The long awaited review into the Australian Retirement Incomes system was finally released by the government on 20 November 2020. As we highlighted in our October 2019 blog, the terms of reference for Michael Callaghan’s Committee was unique in that no recommendations were to be made. Rather, the context of this latest in a series of retirement incomes reviews, was to provide an independent ‘fact base’ from which the government could consider appropriate policy measures for the future.
So what was all the fuss about?
The media headlines have been focused on the heated debate between various vested interest groups about whether the legislated increases to the superannuation guarantee levy from 9.5% to 12.0% should proceed (one of the few things the union based industry superannuation funds and their fierce competitors in the retail sector agree on), or whether the increases are better invested in growing wages to boost consumption and assist with buying homes now. The Committee’s independent economic analysis very clearly came down on the side of the later argument. The government has advised it will consider what it will propose in response to these findings at the next Budget due in May 2021.
You should expect that this debate will continue to rage all the way up to the next election.
Apart from this, the Committee found the following:
- Overall, the retirement income system is effective, sound and its operating costs are broadly sustainable — so a big tick on that measure.
- That said, the system is overly complex which leads to misconceptions, and the Committee found that a major misconception was that ‘retirement income’ involves the return from investing superannuation balances rather than drawing down those balances to fund living standards in retirement.
- As in previous reviews of the retirement income system, the Committee observed that there is no clear objective for the system. An objective needs to be agreed by the Australian community through the Government, in order to guide policy, improve understanding and provide a framework for assessing performance of the system. The Committee suggested that the objective for the system be developed around the goal: – ‘to deliver adequate standards of living in retirement in an equitable, sustainable and cohesive way.’
- The Report stated “The Age Pension, combined with other support provided to retirees, is effective in ensuring most Australians achieve a minimum standard of living in retirement in line with community standards. Retirees receive health, aged care and other Government services worth more than the maximum rate of the single Age Pension.”
- The Report also mentioned “The home is the most important component of voluntary savings and is an important factor influencing retirement outcomes and how people feel about retirement. Home owners have lower housing costs and an asset that can be drawn on in retirement. If the decline in home ownership among younger people is sustained into retirement, there will be an increasing number of retirees who rent. The system favours home owners, such as through the exemption of the principal residence from the Age Pension assets test.”
- The government’s Pension Loans Scheme was mentioned no fewer than 18 times in the Report as a mechanism for the 76% of seniors who own their homes to access the equity they have built. To quote the Report…“The Pension Loans Scheme is an effective option for accessing equity in the home for both age pensioners and self-funded retirees.”
- Interestingly, the Report noted that the current exemption of the principal residence from the Age Pension assets test (and more broadly the income tax system) is a disincentive to using the equity in the home to support retirement incomes.
The Review clearly had a large focus on the current superannuation system which is not as relevant to people who have already retired and did not have the benefit of compulsory super through their working lives, so we have not commented on these aspects in this blog. For those of you interested in the detail here is a link to the Key Observations from the 650 page Report:https://treasury.gov.au/sites/default/files/2020-11/p2020-100554-00bkey-observations_0.pdf
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