The Actuaries Institute has released a ‘Green Paper’ of potential reforms to the retirement systems, at a time when the Government is working on a review of retirement incomes.
In the Green Paper – Options for an Improved and Integrated System of Retirement – the Institute argues now is the time for a review of the retirement systems, or else Australia may lose the opportunity now to prepare for long-term challengers, including longevity, costs of health and aged care, and changing home ownership and work patterns.
“Right now, there is potential fiscal headroom to accommodate changes, especially when a holistic approach to retirement is taken.”
Actuaries Institute Chief Executive Elayne Grace said: “The best system would take an integrated view across all sources of income and expenses for retirees.”
“This includes the Age Pension, superannuation, the family home, aged care and health costs.”
“The current system, though world-leading in some respects, falls well short of that.”
Some of the options raised include simplifying the age pension, addressing “anomalies and perverse incentives” in how the family home is treated, and restricting the concessions for “unusually large superannuation balances”.
“The root cause of current problems is the lack of a national retirement strategy, with proper integration of the key elements of the system.”
“Policies and settings have been treated disparately and have not been developed within an overall objective and framework of standards. The resulting complexity makes navigation challenging, there are conflicting and some perverse incentives, and some people, particularly renters, appear to be falling through the gaps.”
“Perverse incentives” due to exempting the home
The Actuaries Institute says that exempting the family home from the Age Pension assets test creates “perverse incentives”, and while there is acknowledgement in the pension tests for non-homeowners they are “insufficiently compensated for the different income earning capacity of their assets relative to their expenses”.
The Green Paper raised the options of increasing Rental Assistance, or including some or all of the home in the assets test – which is likely to be controversial.
“The exemption of the principal residence from the assets test also discourages homeowners from downsizing as the proceeds of doing so would become subject to means testing. This results in an inefficient allocation of the national housing stock. Some retirees are therefore foregoing what would otherwise be an optimal decision to free up capital from their principal residence to provide additional income.”
Simplify the Age Pension
The Green Paper sets out options to “simplify” the tests that have built up around the Age Pension, aimed at improving the fairness and efficiency of the pension. These include reducing how frequently the assets test applies, or requiring retirees to spend down their other wealth before receiving the age pension, or allowing people to ‘buy’ the age pension at market value.
Alternatively the assets and income tests could be combined into a single test – which would be “simpler to understand and administer, and encourage appropriate retiree behaviour” – or introduced a universal benefit which would be paid to all Australians above pension age.
Limits on large super balances
The Institute says public support for the super system is undermined by the perceived unfairness of the tax concessions applying to “unusually” large super balances.
“The tax concessions on the investment income from such large balances seems to be an unintended consequence of the rules, and it would be reasonable to remove them.”
The paper suggests either capping the amount that individuals can keep in the super system, or imposing higher taxes on large balances.
Using the low-tax superannuation environment to build up amounts that are later taken out as lump sums or passed on as bequests is another issue raised by the Institute.
“As [superannuation] balances have grown, commentators have questioned whether this is a fair use of tax concessions, given such bequests effectively leak from the system. To improve fairness, and inter- and intra- generational equity, it is apparent there should be limitations around bequests and gifting.”
An option would be to reimpose a cap on the maximum annual lump sum that can be withdrawn, or to tax all death benefits equally – not based on the beneficiary.
“Broad scope” for retirement income review urged
This Green Paper comes at a time when the Treasurer is reportedly working on terms of reference for a review of the retirement income systems. Such a review was a recommendation of the Productivity Commission, which said it should be conducted ahead of the next scheduled increase in the Superannuation Guarantee rate. Senior members of the Government have ruled out changes to the legislated increases to the Super Guarantee.
The Actuaries Institute is urging the Government to give the review a “broad scope” – including the Age Pension, aged care, and superannuation. Though the Green Paper says the level of the Superannuation Guarantee, along with the Productivity Commission inquiry into superannuation and the financial services Royal Commission are outside the scope of the Green Paper.