Thinking outside the square with retirement income policy

When superannuation was originally introduced in 1992 it was because the Keating government recognised an ageing population and demand for the age pension would become unsustainable unless public policy was socially efficient and fiscally responsible.

While it is accurate to say that the superannuation system is still reaching maturity – with most retiring today not having had superannuation for their entire working lives – a combination of trends means that the current policy settings need review to reflect the realities of a modern Australia as we may well be heading for an unsustainable retirement structure.

Three trends have been identified that clearly influence public policy. These are the ageing population, which has been much talked about for many years, the current crisis of housing affordability facing many in our capital cities – which will mean more people will retire without owning their own home in the future – and finally, as was stated at the National Reform Summit last week, retirement has changed from a small period of rest to an extended period of leisure.

Whilst currently around 85 per cent of retirees own their own home, it is those who don’t who are at the greatest risk of experiencing disadvantage and poverty. The prolonged period of high housing prices is likely to mean that many young people are simply priced out of the market and therefore will likely retire either at the mercy of the private rental market or be reliant on social housing. As an added burden, they will be managing this for longer, with most people being in retirement for an average of 20-plus years.

In addition, the global financial crisis as well as the share market turmoil just last week exposed again the significant risk our superannuation funds and their contributors can face due to fluctuating international markets.

What is disturbing is that currently superannuation can be invested in higher risk investment options such as speculative shares, yet the family home, which offers a much safer investment, is excluded.

CEDA’s recent research is recommending that a far-reaching, inclusive review be undertaken that considers a range of options. These options should include pre-tax mortgage repayments to help more people to get into the housing market and including the family home in the assets test to ensure the age pension is sustainable and not about inheritance or wealth transfer from one generation to another.

Some of the changes will be considered radical; some are obvious. But more than two decades since the introduction of the superannuation guarantee, we are facing a number of issues which mean we need to consider if structural changes need to be made to the system. The important thing will be to put all the options on the table, undertake the necessary modelling and review as a collective to work out the best way forward.

Changes to tax rates, incentives to put more into super, changes to the age you can access super and changes to employer contributions have all been in play in recent years. Mostly they have been reasonable options. The problem is that changes to retirement policy have been piecemeal.

This haphazard approach to public policy needs to be replaced by a serious review of all the elements of retirement policy, the age pension, superannuation and personal saving for retirement, including the family home, in unison. It is now absolutely critical.

As with any changes, they need to be very carefully modelled to ensure no undue consequences or disadvantage.

However, if we get them right, they have the potential to ensure Australia enjoys a targeted, responsive and financially sustainable age pension, a superannuation system based on certainty and, at the same time, ensure a comfortable retirement for the majority of Australians.

Stephen Martin, cheif executive, Committee for Economic Development of Australia