Summary
Australia’s superannuation system is too complex, and the upshot is that retirees are stressed and lack the confidence to spend their super savings.
About 80 per cent of Australians find retirement planning complicated and about 60 per cent expect their retirement will be financially stressful.
Few retirees draw down on their retirement savings as intended, and many are net savers – their super balance continues to grow for decades after they retire.
This is turning Australia’s multi-trillion-dollar compulsory superannuation system into a massive inheritance scheme.
That is not how it was meant to be. Too few retirees are enjoying the benefits of the savings they built up during their working lives.
How they use their super in retirement is one of the biggest decisions Australians will ever make. Yet the little guidance Australians are offered is unhelpful.
More than four in five retirees are steered into account-based pensions, which require retirees to manage their spending to try to avoid the risk of outliving their savings.
Half of those using an account-based pension draw their super at legislated minimum rates, which leave 65 per cent of super balances unspent by average life expectancy.
Australia needs a three-pronged reform strategy to simplify super in retirement:
1. The federal government should offer all Australians a lifetime annuity, which would pay them a guaranteed income for life. Retirees should be encouraged to allocate 80 per cent of their super balance above $250,000 to the government annuity. This reform could boost retirees’ incomes by up to 25 per cent.
2. The government should create a Top 10 list of the best super funds, and then steer retirees towards those funds. And the government should ask APRA (the Australian Prudential Regulation Authority) to assess and performance-test all account-based pensions. These reforms could boost the incomes of future retirees who continue to opt for an account-based pension by up to $70,000 over their retirement.
3. The government should establish a free, high-quality guidance service to help retirees (and people approaching retirement) to plan their retirement incomes. The service should also assist eligible retirees to apply for the Age Pension. This service would cost about $360 million over its first four years and should be funded by a levy on all super account balances.
The Grattan Institute blueprint for better old age in Australia would let retirees stress less, spend more, and truly enjoy their retirement years.