Do you find the idea of planning for your retirement overwhelming? If that’s you, you’re not alone.
Our new report shows about 80 per cent of Australians find retirement planning complicated and about 60 per cent of Australians expect that their retirement will be financially stressful.
But there are three things the government could do to simplify superannuation – so Australians can enjoy their retirement.
On the latest podcast, Brendan Coates and Joey Moloney discuss their new report, Simpler super, and how these three reforms could take the stress out of retirement.
Transcript
Kat Clay: Do you find the idea of planning for your retirement overwhelming? If that’s you, you’re not alone. According to Choice research, 80 percent of Australians find retirement planning complicated. Instead of being a relaxing time to enjoy the fruits of a lifetime of work, 60 percent of Australians expect that their retirement will be financially stressful.
With these concerns, retirees don’t have the confidence to spend their super savings. Our new report, Simpler Super, aims to take the stress out of retirement. With me are the authors, Brendan Coates and Joey Moloney, to talk about how to simplify the superannuation system.
So, Brendan kicking it off with you, your report says that people find retirement planning stressful and tend not to really spend down their super.
Could you talk us through that?
Brendan Coates: So, for the first time, many Australians are entering retirement with significant superannuation savings as the super system matures. So, you know, individuals are retiring with around 200,000 dollars in their super, and couples with about 300, 000. And so, people’s retirement matters depends much more than it used to and how people are managing those retirement savings that they have in addition to any age, pension, entitlement that they have.
But what we’re actually finding is that people are finding the process of navigating retirement very complicated. Four in five people, according to another survey by Super Consumers Australia say that they finding the process really complicated and that comes despite the fact that objectively people do look like they’ve got enough for a comfortable retirement like our previous workers show that they’re saving enough as does the retirement income review.
So, what we see is happening is that people are stressed. And it appears to be driven by concerns about, one, their risk to their living standards in retirement. So, will their savings last? And also, the challenge of managing what are actually pretty complicated financial affairs. So, point one is they’re stressed.
Point two, as you mentioned, is they’re also not spending. The typical retiree we’re finding is a net saver. People are actually accumulating larger super balances as they go through retirement. You know, in our work, you know, those that are aged 60 to 64, close on 20 years ago, by the time they’re in their late 70s, hitting 80, they’ve got 37 percent more in super.
Even after adjusting for inflation. And these findings are consistent with a range of other studies that also find that people don’t spend. And what that’s doing is it’s turning superannuation, our compulsory super system, into a massive inheritance scheme. And that’s just not how superannuation was ever intended to work.
Kat Clay: So, Joey, what’s fundamentally going wrong here?
Joey Moloney: The core issue here is there’s just too much uncertainty. You know, most of us go through our working life budgeting around regular pay checks. Super’s fundamentally different. You’re handed a pile of cash and expected to figure out how to make it last. When you don’t know how long you’re going to live, or what the investment returns on your super are going to be.
And it’s the first of these that really bites. You know, take someone retiring today. On average, they can expect to live to about age 88. But that’s just an average. There’s a 1 in 5 chance they pass before 81. And conversely, there’s a 1 in 5 chance they make it to 94. So, when you think about it like that, it’s kind of obvious why we can’t expect people to spend down their super with confidence.
Compounding all of this is our means tested age pension. Basically, all developed countries have something like the age pension, you’ve got to protect retirees from poverty, but no one makes it as complicated as we do. Most retirees today and into the future can expect to receive at least a part pension at some point during their retirement.
And with the dual means test, how much you save and spend impacts your age pension entitlements in ways that are basically impossible for most retirees to predict. So, look, the government has created this incredibly complex system. You’d be fair to ask, what does it do to guide retirees through it? Well, the answer, unfortunately, is not much.
While we’re working, the super system makes basically all the big decisions for us. We’re compelled into the system. We’re compelled to contribute 11. 5 percent of our wages, going up to 12 percent in the middle of this year. Most of us end up in funds and investment strategies by default, rather than active choice.
So, you can go through your whole working life without actually having to make many active decisions about your super whatsoever. But once we retire, the system just casts us adrift. Now this makes us a bit of a global outlier. Most comparable country systems are designed to provide retirees much clearer guidance about where their retirement income is going to come from. Now, to their credit, current and previous governments have tried to address the problem, but the response has just not matched the magnitude of it.
Broadly, the current policy approach is really leaning into more personal financial advice to fix, but that’s a really big ask to solve such a complex problem at scale.
We argue that it’s less expensive and more effective to look at the system design to try and simplify the choices that retirees face in the first place.
Kat Clay: Yeah, and we’ll talk a little bit more about a recommendation you do have around financial advice later in the podcast, but there’s a really big recommendation here in your report. And it’s that people should be encouraged to annuitize some of their super. Now, this was the first I had ever heard of an annuity.
Could you tell us briefly what they are? So, we’re all on the same page.
Joey Moloney: The general idea of an annuity is simple enough. You give up a lump sum of money and in return, you get a guaranteed income at a particular level for the rest of your life. Now that’s a simple lifetime annuity. There are more complicated types that we won’t get into heavy detail today to avoid putting listeners to sleep.
Recall I was talking before about the uncertainty retirees face over how long they live and what a big problem that is for retirees to navigate what to do with their super.
So, you can see that what annuity does, basically it takes that off the table and we really think that can be a huge benefit.
Kat Clay: Joey, how then did you arrive at this recommendation?
Joey Moloney: So, look, what you’ve already probably picked up is that we think annuities are really beneficial because they help take that uncertainty about how long you’re going to live off the table. But you might have also picked up that we think that what the system guides people to do really matters because it’s what people anchor to.
There’s a lot of evidence that shows that people tend to take the options put in front of them, you know, they’re trying to reduce the mental effort of decision making. And right now, the only thing the system puts in front of the vast majority of people is called an account-based pension, which is basically just your super sitting in an account for you to draw down on.
That leaves all that uncertainty about the future sitting squarely with retirees. Now on top of this, the other thing the system puts in front of people is something called the minimum drawdown rates. This is the minimum amount you have to take out of your super each year when you’re retired. These rules encourage people to conserve their super.
For someone working today, following the minimum drawdown rates in their retirement can leave them with 65 percent of their super left in their account at average life expectancy. So, we work hard, we save all this money, and then two thirds of it doesn’t get used. So, look, we looked at this and thought a better, more balanced guidance would see people guided towards annuitizing at least some of their super.
So, our proposal is that people be guided towards annuitizing 80 percent of their super above the first $250, 000. Now, this accounts for the fact that people with lower super balances are likely to be drawing bigger age pension payments during their retirement, so get less benefit from annuitizing a relatively small amount of super, and it also leaves a good chunk of super accessible in an account based pension for those large and unexpected purchases people inevitably have to make.
So, in terms of impacts compared to having all your super in an account-based pension being drawn down at those minimum rates, our proposal could boost people’s expected average incomes in retirement by up to 25%. And more importantly, it can ensure that the bulk of their retirement incomes are guaranteed to last the rest of their life.
Now, this might sound a bit out there in the Australian context where we’ve been conditioned to think about super as a nest egg to be protected rather than used for spending, but it’s really not unusual when you look across the globe. Most comparable country systems focus on delivering income that is guaranteed to last the rest of their people’s lives.
Because that’s what reduces stress and that’s what gives people the confidence to spend.
Kat Clay: The second big part of this idea is that the government should offer these annuities. Brendan, why is that?
Brendan Coates: The first thing I’d say is we’ve actually been here before. So just on a decade ago, there was the Murray Inquiry into the financial system that sort of identified the same problem that we were identifying that people are kind of left alone to manage, to plan their retirements in a way that basically requires everyone to be like a mini actuary which puts a lot of stress on people.
And they recommended through that process that we should have something like an annuity. So, an income superfund should be mandated to put in front of people to recommend, develop and recommend a product to people that guarantees an income for the rest of their lives. And what we saw was that the industry opposed it and eventually the government stepped back and said, well, actually, we’re not going to do that. We’re not going to mandate it. So, the first reason why government is probably best place to do this is we don’t think super funds will really get on board with requiring or pushing people into annuities at scale. But even if super funds would do that, I think there’s a big concern that those products wouldn’t necessarily end up being a good deal.
So, we’ve talked a lot on this podcast before about we needed to improve the efficiency of the super system that we needed to get better performance and lower fees. Now, when you’re working, the products people are in a pretty simple like I can explain you know, you need to be in a product that when you’re working, that basically gives you good investment returns and low fees. And it’s the sort of the same with an account-based pension, which is what people are retiring into today. But when we’re thinking about annuities, that’s a much harder proposition to explain to people, particularly when you think about some of the more complex ones .
And so, people struggle to understand and compare annuities for one. So, it’s less likely you’re in a competitive market to emerge. And secondly, the way an annuity works is we’re all in a pool together, and if I’m the one that passes away early, then some of my balance is used to pay for the income for you, Kat, or for Joey if you live longer than average life expectancy.
And part of that deal is it’s a one-shot game. Once we’re all in the pool, you can’t leave. So even if you found a better deal later even if people can understand what a better deal look like, they can’t necessarily move to take it up. And so, they’re one-shot games. And we saw that in the experience of the UK, which compelled people to annuitize until recently.
And what we found was that most people simply took what their farm was offering and often got a poor deal. And so, it’s hard to imagine a regulatory regime that can make those private annuities really efficient. Whereas a government option looks like the best one to us. In most countries, government directly provides, or many countries, government directly provides that lifetime income.
And we think that that’s what we should be done in Australia, because priced fairly, you just have it run by an independent agency, a government annuity would also encourage take up because retirees could be confident that they’re going to get a good deal. They’re not going to get ripped off by the government, which would encourage take up and give that government elephant stamp.
It’s a pretty straightforward process to establish such an entity. You’d basically have people buying annuities. That capital would go into the government annuity provider, which we would call lifetime super because that’s what it’s providing super for life. Those investments could be managed for the by the future fund, and then basically people would be paid out.
Australia has a lot of experience of running this kind of independent financial and non-financial corporations. You’d have an independent set of directors to make sure that things run prudentially. And sustainably. And, you know, even in the sort of modelling we’ve done where we see a fair degree of take up, we wouldn’t expect the assets under management for this thing to be more than 2. 5 percent of GDP by 2040, which is, you know, pretty small in the context of, you know, a system that at that point might be worth 60 to 70 percent of GDP for total retirement assets. So, this isn’t nationalizing the super industry. It’s not putting super funds out of business. It’s just taking a portion of those assets, putting them in an annuity because that will make retirees’ lives simpler and ultimately give them a more comfortable, less stressful retirement and hopefully lead them we expect to spend more of their retirement savings.
Kat Clay: So, you’ve also recommended that the government provide free advice to people too. And I think I understand a little bit of the thinking here, but I’d love to hear it from you.
Brendan Coates: We’re in a world where if we get people to annuitize some of this, it will simplify a lot of their choices, but the system’s going to still remain relatively complex. Particularly as Joey mentioned before, we have a means tested age pension where we’re kind of a unique globally and having such a means tested age pension.
And in fact, some of the survey evidence shows that people really struggle to even apply for the age pension. So, one recent study found that 30 percent of, pensioners delayed applying for more than a year after they were eligible. Because they found the system complex, and they weren’t confident to navigate it.
And that alone is enough to cost some, a couple $42, 000 in pension payments. They’re helping navigate the pension, also having personally useful guidance to help people work out how much annuity they may want or how to invest and draw down their remaining super that would remain in account-based pension.
As Joey mentioned, the government is set to allow super funds to offer more personalized guidance, to take personal circumstances into account and have them advise people about what, how they should manage their super. The challenge there is that only one in five people , would trust advice from their super fund according to one recent survey from Super Consumers Australia.
And that’s why the government should establish a free service that sums what we think of as summing the parts of the retirement income system. Building off an actual UK example, which is the UK PensionWise service, which has become pretty central to how people plan retirements in the UK. As of a few years after it was established, we’re now in a world where 30 percent of people who accessed their retirement super in the last four years that use the PensionWise service.
So, what we’re thinking about here is essentially an independent body free from ministerial control that provides free advice. You’d have a set of tools and calculators that would allow people to sort of understand the interactions between the pension and their super to plan for different scenarios.
But then it would be able to help them to think through. Okay, well, if I spend this amount of money, this is how long it’s going to last. What’s my preferences for how I invest my remaining super? How much risk do I want to take on? You could even have a situation where people could have a single statement through myGov that says, here’s the amount of super you’re going to get from, you know, the income you’re going to get from your annuity.
Here’s how much income you can get from the age pension, and here’s, you know, the income you’re going to get from your remaining account-based pension. It’s like a one stop shop for advice. You know, we think that this is really important in helping people along, give people choice alongside what their super funds may offer to be able to make the choices they need to make to help people apply for the age pension and the upshot of it is, you know, this wouldn’t be, it would be free at the point of access, which means someone’s got to pay.
And essentially, we would estimate it would cost something like 360 million over its first four years. A lot of that includes the setup costs, setting up the I. T. Systems and getting institution running. And then the cost would be roughly 50 thereafter, which essentially we would levy pay for either by curbing some modest super tax breaks or just having a straight up levy on the on super balances that would so all super fund members who have access to this system would have the benefit would basically pay for it out of a really modest levy on their on their balances.
Kat Clay: So, the last piece of this puzzle is the role of super funds and what can we do there and what can governments do there to make sure that they’re delivering for retirees?
Joey Moloney: Obviously there’s still a huge role for super funds. You know, they are and will remain a core part of Australia’s retirement income system. But we do think that the government needs to do more to ensure that they really deliver for retirees. Because picking a super fund in retirement is actually one of the biggest financial decisions people can ever make.
People can expect to pay over half their total super fees in the years after they retire. But really oddly, retirement super is regulated much more lightly than working age super. So, what can we do? So, some easy wins are to extend the performance testing regime and the product assessments that the regulator currently does for working age super to those account-based pensions in the retirement phase.
Like I mentioned at the start, current policy direction is looking to give funds a bit more rope in providing personal financial advice to their members. That’s directionally correct because people are going to ask questions of their super funds, and we want superfunds to be able to help their members.
But we think that at a minimum, those two things I just mentioned before, probably what’s needed to make sure that’s done in a safe way because funds are inherently conflicted in the advice that they will provide their members. Now, a more ambitious idea on top of that is to implement an outstanding recommendation from the 2018 Productivity Commission report for a wholesale competitive process, whereby an independent panel of experts identify the top 10 funds every four years for new workers and retirees to be actively steered towards.
Now this solves the key problem, being that most people don’t have the time and expertise to scrutinize super funds. And this is why, basically, broadly, we’ve had a pretty inefficient and uncompetitive super system build up over the years. So doing that at a wholesale level, injecting that wholesale competition, it creates the incentives for all funds to lift their game.
The PC envisaged that for the accumulation phase. But a lot of the things that matter in the accumulation phase, whether you’re a good fund for workers, you know, you’re likely to be a good fund for retirees too. So, extending that to the retirement phase is a pretty simple extension. And that creates those wholesale incentives to make sure that funds are offering efficient products in retirement to their members and that the advice and guidance and service offerings in retirement are high quality too.
Kat Clay: Yeah, Joey, I really liked that recommendation around the top 10 super funds because it does create that competition there and, and also who doesn’t want as a business to be in the top 10 super funds. It’s a great recommendation and a great thing to aspire to.
If you’d like to read this report and read our recommendations in full, you can find it on our website for free at grattan.edu.au. Our reports and our work are done through donations, so please consider donating while you’re there. We appreciate every donation that we do get.
As always, please do take care and thanks so much for listening.