Recent findings about the Australian retirement income system show it has taken a small hit in world rankings. A small hit is not a catastrophe, but it does offer a cautionary warning that there may be better ways of helping retirees to help themselves. What are these findings? And how can they be used to improve the way the Age Pension and super combine?
The Mercer CFA Institute Global Pension Index 2024.
Mercer is a global financial services organisation which has conducted research for the Global Pension Index since 2009. It partners with the CFA Institute (Chartered Financial Analysts) to collect information from 48 different nations and analyse these retirement systems statistics for adequacy, sustainability and integrity. National retirement income systems can vary widely, so the Global Pension Index provides a very helpful ‘health check’ to participating nations – and their citizens. Dr David Knox has headed up the Mercer Index for 16 years and he generously shares his insights for Retirement Essentials’ members to better understand what these global rankings mean for individual retirees.
How is Australia going?
This year is the first that shows Australia slip slightly in the rankings, from 5th overall to 6th, swapping places with Singapore.
The top four countries with a Grade A (80+) ranking are:
- The Netherlands
- Iceland
- Denmark and
- Israel
In the next tier, with a Grad B+ ranking (75-80) are:
- Singapore
- Australia
- Finland
- Norway
So what’s going on to make our retirement income system slightly less robust than it was a year ago? And how could this affect the different sources of retirement funding?
Is the Age Pension still affordable?
David Knox is quick to put lie to the suggestion that the Age Pension is not affordable.
‘Because of the introduction of super in 1992, the cost of the Age Pension as a percentage of the GDP in Australia is the lowest of all nations in the OECD. It is a mistake for anyone to say Australia cannot afford the Age Pension because the population is ageing. Yes we can afford it and yes it will continue to be a very important safety net.’
Why did we slip in rankings?
‘It’s true that Singapore has jumped us, but this is a very small hit. We still have a very good system which has stood us in good stead. Next year the Super Guarantee will move to 12% which will make it even better.’
But, yes, there are some problems.
‘Australia is the only nation in the top 10 ranking countries which does not require at least some of the retirement savings to be drawn down as income. The purpose of super is to provide retirement income. All other top 10 nations require at least some pension savings to be accessed for retirement living. Retirees in Australia receive significant tax concessions and this is to encourage the saving of super so that fewer rely entirely on an Age Pension. The point of super is not that it be used as estate planning. In industry terminology, the system has been good at encouraging the accumulation phase (saving for retirement) but less so when it comes to decumulation or spending those savings.’
Whose fault is this?
Rather than find a guilty party, Dr Knox believes that a combination of stakeholders could do a better job here. Firstly, there is room for Federal Governments, through Treasury, to provide clear guidelines, and flexible regulation that encourages financial advice for retirees and a clearer understanding of ways to drawdown funds.
He also believes that, since the introduction of compulsory super in 1992, there has been a tendency by the super industry to continually express super as a lump sum. He believes it is misleading to think of super in this simple way; it is better viewed in terms of how much income it will provide across the entire retirement journey. This is best achieved through income projections which include any possible Age Pension entitlements
According to Dr Knox, many people are too strongly attached to the notion that super is about saving only, and that it is safest to live off only the interest from these savings, leaving the capital untouched.
What needs to change?
The most recent Index includes four suggested changes to our overall retirement income system:
- Moderating the Age Pension assets test to increase the net replacement rate (of pre-retirement salary) for average income earners
- Introducing a requirement that part of the retirement benefit be taken as an income stream in most cases
- Mandating the need for super members’ annual statements to include a retirement income projection (and not just a lump sum) and
- A government co-contribution to super for primary carers of young children
Why change the assets test?
As most Retirement Essentials’ members will probably agree, Dr Knox believes that our retirement income system is unnecessarily complicated, particularly the two-part means test for Age Pension entitlements.
‘The whole system would be much simpler if we removed one part of the means test’, he asserts.
Are any of these changes likely to occur?
The above suggestions have been shared with Treasury and some are part of the retirement advice reforms being undertaken by Assistant Treasurer, Stephen Jones. A legislated definition of the purpose of super is imminent. It is also long overdue, given it was originally mandated for all Australians more than 30 years ago. This definition will, in the opinion of Dr Knox, provide an opportunity to further review many of the regulations on super drawdowns and financial advice and hopefully allow for new flexibility in the delivery of advice. Changes to the income or assets tests are a bigger mountain to climb, but if many people are overly daunted by these rules, they will need to be simplified or reduced at some stage.
What might ordinary retirees learn from these rankings?
The short answer is that saving and drawing down super is never a ‘set and forget’ proposition. Engaging frequently with your own super fund, understanding projections of how long your savings will last, and actively managing your savings and entitlements is key to a securely funded retirement journey
What do you think?
Could removal of the assets test help retirees?
Retirement Essentials supports safe spending in retirement in two practical ways.
Firstly, with an Understanding more about super consultation which helps you understand the many ways of making your super work better for you.
And separately, by sharing projections of how long your savings will last in a Retirement Income Forecasting consultation.
These consultations allow you to address any concerns you may have about rules, entitlements and funding your full retirement journey.
