Retirement Income Review 2020

The Federal Government released the Retirement Income Review back in 2020. But even now, two years and changing trends in the pandemic later, there is still much to digest from its estimated 648 pages. Even then, the report is worth a look. This summary aims to check out the report per section and guide the public with the firm education on preparing for retirement.

Section I: Outline of Australia’s Retirement Income System

The chapter defined the meaning of retirement in the Australian context. The report took note of the fact that while legislation marks the average retirement age and the associated access to Age Pension/super fund, many people are not too concerned about it for the moment. They have varied approaches to retirement, such as scaling back work activities as they approach retirement age or even work and retire multiple times. The report also covered the noted three-prong approach to retirement incomes (Age Pension, super, voluntary savings) as more cohesive and makes Australia stand out against retirement systems around the world. 

The chapter also accounted for, among others, increasing life expectancies amongst Australians, the projected size of Australia’s ageing population by 2060, the larger numbers of women in the local labour force than that 40 years before, and growth in local and international equity markets brought about by lower interest rates. On the superannuation front, the report noted a possible full maturity of the system by the 2040s due to hefty workforce contributions of up to nine per cent for 40 years, and increased household wealth over the past 30 years from higher home and super values.

However, the chapter tagged challenges lower- and middle-income Australians faced in home ownership over the past 40 years and why older households from those income brackets went to private home rentals. In addition, stakeholder input noted how an increasingly ageing population, migration, and the COVID19 pandemic may result in lower productivity growth.

Section II: Adequacy

The Review discussed the rationale for achieving and maintaining at least a minimum standard of living in retirement. The Age Pension, in particular, was noted for strong growth since 2009 on account of efficient government action on retirees’ needs, less stress on lower-income households coming up on retirement, and lower income poverty rates over a decade, particularly among singles and renters. 

One part of Section II discussed an idea of raising Commonwealth Rent Assistance (CRA) by up to 40 per cent to improve the minimum standard of living for retirees. Its rationale was based on submission concerns that certain people like renters could fall below a minimum standard of living in retirement. However, the CRA increase was judged not feasible as it would only marginally redress inequity between renters and homeowners, of renting retirees, and disadvantaged groups. The fiscal cost of the measure was pegged at $370m for Age Pension recipients and up to $1.7 billion for all CRA recipients. 

Another part of the chapter theorised maintaining the superannuation guarantee (SG) rate at 9.5 per cent. Submissions postulated that putting the SG rate that high would provide for adequate retirement incomes especially when combined with the Age Pension – as long as retirees are capable of effectively managing their assets. An idea of setting the SG at 12 per cent, meanwhile, stated that while it can result in higher balances at retirement and even better outcomes for women retirees, the tradeoff would be higher cost of super tax concessions against lower Age Pension expenditures.

Section III: Equity

The chapter examined deliverable outcomes for retirees as defined by specific groups. These include men and women of either single or couples, home owners and non-home owners, people covered or not covered by SG, and Aborigines/Torres Strait Islanders.

The chapter’s initial takeaway was that the Age Pension helps reduce income inequality for retirees by offsetting the expected inequality from super tax concessions, plus lower-income households with people over 65 receive more social transfers in kind than higher-wealth households with the same demographic. For superannuation, though, people in the higher income brackets over 55 years old tend to contribute more to their super fund and avoid paying a good deal of taxes in the process.  

On discussion of gender status, the Review noted Australian women as being able to contribute more super finances than men and retire much earlier, even if they are committed single. The worklife pay gap between men and women was also noted because of challenges women face in employment. These include a possible need to just work part-time, longer career breaks, career advancement potential, and sadly, being on the short end financially if they ever undergo a divorce. As for partner relationships, the report highlighted couples being able to enter retirement with more financial and property security than single people, especially men.    

Being a homeowner also factored into questions of retirement equity. The Review stated that the Age Pension assets test supported homeowners whose properties have been highly appraised. However, related submissions pointed out inequalities due to some retirees potentially having more than one property and argued for removing exemptions of the principal residence from the asset test. 

For SG coverage, the report detailed that approximately 90 per cent of all employees are under compulsory super since its introduction in 1992. The exemptions to the rule are for those working less than 30 hours a week (under-18 and private/domestic workers) or earning no more than $450 monthly gross from a single employer. However, the report also identified employees affected by the “SG gap” and the self-employed who may not be able to take advantage of SG at all, and suggested more enforcement of associated legislation to ensure more coverage. 

Age retirement played prominently in the report. The data revealed that forced retirement is “more common” amongst employees with lower wealth and education levels, sapping them of opportunity to keep the income stream moving. People at least 55 years old were also found just as plagued as the 25-54 demographic in not having a job or being underemployed, albeit for longer periods. While government-mandated benefits such as Age Pension were tagged as a safety net, other support methods such as JobSeeker, DSP and Carer Payment offered varying degrees of financial security. 

The Review also covered the problems faced by Aborigines and Torres Strait Islanders in accessing some sort of retirement income. They include limited opportunity for engagement with the system, work opportunities that offer little or no compensation, and lower levels of property ownership/financial security. The report stated that if life expectancy for Aborigine and Torres Strait Islander communities were to improve, so would the possibility of better retirement outcomes.

Section IV: Sustainability

The chapter detailed the stability of the superannuation system and the challenges it may face in the future. The report stated that as the system matures, the combined cost of super tax concessions and Age Pension expenditures could go up from 4.6 per cent of GDP at present to five per cent overall GDP by 2060. Super tax concessions were tagged to help boost retirement incomes. However, while the superannuation system enjoys strong public confidence, the report pointed out the danger of that confidence being hit by system issues and mismanagement.

Section V: Cohesion

The Review tagged compulsory superannuation and the superannuation system’s projected maturity, plus Age Pension, as a good cushion for retirement security. However, it pointed out the apparent failure of any financial incentive designed to induce savings for retirement, as well as those that encourage people to draw down assets as preparation for it.

At the same time, public confidence in the financial advisory industry is a mixed bag. People approaching retirement lack the needed knowledge to make the most out of their retirement income and could be led astray. ASIC investigations and the Hayne Royal Commission, though, have been effective in weeding out shady practices in retirement advice. The report suggested  that the retirement income system can be simplified to better aid retirees with their next moves.

Conclusion

The Retirement Income Review was indeed comprehensive, providing the public with a clearer picture of the current state of Australia’s retirement income apparatus. However, while the opportunities to prepare for a secure retirement were plenty, the document detailed caution and an apparent lack of education to go forward with preparation.

The Review provides an opening for seniors to seek an Equity Release with A.S.A.G.. The service enables the client to use their property equity to finance retirement living through a detailed, seamless process. The final output can be in the form of regular payments or a lump sum, which you can use as your retirement plan governs.