Financial Services Council calls for a policy rethink to encourage retirees to spend their super

Older Australians would be encouraged to draw down their super at a faster rate as part of a proposed overhaul which would see benefits rise by $397bn each year.

The FSC says its proposals would encourage retirees to unlock their savings.

A more efficient superannuation system could boost total benefits paid out to Australian retirees by 10 per cent a year — or $397bn by 2050 — according to the Financial Services Council.

In a new report, the council is calling for a policy overhaul to combat super hoarding and encourage retirees to draw down their superannuation at a faster rate, including the provision of more attractive retirement income products

It seeks government reform on a range of measures, including greater access to financial advice, the removal of inhibitors to the release of better retirement products, and potentially stricter means test rules for pensions.

The research, by NMG Consulting on behalf of the FSC, shows retirees in Australia are currently drawing down 17 per cent less income in retirement from their super “than what is optimal”.

In an opinion piece for The Australian, FSC chief executive Blake Briggs said the reluctance of Australians to draw down enough money in super during their retirement – which was resulting in money left over as inheritances – was leaving the sector exposed to pressure for new taxes.

He said the issue of super fund money “being left for future generations as bequests” had “become a lightning rod” for critics of the system.

Financial Services Council chief executive Blake Briggs.

“Without reform to ensure that superannuation operates as efficiently as possible to raise retirees’ living standards, the system will continue to be targeted by vested interests arguing for higher taxes on retirement savings,” he said.

The federal government has announced plans to double – from 15 per cent to 30 per cent – the tax rate on earnings in super funds worth more than $3m. It’s a move which it says would raise some $2bn a year.

The announcement has attracted criticism in some sectors for involving tax on unrealised capital gains for funds over $3m. The move could particularly hit farmers and small business people who have put property in their superannuation funds.

But think tank the Grattan Institute has argued for even higher taxes on superannuation, including imposing a 30 per cent tax rate on the earnings of super funds with more than $2m.

Mr Briggs said the success of the Australian superannuation system was “too often” measured by its rapid growth to $3.4 trillion in savings, not by its objective which was to provide income for Australians in retirement.

The FSC paper says there needs to be more of a focus on super as savings which are drawn down to finance people’s retirement rather than it being seen as a “nest egg”.

Mr Briggs said three million Australians would be moving into the retirement phase of their lives over the next decade, drawing on some $1.5 trillion in savings.

He said this would expose weaknesses in the current compulsory superannuation system which was still mainly focused on the accumulation phase.

Mr Briggs said a range of policy options put forward by NMG could “provide a more efficient system that would increase the annual benefits paid out of superannuation as retirement income” by 10 per cent a year, increasing the amount paid out to Australian retirees by $397bn by 2050.

Too many retirees save their super for a rainy day only for it to end up in their bequests.

He said this would halve the amount of superannuation savings left to future generations as bequests by 2060, “removing a key inefficiency in the system which has become a lightning rod for superannuation’s detractors”. This included encouraging the development of innovative new retirement income products, a disclosure framework to allow consumers to more easily compare retirement income products, and making financial advice more affordable by implementing the recommendations of the Quality of Advice Review.

He said changes needed to be made to simplify how the superannuation system interacted with other parts of the retirement system, including the aged pension, aged care and health care.

The paper suggests that this could include redesigning pension means test rules to “encourage higher consumption of capital”.

It also recommends addressing the “interaction of major policy levers on retirement spending behaviour including tax policies, especially around inheritance and gifting, home equity release options and aged and disability care”.

The paper stops short of more specific policies to require a faster drawdown of money in super, such as raising the minimum annual drawdown levels set by government when a person retires.

Mr Briggs said the availability of more easily accessible financial advice, which could occur if the recommendations of the Quality of Advice Review by Allens partner Michelle Levy were implemented, would result in 100,000 more retirees drawing down another $10,000 each from their super funds every year.

The FSC says implementing the recommendations of the NMG report would reduce the total assets in the superannuation system by 12 per cent or $1.6 trillion by 2060.

Mr Briggs said this would ensure that the superannuation system “does all that is expected of it to support a federal budget that is running a 2 per cent structural deficit over the medium term, without the need for punitive and unfair new taxes”.

The FSC paper recommends measures to encourage the development of more retirement income products, including reviewing the current capital requirements for retirement products and measures to avoid legacy products, allowing “income for life” products to be transferred between funds.

The report recommends removing “disincentives” for people to postpone retirement.

The superannuation funds are now required to have their own retirement income strategies for their members under the Retirement Income Covenant which came into effect in July last year.

The federal government says tax concessions on super cost the budget $50bn a year in revenue.

But super funds have been cautious about developing their own retirement-income products and approaches differ from fund to fund.

While the industry supports the idea of having more retirement-income products to allow super fund members to move more easily from accumulation to pension mode, the practicalities around product development have proved challenging for some.

At the same time, the compulsory superannuation system has come under attack from critics. The federal government released figures this year to show that tax concessions on superannuation cost the budget $50bn a year in revenue, or 2 per cent of GDP, and could exceed the cost of the aged pension by 2050.

But supporters of the system argue that tax concessions are part of the system which requires people to lock up what will become 12 per cent of their wages by 2025 until their retirement.

They argue that the forced savings generated by the compulsory super system is reducing the number of people who would draw on the age pension or part pensions as the population ages.

Mr Briggs said the proposed changes would deliver consumers a higher standard of living in their retirement.

“With 800 Australians retiring every day over the next decade, if the government fails to focus on improving the efficiency of the retirement system, it will put longer-term sustainability of the system at risk,” he said.

“Australians work hard over their working lives to save for their own retirement, and we owe it to them to deliver policy settings that give them the confidence to enjoy the highest standards of living in retirement.”