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The Committee for Sustainable Retirement Incomes (CSRI) held its second Leadership Forum on 12-13 October 2016. The Committee is an independent think tank which exists to progress policies with the goal of encouraging adequate retirement incomes on a fair and fiscally sustainable basis. The Forum identified wide agreement to a menu of further reforms to realise the full potential of Australia’s still-maturing retirement incomes system: adequate, secure and sustainable retirement incomes for all.

The challenge is to convince politicians that the reform journey will not be over after passage of the current package of superannuation tax changes. This will require demonstrating extensive agreement among stakeholders, identifying a pathway of incremental steps that may gain bipartisan support, and being consistent with short and long-term budgetary imperatives.

The Forum focused on three detailed papers which were prepared following a series of roundtables of experts and commissioned papers. TTPI contributed to two of these roundtables. The overall conclusion from the papers and the discussion at the Forum is that the top priority now should be on converting people’s increasing superannuation balances into appropriate and secure income streams.

Post-retirement Incomes

Australia has successfully established a robust system of accumulating savings, but has yet to design the pensions phase. In many respects, this is a far more complex task than designing and building the accumulation phase, for a number of reasons:

  • people’s circumstances vary more at, and through, retirement;
  • the tax and pension means test arrangements are difficult to navigate;
  • retirees do not have the option they had in the accumulation phase to increase work hours and therefore superannuation contributions;
  • some retirees face cognitive decline and many rely increasingly on others to advise them or to manage their affairs; and
  • superannuation balances represent most retirees’ second largest asset, and the one they are least familiar with managing.

The Government is developing a framework for the pensions phase, drawing on the work of the 2014 Financial System Inquiry to promote ‘Comprehensive Income Products in Retirement’ (CIPRs). CIPRs are intended to offer more security by managing risks more efficiently through pooling funds, thereby offering higher retirement incomes.

Most people at the Forum were looking for firmer guidance for retirees on CIPRs. This would involve a system of ‘guided choices’ where the CIPRs offered by superannuation funds are pre-selected according to broad categories of members, based for example on age, gender, marital status, accumulation balance, extent of likely reliance on the age pension, and ability to access other savings. Such guidance would preferably start from around age 50, involving iterative engagement with members as they consider when they intend to retire (or transition to retirement), and whether to vary their voluntary contributions to achieve their target retirement income. Most retirees would prefer not to rely upon expensive personal financial planning advice.

There are many challenges here, not only about product design but also about the obligations of trustees, and protections for trustees, the regulatory requirements for the product offers, and the degree of compulsion on funds to offer them. The process will only work well if tax and transfer settings in retirement complement the arrangements for superannuation in the accumulation phase, and are sufficiently stable for the purposes of planning and for decision-making at retirement.

The funds are the central players in this, but it is vital that the consumer voice is heard and is given first priority. The aim has to be to make our defined contributions based system look much more like a defined benefit scheme.

Adequacy

Based largely on TTPI work, the CSRI concludes that the basic rates of age pension provide adequate poverty protection for home owners, but not for renters. Increasing rent assistance remains a priority. There is also concern about Newstart for older unemployed people who don’t have disabilities but are unlikely to find work before they reach pension age. These concerns are difficult to address at present unless new offsetting budgetary savings can be identified.

‘Adequacy’ for income maintenance purposes, as opposed to protection against poverty, is less easy to benchmark. Modelling by Phil Gallagher from Industry Superannuation Australia (and formerly the head of Treasury’s Retirement Incomes Modelling unit) suggests that a 12% mandatory superannuation contribute rate will eventually deliver between 60% and 70% net income replacement (IRR) for men and couples on median earnings. It will deliver higher than 60-70% IRR for women and those on lower incomes. Using 70% IRR as an adequacy benchmark therefore means most people can achieve ‘adequate’ retirement incomes with at most modest levels of voluntary savings above the mandated amounts.

Based on this work, the CSRI view is that the case for increasing the mandatory superannuation contributions above 12% is weak, noting this would reduce net incomes of many lower income families when they need the money more. The CSRI is also not persuaded that the mandated contribution should be lower than 12%, noting access to other savings to fund retirement incomes is likely to diminish, not increase, as mandated superannuation savings increase.

Superannuation balances are much lower for those with interrupted employment histories, particularly women, than for those with continuous lifetime careers. The gender gap is driven by differences in employment and wages, and these are compounded in superannuation. Addressing the gap is therefore primarily an issue for employment-related policies, but the superannuation system could go further than the measures in the current tax package (again, however, at some budgetary and economic cost). One obvious way to improve adequacy and to find budgetary savings to direct towards remaining gaps would be to increase the preservation age, and to further increase the age pension age, thereby increasing superannuation balances. 

Sustainability and self-provision

Gallagher has also undertaken modelling for the CSRI to inform debates about superannuation tax and the means test. The former challenges previous analysis by Treasury and by TTPI.

The CSRI strongly disagrees with Treasury’s view that the current tax regime for superannuation involves tax expenditures approaching $30 billion a year, and growing. The Treasury view is based on a ‘Comprehensive Income Tax’ benchmark, taxing superannuation contributions and fund earnings in full, at the contributor’s marginal tax rate.

The CSRI firmly believes the correct benchmark is a comprehensive expenditure tax, where tax is only imposed when the benefits are paid. This is accepted international practice, and is comparable to the way capital gains are taxed – when the gains are realised, not as they accrue. The CSRI would prefer such a tax regime but recognises this is now simply too hard, not least because of the negative impact on revenues in the short and medium term, before the superannuation system matures.

Gallagher also explored whether the current tax regime (as now proposed by the Government) is concessional over lifetimes compared to such a comprehensive expenditure tax regime and, if so, how the concessions are distributed. He concluded that the proposed tax regime is not concessional at all, for high or low income earners, if they are contributing only the mandated superannuation amounts. High income earners could gain concessions relative to an expenditure tax regime with large voluntary contributions but the Government’s proposed caps will be effective in combatting this. Accordingly, the CSRI sees no case for further increasing taxes on superannuation.

On the pension means test, the CSRI considers the evidence that high effective marginal tax rates inhibit employment amongst older Australians to be weak. But, like TTPI, it is concerned about the impact of the new assets test to come into force in 2017. Gallagher’s modelling reveals that the optimal response to the new assets test by retirees will be to draw down their superannuation assets by some 15% a year so that they can rely much more heavily on the age pension in their later retirement years. This contrasts sharply with what the Government is pressing the industry to offer retirees through CIPRs and the intention to reduce reliance on the pension.

CIPRs are expected to involve effective drawdowns higher than the minimums now required by law (which most retirees apply), but generally of the order of 5-8% a year. At these drawdown levels, the new assets test will cause people with assets above the thresholds to gain no net additional income, or more likely suffer reduced income, from any increase in savings because the pension will be reduced by 7.8% of any additional assets. Again, this is the reverse of what the superannuation system is designed to achieve in the accumulations phase: both mandated and voluntary savings are expected to increase incomes in retirement, not just replace the age pension.

There are now two challenges here:

1. choosing an assets test threshold and taper rate that contains age pension outlays but complements the other design features of our retirement incomes system; and

2. convincing the Government and Opposition that revisiting this difficult issue is worth the political pain.

The second challenge is probably just too great for the present, but the issue may be able to be put back on the agenda as the new CIPR framework matures, and those approaching retirement start focusing on what they need to do to achieve the retirement incomes they want given tax and means test arrangements. It will be increasingly clear that the assets test is pressing them to take action that would otherwise make no sense.

Housing

The CSRI highlights the home as the fourth pillar of the retirement incomes system, and suggests it could play a larger role. Few people currently take advantage of the home to increase their retirement consumption. Greater use of equity release products could help the asset-rich, income-poor group of the elderly without jeopardising security of tenure or the capacity to access residential aged care if needed.

Equally, it would be possible to design a pension means test arrangement which included assets in the home above a high threshold without reducing access to adequate retirement incomes or upsetting security of tenure or access to aged care. If phased in by applying only to future retirees, such a test could be linked to phasing in a more coherent merged means test, and to addressing outstanding adequacy concerns, while further improving sustainability in the long term.

Where to from here?

The emerging Australian retirement incomes system has many strengths, but it is still a long way short of maturity and of delivering on its promise to provide adequate, secure and sustainable retirement incomes for all. The reform journey, however, need not be politically too hard if presented coherently and pursued steadily and incrementally. Indeed, it is a little surprising that neither side of politics has presented a clear vision of what the system could be offering in terms of improved retirement incomes without adding to budgetary costs.

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