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.
Removal of all asset testing should be done and any pension just becomes income and is included in any other income that is received just as it is in New Zealand.
Australia is just making it so complicated at the moment and it doesn’t need to be.
I totally agree. I am not rich in any shape or form, having spent most of my life employed by the Government, in one form or another. My super was reasonable when I retired, but I am not completely subsistent. I only receive a part pension and that annoys the hell out of me. I have never been a big earner throughout my life, but have been quite frugal wth my savings. That has come back to bite me on the backside when it comes to pension entitlement. Because I planned for the future I am now being penalised with a limited pension compared with someone else who has not made the same provisions and then qualifies for a full pension entitlement,
I believe all pensioners should receive a full pension across the board and also be able to earn extra money without it affecting the pension. All moneys earnt, includig the pension, should then be subject to taxation as if the indivuidual was still a wage and salary earner. The country and the pensioner would be far better off and the entire scheme would be so much simpler.
With 4% of super drawdown at 60-64 and 5% at 65-70, etc there is a system of super asset drawdown in Australia already! Furthermore, there is a 17% death tax on much of a persons super balance for non partner inheritance purposes. Neither of these facts are mentioned in this article. (Some
Might say that this amounts to a total of 32% tax on super in a ‘raw’ sense is the same level of tax that many wage earners pay).
Yes, our asset test is overly complicated.
Originating from Singapore though, what I do not understand is how can Singapore be ranked higher, which then calls into question the rankings.
Singapore has government controlled superannuation with lower returns and no pension system apart from a very few minority.
I am confused, my understanding of Draw Down from Superannuation when in the retirement phase is regulated by the federal Government . Draw Down has minimum % based on Age.
Can you clarify if minimum Superannuation Draw Down % in Retirement is mandatory.
I would definitely prefer to Draw Down less amounts based on my home expenses budget, as the excess now must be invested in external investment options which generate interest as Income.
Centrelink’s means tests are an impenetrable quagmire. They certainly need to be simplified. Another, related matter is the work bonus. I believe that once a person has qualified for an age pension, they ought to be able to earn a decent income from part-time work if they so choose to do. That income, combined with age pension payments, would be taxed, so what’s the problem?
Good morning
Your information is most helpful.
For last 12 years we have been self funded retirees.
We went to our local MP with the following.
We came within the threshold (last year), for part pension. We are travelling around Australia in our motor home and in this time decided to rent our PPR out. We were advised by Centre Link that after the first 12 months of the rental contract our home would be then classified as an investment not PPR and would take us over the threshold.
To our MP we put.
There are statistics showing at anyone time there are approximately 500,000 nomads of all ages traveling around Australia.
Hypothetically, 50% could be retirees. This could open over night a big house rental pool if retirees were given an incentive to keep there house rented while traveling for more than 1 year without penalty.
Even if the rental income was taxed at normal taxation rates this would still be attractive for people to rent there homes and ease housing rental crisis.
The MP just offered sympathy that we would be penalised and did not consider the bigger political picture of going to assist people wanting a place to live.
Look forward to peoples comments
Regards Peter
Absolutely, the assets test is a nonsense. Whilst I believe there needs to be a cap. That cap is currently not high enough.
Potentially the $1m level should be the cutoff.
The effect of the current levels on Super are where the conversations need to commence.
Good afternoon
If a housing loan reduces a house value for asset purposes, why doesn’t a line of credit secured by a house also reduce asset values?
It is the income test which should be eliminated entirely.
I think expressing projected retirement income on Super statements is a great idea. It would help to embed the idea of what Super is actually meant to be for. When you’ve been a saver it can be quite difficult to get your head around being a spender.
The greatest problem with super is government management of inflation. Not many people consider the watering down of the buying power of their super by inflation. When not working, any loss of buying power in future destroys a lifetimes preparation and cannot be replaced. A comfortable retirement using a super stream can quickly become government pension dependent The asset test then works against any chance of rebuiding.
The aged pension should be tax free and just added to your overall income at year end and then taxed accordingly. It should be paid to everyone in full. We both work a little and sometimes in a fortnight have to work more hours to cover other staff. Our pension is reduced dramatically in those fortnights and is never recovered. We then pay tax at the end of the year on combined earnings, pension plus earnings which is a double whammy. Sometimes we end up losing in proportion % as much money as somebody that is earning $200K in wages per year and paying tax.
Shame we have come to this !
Asset testing should be for the immigrants who arrive and go straight to li e up for unemployment .. Tax them or double their entry fee to immigrants.
Patrol the Cash only Restaurants and massage by introducing finance guards to fine restaurants and the client that doesn’t have a receipt ! Or make Australia Card society and remove all cash transactions ! Let’s get a Grip” on “fraudulent behaviour” !
Dont starve the people who built this Country back in the 50’s, 60’s n 70 ! Just because they worked hard and saved and payed taxes It seems that they are the victims the Government focuses in making their retirement miserable with constant changes and in-depth paperwork etc !
Shame Australia ! The spread of COVID-19 should serve as a reminder of why our country should have a higher protection
and corruption that comes with it .
Guard our docks .. Build better Roads n footpaths Prime Ministers nothing noticeable since the days of Jeff Kennett! Get dole recipients to build roads, sweep streets n parks n clean beaches our Prime Ministers seem to just line up for 6 year terms to get a life Pension same as working pay!
For the rest of their lives !
Justice for Pensioners it should be for everyone not just those that didn’t save or a hiding their money amongst relatives in foreign countries