The Australian government has recently released the final report for the Retirement Income Review, which examined the state of our current system and its long-term sustainability in the face of our ageing population.
The good news is that it concluded that the three pillars of our retirement income system are broadly effective and sustainable. Those three pillars are:
- Age pension
- Compulsory superannuation
- Voluntary savings (including the family home)
However, the report did concede that the current system is complex and there is a need for access to guidance, information and affordable quality advice. (Of course, the government and its red tape has been the main contributor to the complexity and the lack of access to advice!)
There were some key findings, which could shape future government policy direction, so they are worth noting.
- The Age Pension helps achieve a minimum standard of living in retirement and acts as a supplement on top of superannuation savings.
- Age pension expenditure as a proportion of GDP may actually decrease as the superannuation system matures. In other words, we are approaching a period where many retirees have had super for most of their working lives and it will be a meaningful amount.
- Home ownership is a big component of voluntary savings and has a very significant impact on retirement outcomes. This is because home values have dramatically outstripped the implicit value placed on a home by the age pension asset test. As an example, to obtain full pension a single non-homeowner must have assets of less than $473,750. On the other hand, a single homeowner can only have $263,250, but may own $1 million home! So a pensioner who is renting but has $600,000 in the bank would receive less pension than a person who has double the assets e.g. $200,000 in the bank plus the million dollar home.
- The decline in home ownership among young people is a long-term concern. Will we become a nation of renters, like so many other countries?
- The review concludes that more innovative investment products should be developed to assist with increases in life expectancy. Perhaps the Government will incentivise this innovation?
- The cost of tax exemptions on super is likely to grow at a faster rate than Australians economic growth! We believe this is a very important statement as it gives a Government some ammunition to increase taxes on super.