Australia needs new-generation thinking on retirement incomes
Published in The Australian Financial Review, 22 November 2020
Photo: Treasurer Josh Frydenberg and Assistant Minister for Superannuation Jane Hume, who will consider the Government’s response to the Retirement Income Review – AAP Photos/James Ross
It’s more than a quarter of a century since the Keating government introduced a retirement-incomes package in 1992 and Vince FitzGerald reported on national savings in 1993. Ever since, Australia’s retirement incomes policy has been dominated by their assumptions.
A generation of policy thinkers assumed that people won’t have enough money in retirement and that the federal budget will not be able to maintain the age pension, which in any case would leave many impoverished. That thinking has guided the push for higher compulsory superannuation contributions, and support for generous superannuation tax breaks to top-up workers’ retirement savings.
But the Morrison government’s 648-page Retirement Income Review, the July 2020 final report released on Friday, should force many to confront these long-held shibboleths.
First, the review finds that our retirement system is delivering for most Australians.
Most workers today can look forward to a standard of living in retirement that’s on par with their standard of living while working, and often higher. The typical single worker can expect to replace 88 per cent of their pre-retirement earnings, and the typical couple 82 per cent, well above the 65-to-75 per cent benchmark nominated by the review. Even most Australians who work part-time or have broken work histories will hit this benchmark.
The prospect of lower super returns – more likely because of the COVID-19 recession – barely alters these findings. Nor does the fact that one in five Australians have dipped into their super early. When workers accumulate less in super, they tend to get larger part-pensions in retirement that make up most of the difference.
The review also finds that most retired Australians today have as much income in retirement as they did when working 20 years ago. And the age pension keeps low-income retirees out of poverty, provided they own their own homes – although pensioners who don’t own their homes can suffer great hardship, and that group will only get bigger as home ownership falls.
One clear implication of the review is that the already-legislated increases in compulsory super contributions should be abandoned. More compulsory super would force many Australians to save for a higher living standard in retirement than they have while working. And it would lower workers’ take-home pay, slowing the climb out of the COVID-19 recession.
The review debunks the myth that boosting compulsory super would lighten the budgetary burden of an ageing population. Modelling done for the review shows that lifting compulsory super from today’s 9.5 per cent to 12 per cent would cost taxpayers more in super tax breaks than it would save in reduced age pension spending until 2055. And even then there would be 35 years of accumulated debt to pay back before taxpayers ended up ahead.
Analysis commissioned by the review from Australian National University confirms Grattan Institute analysis that workers pay for compulsory super increases via lower growth in wages. And workers’ weaker bargaining power at a time of high unemployment makes it more likely, not less, that they will pay for higher super. Most companies aren’t offering wage rises, so why would they pass on an increase in compulsory super and still give workers the same pay rise when they don’t have to?
Another implication of the review is that the government should reduce excessively generous superannuation tax breaks. These tax breaks heavily favour the wealthiest 20 per cent of households, who already have enough resources to fund their own retirement.
Super tax breaks cost the budget $35 billion a year, and the review projects that that figure will rise sharply in coming decades. If Treasurer Josh Frydenberg wants to ease the budgetary pain caused by the COVID-19 crisis, curbing super tax breaks should be his first priority.
The review also reminds us that Australians pay far too much in fees to their super funds – more than $30 billion a year, or almost 2 per cent of annual GDP. There are too many funds, about 6 million multiple accounts, and 3 million members languishing in serially underperforming funds. That’s why the latest reforms to improve superannuation performance – announced in the October budget – are so important.
The superannuation industry’s response to the Retirement Income Review will no doubt be visceral because billions of dollars in super fees and major political legacies are at stake. But the predictable protestations of vested interests should be ignored.
The review should prompt a once-in-a-generation rethink of retirement incomes in Australia, to help repair the budget, support recovery from the recession, and lift productivity for the long term.