Retirement income review

Retirement income review

The Retirement Income Review (RIR) Final Report was released by the Federal Government on 20 November 2020. Whilst the 648 page report didn’t contain any recommendations, it does make some key observations on the functionality of the retirement income system. It is a fact-based report and although the Government has not yet provided their response to its findings, there is no doubt it will provide a valuable contribution to public policy debate in this space over the coming months, and possibly years.

The RIR found “The Australian retirement income system is effective, sound and its costs are broadly sustainable.…  But the evidence suggests there are areas where the system can be improved.”

From a financial planning perspective there are several areas that the review highlighted:

1. The system is complex and there is a need to improve the understanding of the system.

Lower levels of financial literacy as well as limited uptake in seeking financial advice has resulted is some people failing to adequately plan for retirement. Interestingly, the report cited that most people die with the bulk of the wealth they had at retirement, intact. A number of submissions have called for the system to be structured and communicated so that people can better understand, navigate and plan for their retirement. 

While understanding may be one facet, access and trust may also contribute to lower levels of uptake in obtaining financial advice. In the same week that the RIR report was released, ASIC also released CP 332 which seeks to identify the impediments to the delivery of good-quality and affordable personal advice.

2. The system has neither an agreed objective nor an agreed role for each of the three pillars.

The current retirement system has three pillars – the age pension, compulsory SG and private savings. The panel stated that the system has neither an agreed objective nor an agreed role for each of the pillars, and these key fundamental issues are linked. As such, the role of the pillars must be determined to ensure the system is achieving the objective. The review suggests the objective should be expanded around delivering adequate standards of living in retirement in an equitable, sustainable, and cohesive way.

Although this needs to be explored further, the review panel have suggested “adequate, equitable, sustainable, and cohesive” all be considered as part of the objective. The review calls out that it needs to be clarified and emphasised that the system is aimed at providing income to support living standards in retirement – not building wealth for estate planning purposes.

Adequacy should be centred around two key themes. First, ensuring a minimum standard of living for those with limited financial means and second, facilitating people to maintain their standard of living by incentivising them to save. When considering equity, the system should target Government support to those in need and it should also provide a similar outcome for people in similar circumstances. For the system to be sustainable, the review panel suggested it be cost-effective for taxpayers in achieving adequate outcomes and robust enough for change. And for cohesion, all components in the system should complement each other and work in the same direction without being unnecessarily complex for consumers.

3. The future of superannuation guarantee (SG)

Discussion on what should be done in terms of the rate of SG was central to the review. The report looked at both sides of the debate – reviewing at the time whether leaving the SG rate unchanged at 9.5% which obviously results in lower balances than if it increased to the legislated 12%. However, the report also found if the SG rate remained at 9.5% and people made more efficient use of their retirement savings, many would have higher replacement incomes than they would otherwise have with the SG at 12% and drawing down their superannuation balances at the legislated minimum rate. The Federal Government however has not legislated to freeze the rate of SG and this will become 11.5% in 2024/25. The report outlines several options for people to boost their retirement outcomes, including more effective drawing on super assets, achieving better after fee returns and accessing the equity in the home. From a financial planning perspective these are all factors that may be considered as part of retirement planning discussions with clients.Super guarantee is an employment-based scheme and those who have longer periods of employment and higher incomes naturally have higher superannuation balances and retirement incomes. It also concludes that those on higher incomes receive more tax advantages. The report found that voluntary super contributions are predominantly made by older, wealthier people. Given those on higher incomes receive a larger tax concession, this results in inequity within the system. However, this inequity is reduced in retirement as those on lower levels of income generally receive more in Age Pension payments.

There is a gap in retirement savings and retirement incomes for women, as they are often employed in lower paid professions, take more career breaks for raising children and caring for others, and take on more part-time work. To combat the gender gap, the review received submissions with a range of suggestions including:

• removal of the $450 per month SG threshold,
• paying super on employer paid parental leave and Government Parental leave pay,
• disclosing super balances in divorce settlements,
• reducing super tax concessions for higher income earners,
• increasing support for lower income retirees who rent, and
• increasing the SG rate.

If the Government chooses to implement any of these initiatives, many will require substantive policy change.

When reflecting on the fairness of the SG system, its coverage needs to be examined. While SG is a mandatory entitlement for most employees, it doesn’t cover the 17% of the workforce who are self-employed. And of the employed workforce, around 90% receive SG.  As part of the submissions to the review, several suggestions were identified that could improve the equity within the system including:

• removing the $450 per month threshold,
• expanding the earnings base that attracts SG to include overtime,
• continuing to ensure people receive the SG they are entitled to receive through transparent processes,
• paying SG at the same time as wages, and
• enforcing sham contracting laws,

Government has since removed the $450 per month threshold to expand coverage for lower income workers and Treasury has since consulted on improving the visibility of super balances in family law proceedings. The Government has also announced that from 1 July 2026, employers would need to pay SG at the same time as wages and salaries.

The review also acknowledged that a large proportion of people don’t choose to retire, they are forced to retire. This has a flow on effect as they exit the workforce earlier than planned and with less super than expected. The review panel’s research also suggests involuntary retirement before Age Pension eligibility age is more common among people with lower wealth, lower education levels and those in blue collar occupations. While setting policy to cater for those who retire early and involuntarily would be challenging, the report highlights factors that may need to be considered for effective targeted policy settings, such as:

• setting SG rates at higher levels for those in industries typically impacted by early and involuntary retirement,
• reconsidering the Age Pension eligibility age for people in certain industries or occupations who are more likely to retire involuntarily, and
• increasing the rate of JobSeeker payment.

While all these factors are worth considering, it is evident that further policy changes will be required to address this equity measure.

4. A cohesive system

One area the review focused on was the cohesion of the system. In a cohesive system, people should be encouraged to not only save for their retirement but also to use these savings effectively to support their standard of living in retirement. However, the evidence within the system is contrary to this. Many retirees tend to hold on to their assets and leave significant balances to their beneficiaries. The report found non-homeowners and those with low balances draw down their superannuation at a much higher rate than those with larger balances. While it is important to remember that the report is fact based and doesn’t make any recommendations, it did highlight that few retirees use the equity in their home to support their standard of living in retirement.

Without doubt, when the Government responds to the report, the cohesion of the system will need to be central to any policy changes – particularly with regards to reducing complexity, increasing the uptake of financial advice, as well as exploring default products such as CIPRs (comprehensive income products in retirement) in the retirement phase. 

If you would like further details on the RIR or retirement planning strategies for clients, please contact the BT Technical Services team at technical@btfinancialgroup.com.

Next: Understanding annuities