Changing mindsets: From wealth creation to delivering retirement incomes

Mar 18, 2024
Elderly intelligent couple in love romantically spending time on the beach near the sea, gently hugging each other, looking at the sunset.

Australia’s superannuation system is based upon defined contributions, largely because that avoids the main weakness of many overseas systems based on defined benefits of rising costs for future generations.

The tendency, however, is to focus on the wealth creation from the defined contributions, not on the delivery of secure retirement incomes that is the focus of defined benefits schemes. In Australia, individuals understandably focus on the superannuation savings they have accumulated, and they look to achieve best value from those savings when they retire. Overseas, people do not consider the monetary capital value of their entitlements, but on the level and security of the benefits they receive; consideration of costs and value for money is left to the system’s insurers, mostly governments.

Our superannuation system does not yet deliver the secure, indexed incomes those overseas systems provide, ensuring retirees can maintain their pre-retirement standard of living for the rest of their lives. Moreover, the Australian system involves significant transaction costs and presents retirees with highly complex decisions to make. It has also created a large industry with its own interests that are not always fully aligned with the interests of its members and their families. There is also a real risk of increasing inequality amongst future generations through unplanned, unused savings at death.

The key to addressing these serious weaknesses is to fix the retirement phase of the Australian system. That requires a paradigm shift where superannuation is perceived and used for retirement income, not as a nest egg.

Amongst the measures needed are:

  • regular reports that present savings as retirement income streams
  • merging income and assets tests for age pensions
  • a free and impartial guidance service for retiring individuals and couples
  • availability of standardised retirement income packages
  • government-backed life annuities.

A standard reporting arrangement (at least from age 50), expressing accumulated savings as the likely income fund members would receive in retirement, will strengthen the perception of accumulated assets as retirement income. Reporting mechanisms should allow people to test how varying contributions or retirement age might affect their retirement income.

Merging the income and assets tests for age pensions would improve complementarity between superannuation and the age pension. The current assets test discourages sensible use of savings above its thresholds.

A free and impartial guidance service would help members overcome the inherent complexity of our defined contributions system, made more complex by the age pension and its means test. More extensive guidance from funds might combine personal asset registers with information from partners’ superannuation and links to Services Australia assessments about age pension eligibility and aged care support.

Most members just want a simple suitable product. They may not wish nor have capacity to compare and assess a range of seemingly complex but largely similar products from a range of providers. Most members outside those with excessive balances are not interested in tailored products. Funds should place more emphasis on standardised packages.

We suggest three: one for those likely to receive the maximum age pension; one for those likely to receive a part-pension; and one for those with sufficient superannuation and assets to forgo the pension.

Such standardised packages would balance the objectives of 2022’s superannuation covenant: maximising retirement income, managing risk and flexible access to savings.

We remain concerned, however, that the priority given to the last objective is driven by our continuing focus on accumulated savings: it is not a consideration in defined benefit systems.

Risk management should prompt retirees to allocate a significant part of their savings to products which address the key risks retirees face (longevity, inflation and market risks). We support Treasury’s suggestion of government reinsurance (or longevity bonds) to lower the price of longevity insurance products. But this may be insufficient to facilitate the availability of life annuity products, at least in the short to medium term, nor to persuade retirees to allocate significant amounts towards such annuities.

We suggest that the government also offer life annuities at a price determined by the Commonwealth Actuary. This is not a radical proposal: it is less interventionist than either defined benefit schemes or the age pension (where in both cases costs are met by current and future taxpayers). This would ensure access to products offering appropriate risk protection pending industry development of their own longevity protection products.

The standardised packages could then be required to have minimum allocations towards products offering reasonable risk protection, perhaps at 75% for those unlikely to receive the age pension and 50% for part-pensioners (recognising the role the age pension will continue to play in addressing inflation and longevity risk protection for many on low and middle incomes).

Without reforms along these lines, Australia’s retirement income system will fail to deliver adequacy, security, equity or simplicity. For the ‘world-leading system’ Treasury and others claim we have, we desperately need to change mindsets.


This article is a summary of a submission Podger and Breunig have made to the Treasury’s ‘Retirement Phase of Superannuation’ discussion paper.


Republished from THE MANDARIN, March 14, 2024

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