Hazel Bateman 2.1 Introduction
2.5 Discussion and lessons
The main lessons from the Australian arrangements for countries considering reform of their retirement income arrangements include:
The ability of mandatory private retirement saving in Australia (the Superannuation Guarantee) to increase the coverage and amount of retirement benefits;
The ability of tax concessions and labour market flexibility to increase voluntary retirement saving;
The workings of a means-tested Age Pension which automatically reduce public expenditure on the Age Pension with increases in private retirement provision;
and
The design of the Age Pensions means tests so as to minimize the disincentives associated with means testing.
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However, there are also a number of outstanding policy issues which need to be addressed to ensure the adequacy and sustainability of retirement incomes in Australia. These include: the failure to mandate retirement income streams, the increasing complexity of choices required to be made by individuals, the regressive impact of the recent reforms to the taxation of superannuation and issues associated with retirement income adequacy for workers with discontinuous labour force participation.
Failure to mandate income streams
Australian retirement income policy allows retirees to take their private retirement saving (superannuation) benefits as either a lump sum or an annuity. That is, there is no mandatory annuity purchase with any part of the retirement accumulation. As well, the incentives to take income streams in the tax system and under the Age Pension means tests were abolished in the 2006 Budget (in the name of simplicity). This is of particular concern as it exposes retirees to longevity and inflation risk in retirement if they do not invest their lump sum accumulation appropriately. As discussed earlier, only 10% of the total value of retirement benefits is used to purchase income streams and only 10% of this amount is used to purchase a lifetime, indexed annuity – the best source of insurance against longevity and inflation risk.
Moreover, it is often argued that the take-up of life annuities is low due to the high cost of annuity purchase (due to administrative loadings and adverse selection). Once of the ways of reducing adverse selection in the annuities market would be to mandate annuity purchase, with at least part of one’s retirement accumulation.
Finally, failure to mandate retirement income streams, in conjunction with the design of the Age Pension means tests, can lead to moral hazard issues. That is, retirees may dissipate their lump sum benefits, or make inappropriate investments, and then become eligible for the public age pension. 47
Increasing complexity of choices
The Australian private retirement saving (superannuation) requires individual retirement savers to undertake an increasing
47 Analysis of the optimal asset allocation of retirement assets suggests that current retirees may be pursuing overly risky asset allocations for their allocated pensions, possibly due to the existence of the public age pension (Bateman, Kingston and Thorp 2006).
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number of choices. These include, choice of pension (superannuation) fund; choice of investment strategy (which may include choosing from a menu of multi manager diversified and specialized options, specific investment managers and/or specific investment managers or asset classes); whether to make additional voluntary contributions; and choice of retirement benefit. All of these options are associated with different fees, charges and risk adjusted rates of return, and therefore have differing implications for retirement income adequacy. (Bateman and Mitchell 2004, Bateman and Thorp 2006). A particular challenge for Australian retirement income policy is to ensure that consumers (retirement savers) are able to make informed decisions. This raises questions in relation to the provision of financial education and the role of financial planning.
The regressive nature of the Budget 2006 superannuation tax initiatives
As noted earlier, Budget 2006 included an initiative to abolish all taxes on retirement benefits (for persons aged 60 and over). This changed the tax regime for superannuation from TTT to TTE and was justified by the government on the grounds of improving both simplicity and retirement income adequacy. However, there are concerns with this approach. First, it is likely that incentives to encourage voluntary superannuation contributions would be more effective were the tax on contributions, rather than benefits abolished. Second, the new tax regime still includes the taxation of superannuation fund earnings – which is detrimental to economic efficiency. Third, the taxation of retirement benefits was the only part of the superannuation tax regime which applied some form of progressivity to the taxation of retirement saving. Finally, it is unclear whether the non taxation of retirement benefits is sustainable in an economy that faces an estimated fiscal gap of 6.4% GDP by the year 2045. An alternative tax reform would be the EET regime. This would simplify the tax arrangements, provide a greater incentive for voluntary contributions and provide a source of tax revenue when the proportion of workers to retirees significantly increases.
Ongoing questions of retirement income adequacy
While all Australians of age pension age are eligible for the public Age Pension, the link between superannuation accumulations and labour force participation patterns raises questions about the adequacy of total retirement incomes. Those at
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risk of relatively low total retirement incomes include persons out of the labour force, or with discontinuous labour force participation and those on permanently low incomes. An ongoing policy question includes how to ensure equity in retirement incomes for such ‘non standard’ workers.
Overall, however, while there is room for improved policy design, the Australian retirement income arrangements are far more sustainable in the event of an ageing population than those of many other developed economies.
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