A report has highlighted the need of a decentralised pension regime to financially support retires instead of an age pension but also underscores the need for financial advice to support system.
The report from Natixis IM titled Danger Zone: Global retirement security challenges come home to roost in 2022 stated ageing populations present limited choices for policy makers – choices that will be difficult as retirement benefits compete with a growing public debt burden.
“The debt to GDP ratio for OECD countries reached a record high of 95 per cent in 2020, a figure that’s 73 per cent greater than it was in 2007, before the global financial crisis,” the report stated. “Down the road, policy makers could be forced into one of three tough decisions, none of which are real vote-getters.”
The report suggested those three options are raising payroll taxes, raising the retirement age, and reducing benefits.
However, the report noted workplace retirement saving plans can be a crucial first step, pointing to Australia’s superannuation system as a positive example.
“Australia, New Zealand, Singapore and other countries have taken on the challenge with compulsory retirement savings programs.”
But while Australia’s system was praised, it noted education and advice on how to manage retirement assets is increasingly needed given today’s complex financial choices.
In a survey conducted across 24 countries with CoreData Research, it found 62 per cent identified a need for professional advice in selecting investments from their workplace retirement plan.
Why self-funding models continue to gain steam
The report stated a larger population living longer breaks the formula behind most pay-as-you-go retirement systems and the maths behind that is a concern for policy makers.
“Many of these systems, like Social Security in the US, use payroll taxes to fund government retirement benefits,” the report stated. “What makes them work is the balance between the number of working age people and the number of retirees – and others – drawing benefits.”
That number has climbed steadily higher for the past century and is expected to reach a breaking point within the next few decades. The issue is illustrated by the old-age dependency ratio which identifies the number of retired people out of every 100 within a population.
For Australia that number was 27.7 in 2020 and will jump to 41.6 by 2050. Although it might seem like a daunting change, it is in much better shape than Japan which is already at 52 in 100 and will increase to 80.7 in the next three decades.
Local opposition
Despite support for non-centralised models, Australia’s superannuation industry still must contend with opposition locally despite Treasurer Jim Chalmers prematurely declaring the super wars are over after the Albanese government was elected in May.
In opposition, Coalition Senator Andrew Bragg has described superannuation as “a significant failure” of Australian economic policy.
“It doesn’t get many people off the pension, it costs the budget more than it saves and it reduces agency and individual choices,” he said as part of a statement after this year’s election outlining what he believed should be the nation’s economic priorities.
