This article is authored by Nassim Khadem and is originally published by ABC.
If you are a woman in retirement who is renting in Sydney or Melbourne, you likely won’t have enough savings to live comfortably, according to a new report by the Grattan Institute. But everyone else will do just fine.
The report, Money In Retirement: More Than Enough, hits back at superannuation lobbyist claims that Australians will not retire with enough savings.
It calls for controversial policy changes including scrapping the planned increase in compulsory superannuation contributions by workers from 9.5 per cent to 12 per cent, further winding back super tax breaks and lifting the retirement age to 70.
Grattan did economic modelling that found, even after allowing for inflation, most workers today could expect a retirement income of at least 91 per cent of their pre-retirement income.
This is above the 70 per cent benchmark endorsed by the OECD, and enough to maintain pre-retirement living standards, it said.
Shut down the ‘fear factory’
Grattan Institute chief executive John Daley said the financial services industry “fear factory” should be shut down.
“It encourages Australians to worry unnecessarily about whether they’ll have enough to retire on,” he said.
Mr Daley said ASFA’s ‘comfortable’ standard measure of retirement was too high and originally set to reflect a lifestyle typical for the top 20 per cent of retirees.
He said ASFA suggested retirees should be keeping up with spending patterns of their children.
“Reality is the retirees keep up with spending patterns of their friends at the bowling club,” he said.
“They tend to cut back on spending as they get older — not because they don’t have the ability to spend, but because they don’t have as much energy to spend on the things like travel, recreation and eating out.”
But Industry Super retirement income adviser, Phil Gallagher, said Grattan’s modelling assumptions were unrealistic and unrepresentative of most Australian employees.
“The three key flaws in the modelling are: assuming everyone can top up their super with extra voluntary contributions resulting in lifetime contributions that could be up to 50 per cent greater than the basic SG (superannuation guarantee); assuming a continuous uninterrupted 37 year working life and contributions, ignoring the reality of many workers especially women; assuming living standards in retirement shouldn’t keep pace with the rest of the community,” he said.
He said across all age groups just 12.2 per cent of employees with super make additional concessional contributions but Grattan appear to have assumed that everyone does.
“This loads up contributions and inflates retirement balances significantly,” he said. “There are many other problems including assuming an unbroken career which is not at all representative for women, and setting retirement benchmarks that are not pegged to community living standards.”
Renters at financial stress risk
The retirement incomes system is not working for some low-income Australians who rent, particularly in Sydney and Melbourne.
And this problem will get worse because on current trends home ownership for over-65s will decline from 76 per today to 57 per cent by 2056, the report said.
“Retirees who don’t own their home are much more likely to feel the pinch in future,” the report said.
“Women, particularly single women, are at greater risk of poverty, housing stress and homelessness in retirement,” it added.
As of 2015-16, a man aged 60-64 could expect to retire with average superannuation savings of $270,710 whereas a woman of the same age could expect only $157,050.
Men also have much larger non-superannuation savings.
Don’t hike workers’ super contributions
The report calls on the Federal Government to scrap a legislated plan to increase compulsory superannuation contributions from 9.5 per cent to 12 per cent by 2025. It would save the federal budget about $2 billion a year.
It suggests reducing fees charged on Australians’ superannuation funds would do more to boost retirement incomes.
If superannuation returns were 0.5 per cent higher, then the median income earner would have about 3 per cent more income in retirement, the report said.
And to deal with renters falling into a trap of poverty, the report recommends increasing Commonwealth Rent Assistance by 40 per cent — an extra $1,410 a year for retired singles and $1,330 for couples.
Increasing rent assistance would cost $300 million a year if provided just to retirees, or $1.2 billion a year if also extended to working-age Australians who are on income support and who rent (the latter being Grattan’s preferred option, since rent assistance has not kept pace with rent increases).
Loosen the Age Pension assets tests
The report also suggests loosening the Age Pension assets test – something which Industry Super’s Mr Gallagher agreed is a good idea, to help restore coherent savings incentives.
The report said the Age Pension should be withdrawn at a rate of $2.25 per fortnight for each $1,000 of assets above the “asset free” area, rather than the current rate of $3 per fortnight.
It said this could boost retirement incomes for about 20 per cent of retirees today, rising to more than 70 per cent of retirees in future.
It would also deal with anomalies in the system: some people who save $100 while working increase their total retirement income by less than $100 in real terms.
Relaxing the Age Pension assets test taper rate provides a larger boost than increasing the Super Guarantee to the retirement incomes of 70 per cent of retired workers, it said.
And it would cost the budget only $750 million a year rather than $2 billion a year. While in the long run, increasing the Super Guarantee might cost the budget less, governments will be waiting a long time for this budget dividend.
Grattan’s report also suggests including the family home in the Age Pension assets test where the home value is above $500,000. Such a change would save the federal budget about $1 billion to $2 billion a year, it estimates.
Further tighten super tax breaks
The report also suggests superannuation tax breaks and age-based tax breaks be reduced.
“Superannuation tax breaks cost a lot — almost $35 billion a year in foregone revenue, or well over 10 per cent of income tax collections — and the cost is growing fast,” the report says.
It said annual super contributions from pre-tax income should be limited to $11,000 a year. This would improve budget balances by $1.7 billion a year, it estimates.
It also suggests lifetime contributions from post-tax income should be limited to $250,000, or an annual cap on post-tax contributions of $50,000 a year.
“It won’t save the budget much in the short term, but in the longer term it will plug a large hole in the personal income tax system,” the report says.
Thirdly, earnings in retirement — currently untaxed for balances below $1.6 million — should be taxed at 15 per cent, the same as superannuation earnings before retirement, it said.
A 15 per cent tax on all super earnings would improve budget balances by about $2 billion a year today, and much more in future, the report said.
Wind back age-based tax breaks
The report said tax-free thresholds for seniors and for younger people have diverged over the past 20 years.
“The seniors do not pay tax until they earn $32,279 a year, whereas younger households have an effective tax-free threshold of $20,542,” it said. “These outcomes are hard to justify.”
The report suggests the Seniors and Pensioners Tax Offset should be wound back so it is available only to pensioners, and so those who do not qualify for a full Age Pension pay some income tax.
It said the Medicare levy should also be imposed on seniors at the level where they are liable to pay some income tax.
This package would improve budget balances by about $700 million a year, it said.
Increase retirement age to 70
The report also suggests the Productivity Commission investigate raising the age of access to the Age Pension and superannuation to 70 years.
“Increasing the age of access to 70 years would be one of the largest boosts to economic growth and to budget balances in the long term,” the report said.
But alongside such a move it should consider whether there needs to also be a new regime for easier access to the pension for people aged over 60 years whose health has been so impaired that it is difficult to work.
It also must ensure people with a disability can continue to have early access to superannuation.
The Federal Government should also ask the Productivity Commission to review the adequacy of Australians’ retirement incomes, it said, and as part of that, establish a new standard for retirement income adequacy.