On 22 November 2019, Treasury released a consultation paper as part of the Government’s Retirement Income Review which is seeking to establish a fact base on the operation of the current retirement income system. The review is being conducted by an independent panel chaired by Mr Michael Callaghan, a former senior Treasury official: see 2019 WTB 41 [1301].
As recommended by the Productivity Commission (see 2019 WTB 2 [42]), the review is investigating the “three pillars” of the retirement income system, being:
- the means-test Age Pension;
- compulsory superannuation; and
- voluntary savings (including home ownership).
The Government considers that it is important that the system allows Australians to achieve adequate retirement incomes, is fiscally sustainable and provides appropriate incentives for self-provision in retirement.
The panel said it will undertake a holistic assessment of how the retirement income system is functioning and look at the range of research papers and reports previously published, including the findings of the Productivity Commission report which assessed the fees, investment returns, overall efficiency of the super system.
Interaction of 3 pillars
The paper notes that the diverse personal circumstances of retirees can contribute to complex interactions of the 3 pillars, creating the potential for significantly different retirement income outcomes between individuals. These outcomes are also affected by interactions with other policy areas, such as aged care, health and taxation.
Interactions between superannuation, the Age Pension and voluntary savings may drive behaviour, including:
- the difference in the age at which superannuation and the Age Pension can be accessed. This may affect decision making around when to retire, and how heavily new retirees draw on superannuation ahead of qualifying for the Age Pension;
- the way assets are treated under the Age Pension means test;
- family home treatment under the Age Pension means test.
Changing trends
The paper says the retirement income system needs to accommodate a range of demographic and economic trends without requiring a significant increase in government support. It also needs to be able to withstand one-off shocks. Changing trends include:
- increasing life expectancy and decreasing home ownership;
- lower returns on low-risk investments. If low interest rates persist, higher total savings or increased investment in riskier assets may be needed to support the same level of retirement income;
- labour market trends could reduce the proportion of people covered by compulsory super;
- a major economic crisis could see low investment returns and a fall in asset prices, potentially increasing dependency on the Age Pension.
Family home
The paper notes that the family home is an important asset for retirement. Pensioners aged over 65 who live in their own home have much lower rates of financial hardship than those renting privately. The family home can store equity for use in retirement through downsizing or a reverse mortgage.
Importantly, the family home is exempt from the Age Pension means test. There has also been debate about whether the exclusion of the primary residence from the Age Pension means test results in people overinvesting in their family home.
Aged care
Aged care costs are a major point of interaction for the retirement income system. Uncertainty about the possible need for a lump sum to access residential aged care can lead to retirees not drawing on savings at the rate that they might otherwise do so. In addition, the means test for the Age Pension is structured differently to the means test for aged care and the interaction can be complex to understand.
Consultation questions
The Treasury paper sets out 23 consultation questions. For example:
- What factors should be considered in assessing the fiscal sustainability of the current settings (eg tax concessions, contribution caps, and Age Pension means testing)?
- What evidence is there that people are able to achieve their retirement income outcomes without seeking formal financial advice?
- Is there sufficient integration between the Age Pension and the super system?
- What evidence is available to assess whether the current settings support fair outcomes in retirement for individuals with different characteristics and/or in different circumstances (eg women, renters, etc.)?
- What are the main impacts of the trends (demographic, labour market, and home ownership etc) that affect the operation of the retirement income system now and into the future?
- How does the system balance each of the principles and the trade-offs between principles (eg sustainability and adequacy)?
- What measures should the panel use to assess whether the retirement income system allows people to achieve an adequate retirement income? Should the system be measured against whether it delivers a minimum income level in retirement; reflects a proportion of pre-retirement income (and if so, what period of pre-retirement income); or matches a certain level of expenses?
- Is there evidence the system encourages and supports older people who wish to remain in the workforce past retirement age?
- To what extent does the retirement income system compensate for, or exacerbate, inequities experienced during working life?
- Does the retirement income system effectively incentivise saving decisions by individuals and households across their lifetimes?
- What evidence is available to show how interactions between the pillars of the retirement income system are influencing behaviour?
- What is the evidence that the outcomes the retirement income system delivers and its interactions with other areas (such as aged care) are well understood?
Submissions
Submissions are due by 3 February 2020 to: Retirement Income Review Secretariat, Treasury – email: retirementincomereview@treasury.gov.au; Tel +61 2 6263 4186 (Robb Preston).