The $3 trillion question

The super system, and whether it can provide retirees with a comfortable lifestyle, faces tough scrutiny

Australians are living longer, but whether our retirement income system is coping is a question the federal government wants answered (and consumers need answered) before June 2020.

The government wants an answer because the Productivity Commission recommended so. It especially wants to gauge how the retirement income system is tracking before the gradual increase of the super guarantee (from 9.5% to 10% on July 1, 2021, eventually reaching 12% on July 1, 2025). Consumers need an answer because the commission believes there’s currently a danger of people being nudged into retirement products ill suited to their long-term needs, potentially costing them hundreds of thousands of dollars.

Among several examples, the commission projects the retirement balance of a 21-yearold female on a $50,000 starting salary. If she was in a super fund that returned 5% a year and retired at 67, her balance would be $833,000. However, make it a 6%pa return and the retirement balance becomes $1.1 million. This $267,000 gap highlights how critical it is to be in the right product.

But treasurer Josh Frydenberg’s recent announcement of the Retirement Income Review goes much further than the impact of investment returns. As Ian Yates, president of the Council on the Ageing (COTA) Australia says, the impending review isn’t simply about one or two issues, such as whether a 12% super guarantee is adequate or excessive or whether the pension asset test taper is correct.

“The retirement incomes system is complex,” he says. “Many older Australians do not rely on a single income source, but draw on a variety of resources to support themselves. This is an opportunity to step back and examine the system holistically and ensure that government policies are helping the greatest number of Australians achieve a comfortable retirement at a reasonable cost to taxpayers.”

Is super doing its job?

The retirement income system is based on three pillars: the age pension, compulsory super and voluntary savings (including home ownership). How these pillars interact and support Aussies through retirement will be under the review’s microscope.

As at June 2018, more than $800 billion sat inside the super accounts of members aged over 65 and this amount is growing. It accounts for more than a quarter of our $3 trillion super system and at some stage this money is going to be distributed among the wider population.

The review will address this distribution by looking at the current system’s shortfalls. This includes how super can better interact with lower income and vulnerable workers, those with interrupted work patterns and women.

Financial services and annuity provider Challenger says overall the super system is delivering for people about to retire. It says that as at December 2018, 45% of 66-year-olds were accessing the age pension but only 25% of them were drawing a full pension.

The average super balance for a person aged 60-64 is now over $300,000, Challenger says. But this does not mean the retirement income system is working for everyone.

The review’s terms of reference say it is important that the system allows Australians to achieve adequate retirement incomes. It must also be financially sustainable and provide appropriate incentives for people to self-fund their retirement.

Where most, if not all, industry associations and representative bodies agree is that the Retirement Income Review should not delay important reforms that the government has already committed to and will significantly improve consumer outcomes in super.

This includes the introduction of a “default once” framework to prevent unintended multiple accounts and legislating an obligation for trustees to consider the retirement needs of their members.

Industry Super Australia says when Australia’s super was first established more than 25 years ago, “its purpose was to provide working Australians with some savings at retirement and to ease the burden on the age pension.

“As the system has evolved, people’s super has helped to ensure a better standard of living in retirement, which is especially important as we live longer. Now, nearly three decades later, we all have an obligation to ensure the system is working as efficiently as possible and in the best interests of all Australians.”