your income falls to zero you still have your capital to live on. Is that why you saved it? To spend it in retirement.

The family home should be included in the pension asset test as it is the most inequitable part of the pension system.
Rae
26th Aug 2016
10:17am
Phil not surprisingly the capitalists amongst us refuse to discuss the inequality of income over the past few decades nor the different rules for them and us.

There is a graph that compares wage increases with productivity gains and share that went to labour with the share that capital got and you can see why only a few dozen people own half the world now.

We get to pay tax on each fortnights earnings and super as we earn it but not so the business people because they are special.

It has been eating them up since about 1965 that there was a middle class who owned a home.

The attitude is that labour should never be allowed to get ahead like that.

Getting all those homes back is definitely on the agenda.

Starting with nursing homes and proceeding from there.

And yes a land tax will do it in a similar manner to the way retirees were forced out by councils rezoning and raising rates
as cities expanded.

Best to start a business yourself I suppose and join the game.
Rainey
28th Aug 2016
4:08pm
You are right, Rae. The privileged obviously want a world where the less privileged bust their guts working to provide all the services the privileged need, are paid a pittance, and retire in poverty to live a miserable existence in old age. It makes me ill to see selfish people here boasting about being well off and condemning anyone who was less fortunate to hardship and misery, claiming they have no right to preserve their OWN money that THEY EARNED AND SAVED to provide expensive necessities in old age - but must be compelled to drain it away on basic living expenses so the taxpayer benefits and the wealthy can keep rorting the system. There are some very nasty people commenting here.
Pamiea
25th Aug 2016
8:07pm
Boy Old Geezer I really don't agree with your comments. I am a single on a pension and I can manage on the OAP topped up a bit from my small super for some long awaited trips before I get too old to enjoy. Don't begrudge me that. The Govt have put up our registration about $200 pa over the last three years. Some Prescription medication has gone up to $9 recently and fortunately I don't need to take much. I cannot honestly see how a 'fat cat' Professor can be an expert on the pension. He would obviously not have to budget too hard.
Old Geezer
25th Aug 2016
9:07pm
I don't have a problem with an OAP that uses a small amount of super to top up their pension.
Pamiea
25th Aug 2016
8:15pm
Also old Geezer the family home should NOT be taken into consideration. God we gave worked hard enough to get one so why let the greedy pollies who rip us all off take this into consideration. I did save extra in my super account but dont forget we came into it late so old Geezer I think your comments come from a situarion where two people worked to save money. Singles have to save alone and we are not belly aching about that cos to get an Old Geezer in our life would have been too much to stomach!!
Old Geezer
25th Aug 2016
9:02pm
If you only have a normal family home then I can't see how taking it into consideration will effect you. I have been talking about it with financial advisors and they feel it is coming. One scenario suggested is adding the valuation over $2 million into the assets test.
Pamiea
25th Aug 2016
9:53pm
Having a $2million home certainly wouldnt affect me. I've battled all my life and my home certainly isnt worth $2million.
Golden Oldie
26th Aug 2016
1:45am
2 million would not affect me either. A family home is not an income producing asset. It has costs for rates, and repairs and renovations, to make them suitable to live in as we age. The allowable asset limits are less than for those non-home owners, so there is some recognition for the value of a home owned by the occupants. People who rent have a higher level of assets allowed and they can also get a rent allowance. In a lot of cases, the value of the home is actually the land it sits on, where it is, which is why huge sums of money are paid by ovrrseas investors who will pay high prices and then demolish the existing house and build a mansion on the property, and then leave it sitting idle while they wait for the prices to go even higher. Someone living in their older house, in areas of high demand have no control over the house prices going up.
Becca
26th Aug 2016
8:15am
Not having a big Super and having part of the Old Age Pension. The government should be ashamed of itself. Insurances take a big part for our funds. House and contents. Which We must pay as we could not afford to buy another home. Car Ins., for the same reason and every day costs. Like rates, water an Electricity, petrol etc. I hoper Professor Pigot realises we are just normal people who have aged after years of hard work to survive and raise our families.
Old Geezer
26th Aug 2016
8:39am
If you only have part OAP then you have capital to spend as well as the interest on that capital so you would be doing very well compared to those living only on the OAP. You should be thankful that the full OAP is there as a safety net if you draw down your capital.

Just imagine if you had to completely provide for your own retirement with any health care card or any help from the government. Some of us do exactly that.
Rainey
28th Aug 2016
4:00pm
The super-privileged do that, OG, after using every trick in the book to avoid tax during their working life. They bleed this country of far more than any pensioner takes. They are the problem, not the battlers who struggle to survive old age on a pension or part pension.
ex PS
29th Aug 2016
1:08pm
Becca, I would suggest doing what the government is recommending, live a life of luxury until your Super runs out and then get a full Pension. It seems we were all very foolish saving for retirement, we all should have just relied on the Pension, as people like O.G seems to advocate.
ex PS
26th Aug 2016
10:00am
The more I see of the incompetent fashion that successive governments are stuffing around with Super and Pensions the more I am coming to think that the Pension should be awarded at retirement age to everyone who applies for it. The condition being that they then pay tax at a stage where their income exceeds the Pension Payment Level. There should then be no need for an Assett Test on savings or property as many retirees would decline the Pension as it would push them into a higher Tax bracket.
It is obvious that the government wishes to discourage people from looking after their own retirement so lets get it over and done with.
Old Geezer
26th Aug 2016
10:16am
It is not hard to write off most of one's income under the present tax act so we would see a lot more wealthy people accessing the pension with your suggestion.
Rainey
28th Aug 2016
3:58pm
You are right ex PS. Everyone SHOULD receive a pension. To use the OAP in a discriminatory manner to discourage saving and planning is economically irresponsible and just plain DUMB.
Old Geezer
26th Aug 2016
10:36am
An interesting article about SMSFs.

http://taxandsupernewsroom.com.au/index.php/2016/08/23/smsfs-win-gold-retirement-savings-race/
Pamiea
26th Aug 2016
11:50am
Enough said on this subject. Let's move onto the next topic which gets our blood boiling. Bring it on YourLifeChoices


Join YOURLifeChoices, it’s free

  • Receive our daily enewsletter
  • Enter competitions
  • Comment on articles

you might also be interested in...

How to budget (in retirement)

Are you brave enough to follow Kaye Fallick’s formula to save?

Why the rich live longer

The sad truth that income and occupation control your longevity.

Is a reverse mortgage for you?

Reverse mortgages may become more popular as a means to fund retirement.

Could annuities save your retirement?

Many Australians may turn to annuities as a way to fund their retirement income.

Retirement: the risk is all yours

The risk of funding retirement income has well and truly shifted – and now it’s all yours.