If so, could these solutions help?
A recent report claims Australian retirees are stressed and that a government product would solve this problem. That’s a big statement, so today we are digging a bit deeper to see what the claimed problem is – and whether the suggested solution would be helpful.
The report Simpler Super: Taking the stress out of retirement was published by the Grattan Institute on 19 January. Authored by Brendan Coates, Joey Moloney and Esther Suckling it starts with the rather compelling statement that:
“Australia makes superannuation too complex for retirees”. It then builds a case that most Australians are hands-off about building super, but when it comes to drawing an income from these savings they struggle to understand how to combine it with an Age Pension, how long they will live, how investments might perform and how to ‘get value from their super fund’.
Do you feel like this?
The report goes on to claim that the little guidance retirees receive is unhelpful, with retirees steered into Account-Based Pensions which require them to manage their spending. A result, the report claims, is that 65% of super balances are unspent within average life expectancy.
The solution, according to the Grattan Institute, is three-fold:
- Retirees would be encouraged (mandated?) to use part of their super to buy a government-backed annuity. This portion would be 80% of super balances above $250,000
- Retirees need better guidance so the government should establish a free service for all retirees and those approaching retirement , costing about $360 million over a four-year period and funded by a levy on super fund balances (it is unclear if this means funds pay or – more likely – members pay through their funds) and lastly,
- A list of the top 10 funds should be created by government and retirees should be ‘steered toward’ these top 10 funds.
In summary, the report tells us:
“This … charts the path to a simpler super system that lets retirees stress less, spend more and truly enjoy their retirement years.”
Where to start?
The Grattan Institute is highly regarded, in no small part due to the expertise of its researchers and advocates and its careful consideration of the bigger picture when it comes to retirement income. So any report it releases on this subject deserves respect. But it also deserves careful scrutiny. It is worth noting what this report did not take into consideration (page 14) and that includes adequacy of retirement incomes, reforms to the Age Pension (including the efficacy of the means test), health and aged care funding nor the taxation treatment of super. So the focus is exclusively on the drawdown of super savings and how this might be better achieved.
An initial response may seem like a quibble, but the notion of stressed retirees seems a little over the top. Health and wellbeing research continually suggests that retirees are the most content demographic in Australia. Yes, retirement income decision-making can be challenging, but stress is a big word! Putting that aside, let’s consider Grattan’s three main suggestions.
1. A mandated government annuity
Life time income streams are becoming more available (often through super funds) and the uptake of these products is gradually increasing. The concern to date has been that they are generally offered and sold by financial advisers as they are complex products, often difficult to understand or assess and the fees and returns are far from transparent. It’s quite the leap to think that any government might want to enter this arena and that there will be a strong appetite for a government annuity anyway. The language used by the report is that retirees should be ‘encouraged’ to use 80% of a balance over $250,000 to purchase an annuity. This sounds as though retirees might be forced into a product which then reduces their overall financial flexibility. Noting that this would be an income for life makes it sound attractive, but currently there is no denying that such products are not in high demand.
2. Establish a government guidance service
Whilst this is nominally ‘free’ it is funded by the super funds, which probably means the members of the funds. Given the recent reports of Centrelink call-wait and processing times and the previous Robodebt debacle, there would need to be a lot of trust that such a guidance service would be effective,. And would such a government service really assist retirees to maximise their Centrelink benefits with suitable strategies? It seems counterintuitive, to say the least.
3. Establish a top 10 list of funds
And guide retirees to join them or assign new workers to them. This again seems to be overreach. There are currently just over 100 APRA-regulated super funds in Australia as the industry has undergone some contraction in recent years. Whilst a ‘Top 10’ (as judged by a panel) may seem to help retirees, it is possible that this recommendation could cause a shrinking of alternative options … hopefully not to the point with the big getting bigger and a situation as we have with a handful of major banks dominating their sector. The real question is whether an emphasis on ten funds is good market practice. And how retirees might be ‘steered’ – encouragement is one thing, coercion another.
Reviewing the way our retirement income system functions is a necessary task, so well done to the Grattan Institute for continuing to question the key stage of moving from saving for retirement to funding it. But are these the best solutions to the dilemma most retirees report – the very real concern about their savings ability to last the distance?
What else can be done?
The Fear of Running Out (FORO) of savings is very prevalent. But most ordinary retirees manage this concern in a steady and adult way. As noted, the Grattan Institute did not take into account the possible need for aged care funding, but many retirees do consider having some funds held aside for such an eventuality is just smart planning. Breaking down the different decisions required across a full retirement journey is a smart way to tackle the need to plan spending and to ensure there will be enough of a ‘retirement salary’ to cover this spending.
Staying in control
There are three main ways you can stay on top of your needs and monitor your retirement income:
Stay informed – arm yourself with the relevant information for your current age and stage – as well as the one coming up. For instance, this might mean learning about Preservation Age and drawdowns as well as looking ahead to potential Age Pension eligibility
Make a call – on what you know and are confident to decide versus areas where you may need further information or specific, tailored advice
Use accurate projections – as a member of Retirement Essentials you can access the Retirement Forecasting tool to see how your savings, investments and an Age Pension might combine to deliver a reasonable income – and ways to enhance this outcome if need be.
What’s your take on the Grattan Institute suggestions?
Do you feel stressed about making the necessary decisions?
Do you endorse the concept of a government-supported annuity?
And is being steered towards the top-10 super funds a good idea?
