Reforms are needed to ensure an adequate retirement income
Jan 25, 2025
Australians now have access to significant superannuation balances, but if superannuation is going to meet its purpose of ensuring an adequate income in retirement, reforms are needed to provide better access to a superannuation pension.
The spread of superannuation is a major achievement
The introduction of superannuation covering all employees by the Keating Labor Government in the early 1990s was a major reform. Previously superannuation was pretty much limited to employees in the public sector.
Initially in 1992-93 the contribution rates to private sector employees’ superannuation funds were low at 3 per cent so as to phase in the impact on labour costs. However, as planned, these contribution rates have increased over time, and this financial year the contribution rate is 11.5 per cent of an employee’s salary, rising to 12.0 per cent next year. As a result, the accumulated superannuation balances of retirees today are substantial.
As set out in a recent report by the Grattan Institute, Simpler super: taking the stress out of retirement, in 2019-20, Australians were retiring with an average superannuation balance of more than $200,000, and couples about $300,000.
Superannuation is now the main source of retirement income. In 2022-23, 34 per cent of Australians who had retired in the past five years reported superannuation as their main source of income, compared to 28 per cent who said it was the age pension. While 60 per cent of people who planned to retire in the next five years said they expected superannuation to be their main source of income.
By the early 2040s, most Australians will retire with at least $250,000 in their superannuation (in today’s dollars), and by the 2060’s many Australians will be retiring with nearly $500,000 in their superannuation. At the same time, the share of retirees on a full Age Pension will have fallen from 44 per cent in 2023 to 21 per cent in 2063.
As a result of the spread of superannuation most recent retirees now have adequate retirement savings to support maintenance of their pre-retirement incomes. And this situation will get even better over time.
Potentially older Australians are now well placed to support continuation of their living standards. In addition, Australia is also well placed to cover the cost of the projected ageing of its population, as fewer elderly Australians will be relying on government support through the Age Pension.
Reforms needed to pension arrangements
As the Grattan Report elaborates, there is, however, one major problem. Four-in-five pre-retirees find their retirement planning complicated. They are uncertain as to how to cover the risks in their retirement about how long their savings will last and how long they themselves will live, as well as navigating the complex interactions of their savings with the means-tested Age Pension.
Because of this uncertainty, retirees are cautious and tend to hang on to their superannuation savings balances. Thus, the Grattan Report found that the average superannuation balance of all 60-64 year-olds in 2003-04 grew by more than 37 per cent in real terms by 2019-20.
Although four in five retirees are steered into account-based pensions by their superannuation fund, because of their future uncertainties, these people manage their spending very cautiously. Half of them only draw their superannuation at the legislated minimum rates, which if followed, leave 65% of their superannuation balances unspent by average life expectancy.
Furthermore, the Grattan Report cites Federal government data for 2015 which show that less than half of all pensioners draw down on their assets, and more than 40 per cent are net savers.
In effect, Australia’s $4 trillion compulsory superannuation scheme has become a massive inheritance scheme. The 2020 Retirement Income Review projected that by 2059, $1 in every $3 that’s paid out of the super system will be a death benefit, compared to $1 in $5 today.
As the Grattan Report points out, however, inheritances tend to transmit wealth to people who are already well-off. Among those who received an inheritance over the past decade, the wealthiest 20 per cent received on average three times as much as the bottom 20 per cent.
Most importantly superannuation savings receive favourable tax treatment on the grounds that they help provide for retirement incomes. But the transfer of these savings to high income children is defeating the purpose of superannuation to provide adequate retirement incomes.
Proposed new pension arrangements
The most important reform proposed in this Grattan Report is that the Government should steer retirees into taking out annuities. These annuities would provide a guaranteed income until death and thus remove much of retirees’ uncertainty.
The Grattan Report argues that retirees should be encouraged to use 80 per cent of their superannuation balance above $250,000 to purchase this annuity. The remaining balance would then still be sufficient to cover the cost of any large spending if needed.
It is estimated that using some superannuation to buy an annuity could boost expected retirement incomes by up to 25 per cent, compared to solely drawing on an account-based pension at the legislated minimum rates, as most retirees do at present.
A critical question then is who should provide these annuities? The Grattan Report argues that steering retirees into annuities provided via their superannuation fund is unlikely to work. The funds have resisted pressure from government to require them to offer annuities to retirees, and the necessary regulatory regime also presents a huge challenge.
Instead, the government should offer these annuities. Annuity payments would be made from the pool of capital created by annuity purchases, with these investments managed by the Future Fund. In addition, the government should establish a separate agency to provide financial advice to retirees and those people contemplating retirement.
Conclusion
I was heavily involved in advising on retirement incomes policy for a large part of my career. Indeed, I was Head of the Prime Minister’s Department when Prime Minister Keating established the National Superannuation Scheme.
In my opinion the Grattan Institute has pointed to a serious flaw in our superannuation arrangements. In effect these savings are not being used to achieve their purpose of ensuring adequate retirement incomes.
The Grattan Institute’s proposals for the introduction of government annuities that will guarantee the maintenance of retirees’ income for the rest of their lives should therefore be strongly supported.
The Albanese Government has been characterised as offering a small target. If it is going to win the next election it needs to get on the front foot.
Here is an opportunity for a major new policy initiative by the Albanese Government to significantly improve the retirement incomes of many Australians. Furthermore, it will cost nothing. It just makes better use of retirees’ superannuation savings.