When Australia embarked on its unique retirement incomes system in 1992, the World Bank was quick to encourage other countries to take the same approach to “averting the old age crisis”, claiming it would “protect the old and promote growth”.

The World Bank highlighted the system’s “three pillars”, a general revenue-funded pension to protect the elderly from poverty, mandated private contributions to provide income maintenance, and voluntary savings for those who want enhanced income maintenance. The second pillar would be in place of the public defined benefit schemes that are more common amongst OECD countries, and would provide a vehicle for increasing national savings and investment.

Many Australians also lauded Paul Keating’s reforms as the means for enhancing living standards amongst the aged, avoiding the pressures on government costs evident overseas from ageing populations and increasing national savings.

Largely ignored were the drawbacks of this system which are becoming increasingly clear as our system matures.

First, we have transferred most of the risks — market, inflation, longevity — to individuals and away from government. Regulation may contain market risks (though not remove them) but market failures are increasingly apparent in the absence of products for retirees which offer protection from inflation and longevity risks. Such protection requires the pooling of funds and the provision of products such as lifetime annuities.

Second, the system’s continuing emphasis on accumulated assets distracts people from the system’s fundamental purpose of secure retirement income that maintains living standards by smoothing lifetime earnings. So, demand as well as supply of such products is low, and too many people are overly keen to hang onto their capital even if that means a lower standard of living than the system was intended to deliver.

Third, the system is extremely complex. This is most apparent at retirement when decisions must be made about converting savings into incomes, integrating superannuation with any age pension entitlement, taking into account total assets including home ownership, and a partner’s savings. The funds are not well positioned to provide such personal advice. Most retirees need to review their decision later, even as their mental facilities diminish. Unlike most overseas systems, ours has no simple fortnightly superannuation pension, indexed to prices, guaranteed until death (or death of the surviving partner).

Fourth, we have a created an enormous industry with its own interests and capacity to extract rents.

In hindsight, perhaps we would have done better introducing a modest public sector national superannuation scheme such as that proposed by Hancock in 1976, providing a universal age pension plus a small earnings-related supplement linked to compulsory contributions. The risk of such a modest scheme imposing costs on future taxpayers as population ages could have been managed by strict controls tying the costs of benefits to contributions. Those on higher incomes would have the option to supplement the benefits by voluntary contributions. And we should have proceeded with fully taxing benefits and exempting contributions and earnings as most OECD countries do.

Such an arrangement might have led to a more appropriate sharing of risks between individuals and the government, ensured the system was genuinely focused on retirement incomes, was far simpler and created a less powerful industry.

But that is no longer possible. The task now is how to reform our second-best model to address its main weaknesses.

First, retirees need access to products that help them to manage market, inflation and longevity risks. Offering government-managed lifetime annuities for sale would not transfer costs to government if the Australian Actuary set the price.

Second, as people approach retirement, funds should be required to provide annual statements of the projected lifetime incomes their expected accumulated savings could deliver if fully converted into lifetime annuities. The assumptions involved should be established by the regulator in collaboration with the Actuary. That would ensure people focused much more on their retirement incomes and not solely on their “nest eggs”. The projections would also assist in benchmarking the retirement income products which the funds might offer.

Third, the government should offer free independent advice to retirees to help them to navigate the complexities of the system, including the age pension means test. That would also put pressure on the government to simplify the means test and ensure the complementarity of superannuation incomes and any age pension entitlements.

The access to government annuities and the fostering of private providers of retirement income products (as subsidiaries of funds or as separate entities) might also dilute the power of the current industry and refocus its attention to serving the public, rather than just accumulating capital.

While there is a strong case for ensuring contributions to superannuation are genuinely aimed at retirement incomes rather than wealth creation, the most constructive approach to addressing intergenerational equity is to help retirees convert their savings into secure incomes, not increase superannuation taxes.

This is an edited version. Republished from Australian Financial Review, 14 October 2025

The views expressed in this article may or may not reflect those of Pearls and Irritations.