Published at the Australian Financial Review, Sunday 8 March
Should you be worried about your retirement? The superannuation lobby wants you to be. But the evidence tells another, more comforting story.
The good news is that Australia’s retirement income system is working well for most Australians.
Retirees are less likely than working-age Australians to suffer financial stress such as not being able to pay a bill on time, and are more likely to be able to afford optional extras such as annual holidays.
Most people aged 65-84 have as much or more income today than they did 20 years ago when working. Many of them are net savers in retirement.
And the age pension keeps low-income retirees out of poverty, provided that they own their own homes. In fact fewer retirees are in poverty today than younger Australians of working age.
As for future retirees, Grattan Institute research shows that the majority of working Australians 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.
Even Australians who work part-time or take significant career breaks, such as to care for children, can typically expect to have incomes in retirement that meet or beat the retirement benchmarks used by the OECD and others. When careers are interrupted, workers save less super, but tend to get larger part-pensions, offsetting much of any fall in retirement income.
This good news story has policy implications: in particular, the legislated increase in compulsory super from 9.5 per cent of wages now to 12 per cent by 2025 should be abandoned.
Why? Because higher super means lower wages. That’s the finding of our recent paper, No free lunch. And the Reserve Bank agrees: it’s forecasting wages growth to be slower from next year than if compulsory super wasn’t rising.
Our work shows that 80 per cent of the cost of super comes via lower wages within 2-3 years. And the long-term impact could be as high as 100 per cent. That’s what international studies of similar schemes typically find.
Industry Super Australia’s Phil Gallagher argued recently in these pages that higher compulsory super should go ahead because it would boost workers’ lifetime incomes.
Our modelling finds the opposite – many middle-income workers could be worse off over their lifetimes if super rises. But there’s another problem: if more super is always good, how can you ever have enough?
Compulsory super shouldn’t rise, because that would force Australians to save for a higher living standard in retirement than they have while working, which is simply a recipe for larger inheritances. That’s why the Henry tax review recommended against raising compulsory super beyond 9 per cent.
Raising compulsory super would also cost the budget $2 billion a year in foregone tax, which would vastly exceed any savings from less spending on pensions for decades to come.
And higher super would harm pensioners today, because wages would grow more slowly and pension payments are benchmarked to wages. And it wouldn’t actually help the typical worker much in retirement because of the pension means test. Treasury research even shows that more compulsory super would worsen the gender gap in retirement incomes.
Others suggest the prospect of lower future investment returns warrants higher compulsory super. But returns actually matter much less to actual retirement incomes than many think. For most retirees the main impact of lower returns will be higher pension payments. However, that is better (and cheaper) than boosting compulsory super to offset the risk of lower future returns.
Since retirement incomes are broadly adequate, there is room to reduce excessively generous super tax breaks that largely benefit the wealthiest 20 per cent of Australians – who already have the resources to fund their own retirement. Reducing super tax breaks could save the budget more than $4 billion a year, all without hurting the retirement incomes of middle Australia.
Rent assistance boost needed
But the retirement incomes story is not all good news. The system is failing too many poorer Australians, especially low-income women and especially retirees who rent.
Forcing the entire workforce to save more for their retirement by increasing compulsory super – as some have argued – is not the way to prevent senior Australians suffering poverty in their later years.
Instead, the Government should boost the maximum rate of Commonwealth rent assistance by 40 per cent, or roughly $1400 a year for singles. This would cost just $300 million a year if it applied for pensioners, and another $1 billion a year if it was extended to younger renters too.
Newstart should be increased by $75 a week. This would cost a lot but it would help the growing legions of older Australians, many of them women, who find themselves among the long-term unemployed in the years leading up to retirement, or are forced to retire involuntarily.
Together these changes would do more far than higher compulsory super to help the growing number of older Australians to avoid poverty and homelessness in retirement.
Home ownership rates are falling in Australia. And our retirement incomes system makes this worse by favouring home owners over renters. Once a person is retired, their house is treated differently to other assets, which is why $6 billion in pension payments go to people with homes worth more than $1 million. It’s time for more of the value of the family home to be included in the pension assets test. Counting more of the home above some threshold – such as $500,000 – would be fairer, and save the budget up to $2 billion a year.
Our retirement incomes system is working well. But we should aim for better. The reforms we propose would make retirement fairer, save taxpayers’ money, and ensure that all Australians can enjoy a comfortable retirement free from poverty. And that would be a good news story.