Australia's Future Tax System

Consultation Paper

Section 5: The retirement income system

The Treasurer wrote to the Panel on 4 November 2008 asking it to bring forward its consideration of the retirement income system. This is to allow the Government to consider the issues facing the retirement income system in conjunction with those arising from the Pension Review, due in February 2009.

In meeting the Treasurer's request to bring forward its consideration of the retirement income system the Panel has released a separate consultation paper.

The Panel is to report to the Government on its findings on the retirement income system by the end of March 2009. The Panel is seeking community input to help develop its report. The Panel is inviting written submissions from the public by 27 February 2009. The Panel may initiate meetings with representative organisations for further discussions on the retirement income system.

Overview

Australia has a three pillar retirement income system:

  • a government-provided Age Pension;
  • compulsory savings enforced through the superannuation guarantee (SG); and
  • voluntary savings (both through superannuation and other sources).

The Age Pension provides a guaranteed income based on means, while the income generated from the second and third pillars depends on the amount invested and returns on these investments.

The retirement income system has developed over time. The SG pillar will not mature until 2037 when employees retire after a full working life (35 years) of compulsory superannuation contributions of 9 per cent.

Submissions to the Panel support the structure of the retirement income system. Common themes in the submissions concern the current rate of the SG and the level of concessions provided to encourage additional saving. Other themes relate to how the system should deal with individuals outliving their savings and the way the system treats individuals with different circumstances.

Key considerations about the retirement income system are whether it is broad and adequate, acceptable, robust, simple and approachable, and sustainable.

Another aspect to be considered is the role of the retirement income system in providing health and aged care services.

Consultation questions

Q5.1 In considering the future of Australia's retirement income system, which objectives are relevant in setting retirement income policy? Does the current system of the Age Pension and compulsory and voluntary savings meet these objectives? If not, how should the system be changed to meet these objectives?

Q5.2 As the SG system matures, it will become a greater part of an employee's retirement income. What are the implications for individuals partially or fully excluded from the mature SG system (the self-employed, individuals with broken work patterns such as carers, women and migrants), and how can the retirement income system best accommodate these groups?

Q5.3 Noting that the adequacy of the Age Pension is being considered by the Pension Review, what is an appropriate concept of adequacy for the retirement income system? Should it be to ensure there is a minimum level of income in retirement, to replace a proportion of income earned prior to retirement, or some other alternative?

Q5.4 What should the role of the government be in assisting individuals to meet their retirement income expectations in relation to the support provided by the Age Pension, the level of compulsory savings and incentives to make additional savings? Should the role of government change as an individual's income increases over their working life?

Q5.5 Do the settings of the retirement income system, such as the level of SG and access to concessions, adequately consider the needs and preferences of individuals both before and after retirement?

Q5.6 Is the current level of superannuation income tax concessions appropriate and sustainable into the future? Are the current concessions properly targeted and, if not, how should they be reformed?

Q5.7 At what age should an individual be able to access their superannuation and at what age should they become eligible for the Age Pension?

Q5.8 What is the role of individuals in dealing with investment and longevity risk in accumulating and drawing down their retirement income? Do financial markets provide the means to deal with these risks? If not, is there a role for government to address these shortcomings?

Q5.9 In what ways does the retirement income system impose undue complexity and cost on retirees and workers? How could this complexity be reduced?

Q5.10 The Age Pension serves two roles, as a safety-net for individuals who are unable to sufficiently save for their retirement and as an income supplement for many individuals who do save. What should be the role for the Age Pension and means testing in a future retirement income system and what impact does this have on its sustainability into the future?

Q5.11 In what ways does retirement income policy affect workforce participation decisions and what, if any, changes might reduce disincentives to work? Does the sustainability and cost of the retirement income system affect the workforce decisions of younger generations of workers?

Q5.12 What impact could financial intermediation have on the effectiveness of retirement income policy?

Q5.13 The cost of providing health and aged care to older Australians is currently met by government through the health sector. Should retirement income policy take into account projected increases in health costs for older Australians? If so, what would be the most effective mechanism and how might the transition to such a system be achieved?

The future role of the retirement income system

The Panel is also reviewing the personal tax arrangements of retirees and the taxation of non-superannuation savings as part of its broader consideration of the tax-transfer system. The Panel may suggest possible changes in these areas, which may have implications for retirement income policy. These implications will be dealt with at the time of the Panel's final report at the end of 2009.

One aspect to be considered as part of the broader paper is the role of the retirement income system in providing health and aged care services.

In retirement, the type of products and services people consume will change as they age. In particular, as a person gets older they are likely to require more health and aged care services. A significant part of this care is paid by the government.

The 2007 Intergenerational Report (Australian Government 2007) projects health spending as a proportion of GDP to increase from 3.8 per cent in 2006-07 to 7.3 per cent in 2046-47. While a significant amount of this increase is due to technological change, including the development of new drugs and treatments, the affect of an older population is also considerable. Historical data show that average per person spending on pharmaceutical subsidies for those aged over 65 years is around four times greater than on the general population.

A question is whether arrangements should be introduced now so that current generations of workers save for these costs. One option would be to pre-fund this expenditure as an individual account similar to superannuation, or as part of an insurance arrangement. This would have an effect on the pre-retirement standard of living of individuals. However, as it is difficult to predict future health costs because of unknown future diseases and health technologies, other possible responses might include changing current policy on co-payments and health concessions.

Consultation questions

The Panel has asked 12 questions in its Retirement income consultation paper. The following question is specific to this section.

Q5.13 The cost of providing health and aged care to older Australians is currently met by government through the health sector. Should retirement income policy take into account projected increases in health costs for older Australians? If so, what would be the most effective mechanism and how might the transition to such a system be achieved?