Our retirement system is far from perfect, but it’s still better than most
Segments of the workforce such as low-income earners should be set free from super’s stranglehold. Funds are too powerful because of the sheer amount of money they control. High fees are a rip-off and some providers are profiting from the retirement savings of hardworking Australians.
How, then, as we endure round after round, can Australia’s retirement system be the third-best in the world, as announced in last week’s Melbourne Mercer Global Pension Index?
Because we’ve earned it.
The index, published by the Monash Centre for Financial Studies with the support of the Victorian government, is overseen by a steering committee of international pension experts, including academics and practitioners. These world-class experts have deemed Australia’s retirement system, of which superannuation is a component, as among the best in the world.
Why? For starters, the Australian Age Pension is relatively generous on a global scale. Expressed as a percentage of the average wage, it is higher than that of France, Germany, The Netherlands, Britain and the US. We’re giving a good base to those in need.
Then, if we look at assets, during the past 20 years the level of assets in Australian super funds has skyrocketed from 40 per cent of our GDP to more than 140 per cent, a strong result as funds are being set aside for the future retirement benefits of us all, vital for an ageing population. While this is significant progress in a relatively short amount of time, it is still less than the level of pension assets held in Canada, Denmark, The Netherlands, and the US, when expressed as a percentage of GDP.
We also have a workforce that has a comparatively strong level of coverage of people that are receiving and will receive superannuation benefits, thanks to the compulsory superannuation guarantee. Without it, future retirees would be relying on the means-tested Age Pension. Australia, in fact, is likely to have the lowest government expenditure on pensions of any OECD country within the next 20 years, an excellent outcome for the next generation of taxpayers, with the resulting reduced pressure on federal budgets.
Finally, while we are an ageing country, our demographic outlook is well placed when compared to other countries, particularly those in Asia and Europe, as we are ageing at a slower rate due to immigration and a higher fertility rate.
The integrity of our superannuation system has been called into question, citing the recent banking royal commission’s findings and high fees. The reality is that some funds have high fees, others don’t. Generally, fees are very competitive and members are getting good outcomes for their fees.
The integrity of our retirement system is supported by the fact that we have continuous scrutiny and review in the public domain. That we can even carry out a royal commission as well as a Productivity Commission review, Financial System Inquiry and the present Retirement Income Review are testament to the integrity of the system. Many other countries included in the index don’t have this luxury. While each review has highlighted some shortcomings, leading to amendments, the core elements of our system have remained unaltered and supported.
So, is it among the world’s best retirement systems? Yes.
Is it perfect? No.
Our Age Pension is generous but there needs to be more assistance for private renters, and a moderation of the present strong assets test taper. A recent review by international experts from the International Centre for Pension Management confirmed the need to set a goal for Australia’s overall retirement income system.
It is important that the forthcoming review considers the role of each pillar of Australia’s system — including the Age Pension, superannuation and voluntary savings, as well as home ownership — and how they interact with each other to develop an integrated retirement income system.
After all, there are elements within the present arrangements that may be operating in sub-optimal ways.
We seem lost when considering the decumulation years. We’re great at accumulating retirement savings, but after that, what then? There is no clear direction. It is critical that we understand the purpose of the overall system and that a broader range of pension products be developed to ensure that retirees receive income for life in a fair and sustainable manner.
Fruitful friction plays an important role in building a stronger system and future for our retirees. But, as we throw the punches, we shouldn’t lose sight of our successes while at all times keeping our eye on the prize — making the necessary improvements to ensure that we have a first-class retirement system that serves all Australians.
David Knox is a senior partner at Mercer.
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