Australia's Future Tax System

Retirement Income Strategic Issues Paper

3. Responding to emerging pressures by enhancing the system

3.1 Emerging pressures

While the existing broad architecture is supported, the retirement income system is facing a changing environment. Most of these changes occur gradually over time but can accumulate to a level requiring a response. They include:

  • dramatic long term changes in Australia's demographic structure, with an increasing proportion of aged people and a declining proportion of working-age people;
  • increasing life expectancies, leading to a longer average period in retirement and particularly strong growth in the number of people in the oldest age groups;
  • advances in health technology that are improving the quality of life for many people with previously debilitating ailments;
  • changing patterns of workforce engagement and labour mobility; and
  • changing patterns of retirement, with sudden cessation of employment at a given age increasingly replaced by a longer and more flexible transition from work to retirement.

Collectively, these trends put increasing pressure on the retirement income system on three main fronts.

  • Sustainability. For example, demographic change will impose increasing costs on government budgets, not only for retirement incomes but also for health and aged care services. Across governments, these increases are likely to exceed four per cent of GDP by the 2040s. Four per cent of GDP is equivalent to the revenue currently raised by the GST or the entire Australian Government health budget. Future taxpayers may therefore have to carry a higher taxation burden to support the funding of pensions, and other services, for a much larger population of retirees.
  • Adequacy and acceptability. For example, longer periods in retirement increase the difficulty of relying on accumulated savings and, together with increasing numbers of the very old, ultimately increase considerably the reliance on the Age Pension. The distribution of concessions also influences the acceptability of the system.
  • System coherence — that is system consistency, simplicity and transparency for individuals. For example, as Australia's three-pillar system matures more people will face the complexities of both the tax system and pension means tests (both assets-based and income-based). The impact of the means tests has changed considerably due to inflation, growth in household wealth and complexity, creating vulnerabilities for many people. While Australia's targeted assistance serves both sustainability and fairness goals, a priority is to make it more coherent, consistent and easy to understand.

This review also provides an opportunity to address existing structural weaknesses in the system such as a lack of integration between the Age Pension and superannuation and the limited range of products a person can purchase to insure against the risk of exhausting their assets before they die, to make the system more robust.

3.2 Enhancing the system

These challenges and structural weaknesses lead the Panel to conclude that some adaptive changes will be necessary over the coming years to calibrate the system so it serves its purposes and retains its strengths. Policy change needs to be gradual to give people time to adapt.

The Panel recommends:

  • gradually increasing the Age Pension age to 67 years;
  • gradually aligning the age at which people can access their superannuation savings (the preservation age) with the increased Age Pension age;
  • improving the fairness and coherence of the existing pension means tests, possibly through a single test, and improving incentives to work beyond retirement age;
  • reducing the complexities resulting from the interactions between the tax-transfer system and the aged care sector;
  • maintaining tax assistance to superannuation but improving the fairness of concessions for contributions, including by broadening access to them and limiting generous salary-sacrifice concessions;
  • improving the ability of people to use their superannuation to manage longevity risk; and
  • improving the awareness and engagement of individuals with the retirement income system.

Reflecting the need for many of these issues to be considered in the context of the overall design of the tax-transfer system, they will be the subject of further analysis by the Panel in developing its final report.

3.3 Access ages for the Age Pension and superannuation

The age at which pensions become available should be responsive to the increase in life expectancy and longevity. For a century, the Age Pension age has been 65 years for men. To support system sustainability, and fairness, and to ensure that social policies adapt to changes in the life circumstances of people, the Age Pension age should rise modestly and gradually to age 67 years. This would provide a strong social signal about work and retirement expectations and their link to increasing life expectancies. The increase in the Age Pension age should be part of a suite of polices to increase the social and workforce participation of older Australians.

Consistent with the proposal to increase the Age Pension age, it is recommended that the preservation age gradually increase to age 67 years, with a view that it be aligned with the Age Pension age. This will enhance retirement incomes provided by the superannuation guarantee and improve the system's coherence by strengthening the integration between the Age Pension and superannuation.

In some circumstances, individuals have no choice but to retire early. Where they are not expected to be able to work again, it is appropriate they remain able to access their superannuation savings (and where applicable pension support). It is recommended that the current ability to take an income stream for life before preservation age continue, so that people can smooth their retirement income levels before and after preservation age.

The terms of reference require the Panel to have regard to the policy of tax-free superannuation from the legislated future preservation age at 60 years. The Government may wish to consider whether the age for tax-free superannuation should increase in line with future increases in the preservation age. Section 5 outlines the proposed changes to the Age Pension and preservation ages in more detail.


Australia's retirement income arrangements should be adjusted to respond to increasing life expectancies. This would enhance the acceptability, adequacy and sustainability of the retirement income system. Increasing life expectancies mean that: people are spending more time in retirement relative to working life; savings during working life are less able to meet retirement needs; and aggregate budgetary costs of the Age Pension are increasing. While provision must continue to be made for those who are required to retire at earlier ages, the general age for access to the Age Pension and for access to preserved superannuation benefits should be increased.

The eligibility age for the Age Pension should be increased to 67 years. This should be done gradually to give people time to adjust to the changes. The increase in the Age Pension age should be part of a suite of policies aimed at increasing the workforce participation of older Australians. It is proposed that the current five year difference between eligibility for the Age Pension and the Service Pension remain.

The general access age for superannuation benefits should also increase to 67 years. This would enhance the outcomes from the superannuation guarantee and improve the coherence of the system by strengthening the integration between the Age Pension and superannuation components of the retirement income system. The Panel's final report will explore further some associated issues such as the treatment of occupations with mandatory retirement ages and Service Pensioners.

A review should be undertaken by 2020 to consider whether it is appropriate to increase retirement ages further in later years.

3.4 Older Australians and the tax-transfer system

Many older Australians interact with both the personal tax system and the Age Pension means tests. The complexity associated with these interactions places a substantial burden on older Australians. In its final report, the Panel will explore ways to improve the experience of older Australians engaging with the tax-transfer system. This may involve reducing the number of people who interact with both systems, making the system more seamless so people can deal with it in a single interaction or implementing a more integrated user interface.

The retirement income system and other tax and transfer arrangements are important in encouraging workforce participation and, consequently, in fostering system sustainability. Arrangements applying to the labour income of older Australians are likely to affect their work choices. The Panel will make recommendations that ensure appropriate incentives for workforce participation and skill formation for all Australians, including older Australians. For example, a concessional treatment of earned income in the Age Pension means test would improve incentives to work.

Means testing of pensions is an important tool for managing the sustainability of the retirement income system. However, some features of the current means tests influence choices about the form in which assets are held, resulting in an unequal treatment of pensioners with similar levels of private means. They also reduce coherence, partly because of increased complexity.

A single pension means test would have the potential to improve the integration of the retirement income system with the broader tax-transfer system. This could be achieved by eliminating the assets test and extending the income test by applying deeming to a broader range of assets. The Panel considers that a reformed means test would need to include concessional treatment of income from employment to improve incentives to work, and should continue to recognise the special nature of owner-occupied housing. Section 6 outlines an illustrative alternative means testing approach in more detail.

In addition to their retirement income, the quality of life of older Australians is affected significantly by their access to, and experience of, services such as aged care and health. Government spending on these services is projected to increase substantially in the future. It is important to consider how the tax-transfer system might best evolve to assist in meeting these rising costs.

The aged care sector is complex and makes many of the important decisions faced by older Australians unnecessarily difficult and their consequences highly uncertain. The National Health and Hospitals Reform Commission interim report (NHHRC 2008) identified some of these challenges, as well as potential reform directions.

Aged care support is means tested, and the means testing treatment varies according to the level of care provided. These interactions can affect the adequacy of the retirement income system.

In its final report, the Panel will consider the interactions between entitlements to aged care services and the broader tax-transfer system. It will undertake this review as part of a broader assessment of the role of the tax-transfer system in support of, and in interaction with, other social programs (such as those delivering housing assistance and financial support for health care).


There is a case for reforms to improve the fairness and coherence of Age Pension means tests through a single means test that removes the assets test and extends the income test by deeming returns on a greater range of assets. A single means test has the potential to improve the fairness and coherence of the retirement income system. The design of the new test should await further consideration of the interaction between means tests and the personal income tax system. The broad intention is to find ways to simplify substantially the experience of part-rate pensioners in complying with the two systems, while also striking an appropriate balance between the targeting of pensions and maintaining incentives for work and saving. To encourage ongoing workforce participation, the new test should include concessional treatment of income from employment (relative to the treatment of other income). The new test should continue to recognise the special role of owner-occupied housing in retirement security and wellbeing.

The interaction of the tax-transfer system and the aged care system, particularly the means testing arrangements, needs to be explored further. The quality of life of older Australians is affected significantly by their access to and experience of age-related services, such as aged care and health. Future government spending on these services is projected to increase substantially. The Panel will give further consideration to a range of interactions between the tax-transfer system and other systems (such as the funding of housing assistance and health care). It will address the role of the tax-transfer system in funding aged care as part of that wider review in its final report.

3.5 Taxation of superannuation

Many submissions raise a concern that the superannuation taxation arrangements provide greater concessions to high income earners than low income earners. Assessing the equity of these arrangements solely on the interaction between the taxation of superannuation contributions and personal tax rates can be misleading. Any assessment should be done across the broader tax-transfer system.

The Panel's final report will review the tax treatment of superannuation as part of a wider assessment of all saving to ensure a coherent overall treatment. However, the Panel has formed in-principle views on some key elements of the treatment of superannuation savings.

  • There is a general case for providing concessions under income tax arrangements for all forms of savings to reduce distortions in the relative treatment of current and deferred consumption. This case must usually be balanced against vertical equity considerations. Beyond this, reasons for favouring additional tax assistance for superannuation include the social benefits of overcoming life cycle myopia and compensating for compulsion and preservation.
  • The distribution of the concessions is affected by a number of factors including income, age, access to income support and the level of contributions that a person makes. These factors mean the distribution of concessions for superannuation guarantee contributions is highly dependent on individual circumstances. Arrangements for voluntary superannuation contributions provide little or no concession for lower income earners (other than the superannuation co-contribution) and larger concessions for higher income earners. In its final report, the Panel will consider options to distribute concessions more coherently and equitably across people with different income and circumstances.
  • Access to tax assistance for contributions should not be limited by an employer's salary sacrifice policies, such that concessional treatment should apply to both salary sacrifice and personal contributions. However, there is a need to consider whether the current cap on the concessions available on contributions is appropriate.

Submissions also raise a number of specific tax-related issues including the age beyond which a person cannot make contributions, the taxation of benefits received by members of untaxed funds and the taxation of superannuation death benefits. These issues relate to the appropriate taxation of retirees and other savings. They will also be taken into account in the Panel's final report.


The tax advantages provided for superannuation serve the dual purpose of providing incentives for contributions and delivering more neutral overall tax treatment of deferred consumption relative to current consumption. Current arrangements serve the second purpose effectively but some features do not provide fair or adequate incentives to all. Superannuation should continue to receive tax assistance, but there is a case for distributing assistance more equitably between high and low income individuals, including by limiting generous salary-sacrifice concessions. Similarly, everyone should have equitable access to the assistance. The Panel is undertaking a comprehensive review of the taxation treatment of saving and investment for its final report. Accordingly, it proposes to consider further the taxation treatment of superannuation saving as part of that wider assessment.

3.6 Use of superannuation benefits

Currently, individuals have considerable flexibility in their use of superannuation benefits. Given the very wide range of circumstances of retirees, this flexibility should continue to be available. However, the lack of products that guarantee an income over a person's retired life represents a structural weakness in the system. There is a strong case for new products to be developed and made available that would allow people to insure against the risk of exhausting their assets before they die.

While the Age Pension supports people when they exhaust their private assets, products that give people comfort that they will always have an income above the Age Pension would advance the financial security offered by the system. The Panel will undertake further research into whether these products should be delivered through the public or private sectors, or both. A range of other issues also need to be considered, including interaction with means tests. The Panel will also examine whether there should be a requirement for people to devote some part of their superannuation savings to the purchase of an income stream from the time of their retirement or, alternatively, a deferred income stream to support them in old age. Section 7 outlines issues in relation to these superannuation matters.


While superannuation generates assets for retirement, current arrangements do little to ensure that those assets can be used for income purposes throughout the years of retirement. As people live longer, there is a growing risk that individuals will exhaust their assets before they die. The lack of products that retirees can purchase to insure against longevity risk is a structural weakness in the system. Better retirement income products should be available for purchase so a person can ensure an income higher than the Age Pension throughout their retirement. A range of complex issues need to be addressed to deliver this outcome, including the scope for public and private provision, regulation and incentives to address market failures, and interactions with means tests and the tax system. The Panel proposes to give these issues further consideration in its final report.

3.7 Awareness of the retirement income system

For many people, superannuation may be their first interaction with a financial product other than a bank account. People can remain disengaged from the system until they near retirement. This is because the decision to save is made for them through the superannuation guarantee, the choice of fund may be determined by their employer or an industrial agreement, and investment decisions are made by the fund trustee.

This lack of engagement may be contributing to the number of lost superannuation accounts. As at 30 June 2008, there were 6.4 million lost accounts, an increase of 300,000 accounts since 30 June 2007. There are approximately another 9 million inactive accounts.


The level of awareness and engagement of individuals with the retirement income system should be improved. There is evidence that a lack of awareness and engagement affects the coherence of the system and, potentially, its adequacy. Simpler arrangements, such as a single means test, can contribute to this task, but more needs to be done, particularly in building understanding of issues such as longevity risk. Government and the superannuation industry should share in the responsibility of assisting individuals to better understand and engage in the system.