Last year’s Treasury Discussion Paper, “The Retirement Phase of Superannuation“, highlighted the emphasis that has been placed on the accumulation phase of Australia’s superannuation system, and the continued slow progress on the retirement phase, 30 years on from the system’s creation. Sadly, the government’s timid response in November to Treasury’s suggestions and the wealth of submissions its review attracted demonstrated once again unwillingness to bite the bullet and ensure the system actually meets its objective of “delivering income for a dignified retirement”.
By contrast, the Grattan Institute has now presented a package of proposals that would help enormously. They directly address the complexities facing retirees at present, guiding retirees on how best to manage the risks they face, including by converting a sizeable proportion of their accumulated savings into regular incomes for life.
Instead of more grandstanding about encouraging the industry to develop innovatory products, hoping retirees will understand them and take advantage of competition to get the best result, Grattan calls on the government itself to offer lifetime annuities, to encourage people to buy them, and to offer free expert advice including on how best to combine superannuation with age pensions.
For too long, Australians have been told they have a “world-leading” retirement income system. That term appears again in the Treasury Discussion Paper. This claim is based on the fact that the system protects future taxpayers from the costs of an ageing population, with the future cost to taxpayers of our age pensions projected to fall as a percentage of GDP over the next 40 years while the cost of overseas retirement systems are increasing.
What is rarely acknowledged is that this is because our system leaves so many of the risks with individuals, not the government. And the poor management of those risks and the inherent complexity involved means the system is not achieving its overall objective. Inadvertently, the system is leading instead to increasing inheritances, exacerbating inequality amongst future generations. In addition, our system has imposed much higher transactional costs than overseas systems and created a powerful industry with its own interests to protect.
Changing the mindset
The failure to address these significant shortcomings is due in large part to the very different perceptions generated by Australia’s emphasis on defined contributions and other countries’ emphasis on defined benefits. In Australia, individuals understandably focus on the superannuation savings they have accumulated. Overseas, people do not consider the monetary capital value of their entitlements; they focus on the level and security of the benefits they receive, leaving consideration of costs to the system’s insurers, mostly governments.
Yet the underlying objective is exactly the same.
Somehow we need to change mindsets from looking at super as a “nest egg”, to focus on the income and security that the accumulated savings are meant to deliver.
Treasury’s Discussion Paper was aimed to achieve just that, and the government’s response might help a bit. But experience suggests that more guides and calculators and encouragement of the industry to develop “innovative income stream” products will have limited effect. Indeed, the sale of lifetime annuities has fallen in recent years from its existing very low level.
The Grattan proposals for government annuities
The Grattan Institute has two core recommendations:
- Government guidance encouraging retirees to annuitise 80% of their superannuation savings over $250,000, offering its own simple lifetime annuity amongst a small range of government annuities (to be called, Lifetime Super).
- Establishment of a free retirement guidance service providing general and personal advice, including assistance to apply for the age pension (where applicable).
These are spelt out in some detail including ways to ensure competitive neutrality with fund products, paying the government annuities through Services Australia, and exploring the possibility of combining these directly with the fortnightly age pension.
These recommendations are also complemented by other measures to promote better products and to guide retirees to the best super funds.
The government offering its own annuities would address what Grattan calls “the annuity puzzle”: why few retirees take up annuities on their own accord, in Australia or elsewhere. The problems are on both the supply and demand sides, despite the clear benefits to retirees.
The government intervention suggested, however, is by no means excessive. It would still leave the superannuation system self-funded and based primarily on non-government superannuation funds, with individual choice about investments and retirement products.
The politics involved
The Grattan proposals offer the Albanese Government the opportunity to shed some of its policy timidity by taking a bold step towards completing the Keating superannuation reforms. Fixing the retirement phase has been kicked around for way too long.
There seem to be only upsides involved: helping retirees, not constraining choice and flexibility, modest cost for the free advice, and no new taxes or charges. There will, of course, be opposition from the superannuation industry, including from the big industry funds and their union connections. But surely this can be tackled by charges of industry self-interest as against their members’ interests.
There is also reason for support from the conservative side of politics. Former Treasurer, Peter Costello, has for over a decade proposed that the Future Fund play a big role in superannuation. More recently he suggested the Future Fund be leveraged “to provide a stable and secure option for managing retirement savings” and to “offer a reliable source for annuities”.
Grattan’s proposals are consistent with this, suggesting the Future Fund manage investment of the underlying assets from retirees purchasing the government annuities, but with a separate independent Commonwealth-owned entity to manage Lifetime Super.
More reforms will still be needed in the future
The report notes that future Grattan work may consider reforms to the age pension means test, and refers to its previous reports about reforming super tax breaks.
In our submission to the Treasury Review last year, Professor Robert Breunig and I also proposed the offer of government annuities and improved independent advice to retirees. We also drew attention to the need to reform the means test, but we remain unconvinced of the need for further significant changes to tax arrangements (the arrangements are too complicated, but overall have a similar impact to arrangements in most other countries, and certainly do not involve the scale of ‘tax expenditures’ continually and misleadingly presented by Treasury).
The priority right now is to act on the measures in this Grattan report – offering and encouraging government annuities and providing free independent advice. Once these are in place, and mindsets change to focus on incomes in retirement, the problems associated with our complex means test will become more obvious and attract the political support needed for that reform as well.
Republished from THE MANDARIN, Feb 06, 2025
Andrew Podger is honorary Professor of Public Policy at The Australian National University, and former Australian Public Service Commissioner and Secretary of the Departments of Health and Aged Care, Housing and Regional Development, and Administrative Services. He was national president of the Institute of Public Administration Australia from 2004 to 2010, and a member of the foundation board of the Australian and New Zealand School of Government. He was made an Officer of the Order of Australia (AO) in 2004, and has written extensively on social policy including health financing, retirement incomes and tax and social security, and on public administration.