The long awaited review of our retirement system has been announced. The Government has asked the Henry Tax Review to bring forward its consideration of our retirement incomes system, and all three pillars will be reviewed – the pension, the compulsory and the voluntary components. Adequacy and tax are high priorities.
There are many reviews currently underway relating to superannuation and retirement – self-managed superannuation funds, tax, pensions – and what we really do need is a comprehensive and integrated approach to ensuring that more people have an adequate, and self-funded, retirement.
Australia already has a first-class retirement incomes policy when compared with the rest of the world. We are the envy of most other OECD countries because we have a sensible policy approach, with bi-partisan support in terms of the three pillars. We have a safety net, we have expanded superannuation coverage to almost 71 per cent of the working population over the age of 15 (this excludes self-employed people), and we have modest tax incentives for those who wish to make additional, voluntary contributions.
Of course, the system is not perfect. The removal of taxation on end benefits, and the subsequent tax concessions that were made available to Australians in 2006/07, were not beneficial to everyone. The co-contributions have worked well, but more Australians could benefit from a better-funded retirement with less reliance on the age pension. The age pension itself is somewhat inadequate with the ever increasing cost of living, and the transition to retirement is complicated, at best.
Improving Government policy to encourage Australians to save through retirement, and to smooth the transition between work, self-funded retirement and the age pension, would greatly enhance retirement income adequacy and reduce reliance on social security benefits.
Recent research shows the “retirement savings gap” was as high as $823 billion in 2003-04. Given that many people are failing to provide adequately for retirement income now, the implication is that without changed behaviour, the retirement savings gaps may grow.
Some 86 per cent of Australians do not believe that the age pension will be sufficient for retirement, and 73 per cent say employer-funded superannuation will not meet their retirement needs. This research indicates that many Australians will rely on the age pension, in whole or in part, to fund their retirement. It highlights that investing for quality of life and health beyond retirement is a new essential in the 21st century.
With this in mind, our top three items on the review shopping list should include:
1. EXTENDING THE SUPERANNUATION GUARANTEE
The Superannuation Guarantee is insufficient to adequately fund a comfortable retirement. The contribution level should be increased over time. FPA members suggest an increase to between 12 and 15 per cent. Contributions could be delivered through a number of options, including:
a) A soft compulsion mechanism to encourage contributions from employees, employers and Government;
b) Targeted increases in contribution levels for those who currently benefit from the Government co-contribution, by increasing the Government co-contribution to above $1500, and by increasing the income threshold for access to the Government co-contribution; and
c) Extending the co-contribution scheme to people who are not working, such as stay-at-home parents and those who are less able to fully fund a retirement benefit over a full working life.
2. IMPROVING THE TRANSITION TO THE AGE PENSION
A very important issue is the transition from a superannuation income to the age pension. Improving financial incentives offered through the Pension Bonus Scheme for people to continue working will reduce the reliance on the age pension at younger ages. For example, the monetary amounts for the Pension Bonus Scheme could be reviewed to ensure they reflect current inflation levels; the five-year cap on the pension bonus scheme could be extended; and the work test requirements be removed.
Currently the Pension Bonus Scheme allows people of pension age to defer receiving their age pension entitlements for a maximum of five years. The longer you defer receiving the pension, the greater the amount. However, you need to register between the ages of 65 and 75. Once you are over 75 you are not entitled to this option. In addition, a work test needs to be satisfied.
A critical component of self-funding retirement is access to the Seniors Health Care Card and other government services. The FPA supports improving access to such vital services to support self-funded retirees to sustain financial independence for longer.
3. ENCOURAGING A SAVINGS CULTURE AND IMPROVING FINANCIAL LITERACY
Currently, “approximately 8 million Australians or 53 per cent of the adult population have been assessed as having low levels of knowledge and skills required to effectively manage and respond to the mathematical demands of diverse situations”; and 44 per cent of households on incomes of less than $50,000 per annum do not have the skills to make sound financial decisions.
Further, Australian household debt is currently rated the fourth highest of the developed world. We know that despite the compulsory nature of superannuation, our overall savings pool has not increased to the extent that it should have. Australians are very much a spending nation, and we need to return to the savings generation born out of the Great Depression of the 1920s.
Financial advice from a qualified professional can certainly help Australians understand financial matters and engender that savings culture. Recent research found advice from a qualified financial planning professional unlocked $1.7 million in collective financial value for eight Australians. In most cases, the financial advice led to immediate savings.
However, only three out of 10 Australians seek professional financial advice, and many prefer to use their own skills to manage their finances.
Government incentives to help consumers pay for advice, such as tax rebates and tax deductibility of advice fees, would help consumers to make sound and informed financial decisions, including funding their own retirement.
There are many other areas that we will be recommending for discussion through this Review. What we are most keen to ensure is that we do not lose the incredible gains we have already made over the past 15 years toward establishing a robust, bi-partisan retirement incomes system that has offered certainty, security and greater coverage than any other country that has a privately funded pension system.