Superannuation system not ready for change to access age

Extending the age of retirement and access to super are politically attractive but unrealistic.

Mature age labour force participation rates (all persons)

In common with one million other Australian investors I’ve got a DIY super fund. I also hold the view that I’ll work for as long as I wish. If — or when — I want, I will retire ... gradually. This week those attitudes were seriously challenged by an unlikely source: the Productivity Commission.

The commission, which is best known for its hard-nosed reports chock full of detailed measurements and earnest modelling, has put a very large question mark over a trend among policymakers and analysts who assume that because we are all going to live longer, we can all work for longer and retire much later.

Already moves towards encouraging us all to work longer and restricting superannuation access to much older age groups than today are official government policy. In the federal budget papers we have the retirement age set to lift from 65 now to 67 in 2023; this figure is set to move eventually to 70. There also are policy goals of lifting the preservation age (the age from which you can first access superannuation payments of any kind) from today’s levels of about 56 to 60 by 2024 and eventually to 65.

Of course it is good macro-economic policy to try to lift taxation revenues and minimise reliance on superannuation payments. Indeed, as you may expect, the Productivity Com­mis­sion details a variety of benefits if we lift the age barriers to super, the most important being national savings of $7 billion a year.

It’s widely known we all face so-called longevity risk. As the Productivity Commission’s report — Superannuation Policy for Post Retirement — points out, women who are 65 today underestimate how long they will live by five years on average. Actuarial estimates show they will live to 91. Men underestimate how long they will live by three years.

It’s also well known that the nation is getting older. Basically we have one in seven over 65 today and by 2055 it will be one in four. If that does not sound like something that will be a strain on the economy, think of this: 80 per cent of people in Australia over 65 receive some form of government pension.

But that litany of superannuation realities does not reveal the weakness of the core assumptions within policy pushed by successive treasurers Wayne Swan (who introduced the plan for higher age pension access) and Joe Hockey, who has now been handed the latest Productivity Commission paper that specifically focuses on the idea of raising the age we can access superannuation payments.

Two key points fully amplified by the report raise serious question about current views on superannuation.

● Half of the people who retire do not wish to do so.

Remarkably, the Productivity Commission points out that half of those who retire do so involuntarily. This does not mean they are all engineered out of their jobs before 65 (though this is obviously a factor) but ill health and, increasingly, caring for elderly partners or parents compel people to leave the workforce.

To be precise, the report says half of the men and one=third of the women who retire before the current retirement age do so involuntarily. The report tops that off with the observation that changes in the age we can access super will “make little if any impact on the workforce participation of individuals who retire involuntarily”.

In other words, making people work for longer does not mean that they will be able to — in fact the real danger here is that a strata of the workforce emerges that is quite simply old and unemployed at the same time.

Obviously the nightmare prospect here is a stranded generation of older Australians who get caught waiting for the pension with no income.

In the US, which has a later pension age than Australia, the common sight of plainly very old kitchen staff, Walmart cashiers and others struggling to stay in the workforce clearly reveals what happens when you raise the pension age.

● Just 5 per cent get to retire gradually.

The idea that you can slow down your working life seems to be extremely difficult to achieve. The Productivity Commission says that only 5 per cent of the population retires gradually, moving through ever lighter duties. In other words, retirement remains a binary proposition for the vast majority — one day you are in full-time work and the next day you are retired. As the report also concedes, it is only the wealthiest and luckiest who actually manage a phased retirement: “When transitions to retirement do occur, they are typically ­observed among individuals with higher household wealth, longer work experience and partners who work.”

As an investor alert to the alleged popularity of transition to retirement plans, this 5 per cent figure seems very low.

Under transition to retirement pension plans individuals aged between 56 and 65 keep working — but for less hours — using super payments to top up their income while continuing a tax-effective contribution to super regularly.

It also means that perhaps for all the attention financial planners give to the benefits of TRIPs the take-up rates can hardly be impressive.

Both these uncomfortable truths about our superannuation system are surely sobering news for any investor planning to work “forever” or those of us who may reasonably expect we can retire whenever we want.

On a more macro level, if the government is seriously considering lifting the retirement age beyond 67, or if the preservation age is to be lifted beyond 60, there will have to be huge changes. There is talk of supplementary payments rather than pensions to carry older people through to retirement, but this is a Band-Aid solution.

Basically, the report shows our superannuation system and social welfare arrangements are nowhere near ready to accom­modate any further extension in the retirement age or the preservation age, regardless of how politically attractive this may seem.