Provided by Mercer: 4/3/09
Australia's three pillar retirement system will remain fundamentally flawed until all pillars are better integrated.
In its final submission made to the Henry Review last week, global consulting, outsourcing, and investments firm, Mercer, said Australia’s three pillar retirement system will remain fundamentally flawed and inadequate until all three pillars – the age pension, compulsory super, and voluntary savings – are better integrated.
Worldwide Partner at Mercer, Dr David Knox, said unless the current Government was able to do something that no other government had been able or willing to do since the introduction of the Superannuation Guarantee (SG) – clearly set out the objectives for an overarching retirement income system that is equitable, adequate, and actually encourages Australians to remain in the workforce longer – then the system would remain flawed.
“This review offers a once-in-a-generation opportunity to effectively balance the three pillars of our retirement system and put all Australians in a better position to save for a comfortable retirement.
“The Government has to avoid ending up with a collection of well-intentioned but piecemeal initiatives that may make incremental improvements but will not address the overall adequacy, simplicity and sustainability of the total system,” said Dr Knox.
Mercer’s submission made a number of recommendations including:
Improve the adequacy of Australia’s retirement system
“Until 100% of the Australian workforce is covered by the Superannuation Guarantee (SG), Australia’s retirement system will remain flawed and a large group of Australians will not be appropriately prepared for retirement,” said Dr Knox.
“Approximately 20 per cent of the workforce are not covered by SG. If changes are not made to fill these gaps, these people will not be able to afford to retire and will put increasing pressure on the Government pension system,” he said.
Improve the equity of Australia’s retirement system
“The lack of tax concessions linked to superannuation for lower income earners is one of the biggest inequities in our retirement system. There should be clearer tax concessions for lower and middle income earners – but concessions for high income earners should not be reduced. It is important that superannuation remains attractive for all Australians,” Dr Knox said.
Improve the sustainability of Australia’s retirement system / Encourage people to stay in the workforce longer
“The current age pension system effectively discourages people from remaining in the workforce after age 65 because it reduces their age pensions if they are earning an income from employment.
“Despite the current economic conditions, our workforce continues to age, business will have limited respite from a tight labour market and employers need a long-term solution.
“Traditional retirement at age 65, particularly for many baby boomers, is no longer an option due to both the impact of recent stock market volatility on superannuation savings and the fact that we are all living longer.
“Yet, the current age pension system perpetuates the idea that people should retire by 65 and it certainly discourages people to earn any more than a nominal income through paid employment.
“Removing income from the income test and lifting the pension age will change the ground rules of how long Australians remain in the workforce. Australia’s mind-set that 65 is a magic retirement age needs to shift. It has not been changed for 100 years, yet we are all living longer,” said Dr Knox.
Improve income protection in retirement
“A better system of spreading income throughout retirement needs to be developed.
“No-one knows how long they are going to live or really how much they need in retirement and Australia’s retirement system provides limited protection against longevity risk or inflation for retirees.
“Both the Government and the private sector should be playing a role in providing guaranteed lifetime income streams – we need joint collaboration to get this right. Without more structured protection for Australian’s retirement income we risk having a new social class of poor and older retirees,” Dr Knox said.
Mercer’s Key Recommendations include:
- Expand coverage of the SG system to include the self-employed, those on workers’ compensation or parental leave, those who earn below $450 per month, are over the age of 70 or under 18 and the disabled and carers.
- Provide simpler incentives to contribute additional savings to superannuation – ie. Introduce a refundable tax offset, or additional Government contribution to superannuation, of 15% should be applied to low income earners.
- Enable more Australians to receive Government co-contributions by increasing the maximum eligible salary to $80,000 – ie. When the 40% marginal tax rate applies
- Introduce soft compulsion for member contributions
- Exclude income from paid employment from the pension income test.
- Gradually increase the pension age gradually from 65 to 67 by 2025
- Introduce a universal pension at the age of 85
- Ensure a portion (eg. 30%) of any super benefit must be taken in the form of an income stream payable until at least age 85
Download Mercer’s submission to the Henry and Harmer review
More information
Danielle Murdolo
Media Consultant to Mercer - Buchan
Phone: (03) 9866 4722
Kyahn Timms
Media Consultant to Mercer - Buchan
Phone: (02) 9866 4722
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