Australia's Future Tax System

Retirement Income Strategic Issues Paper

Summary of findings and recommendations


  1. The key finding of the Panel is that the three-pillar architecture of Australia's retirement income system, consisting of the means tested Age Pension, compulsory saving through the superannuation guarantee and voluntary saving for retirement, should be retained.

    The retirement income system is facing increasing challenges as the 21st century unfolds. Some are relatively clear to us, including the ageing of the population, longer life expectancies and the fact that many more people will interact with the system. Others are less clear, arising from the diverse range of risks and uncertainties about future economic, social and environmental circumstances faced by all. These challenges will test the sustainability, adequacy, acceptability and coherence of the system, but the three-pillar architecture is well suited for a balanced and flexible response.

    The three-pillar system has strong community support. The five objectives of the system outlined in the Retirement income consultation paper released in December 2008 — adequacy, acceptability, robustness, simplicity and sustainability — inevitably involve tradeoffs. The present three-pillar architecture broadly addresses these objectives in a reasonable, balanced way. Critically, it also provides flexibility, adaptability and sharing of risk to face the challenges ahead. Consequently, the Panel is proposing a range of improvements to the present system, rather than wholesale redesign.

  2. The three-pillar architecture should be founded on the presumption that the responsibility for providing for retirement is shared between government and individuals. Governments should provide for minimum and essential needs and facilitate self-provision. Each of these goals should be pursued in an equitable and targeted way. Individuals should save or insure during their working lives to provide resources in their retirement. Inevitably under this approach, retirement outcomes will differ for different people, depending on the extent to which they can and do make self-provision.

    The objectives of each of the three pillars should be as follows:

    1. The means tested Age Pension should ensure that all Australians receive a safety net level of income throughout their retirement that is adequate to provide a reasonable minimum standard of living. The question of Age Pension adequacy has been addressed in the Pension Review and is not considered further in this report.
    2. Compulsory superannuation should ensure that a reasonable minimum share of employee income is saved to contribute additional resources to retirement. Because it is a defined contributions system, rather than defined benefits system, it is not appropriate or practicable to set a target replacement income rate for the superannuation guarantee. However, the rate of the superannuation guarantee can be benchmarked by reference to moderate potential replacement rates for retirees with a full history of contribution at median to average earnings.
    3. Voluntary superannuation should provide a tax-assisted means for all to make self-provision for retirement in accordance with their circumstances and preferences. For reasons of both acceptability and sustainability, the extent of tax assistance should be capped.
  3. There is a need and an opportunity to calibrate the three-pillar architecture to meet better the future challenges, and to reform some structural weaknesses within the system. However, reflecting the fact that the retirement income system is one part of the broader tax-transfer system, the Panel's final recommendations on some of these opportunities will depend on its assessment of that broader system.

Recommendations for system design

  1. The superannuation guarantee rate should remain at 9 per cent. The Panel has considered carefully submissions proposing an increase in the superannuation guarantee rate. Such an increase could be expected to lift the retirement incomes of most workers. However, the Panel considers the rate of compulsory saving to be adequate. The Age Pension and the 9 per cent superannuation guarantee (when mature) can be expected to provide the opportunity for people on low to average wages with an average working life of 35 years to have a substantial replacement of their income, well above that provided by the Age Pension. This strikes an appropriate balance for most individuals between their consumption opportunities during their working life and compulsory saving for retirement. The Panel considers that more can be done through preservation and other rules to ensure that the 9 per cent contribution rate produces an adequate retirement income for greater numbers of people, and its other recommendations are made partly for this purpose. For higher income workers especially, the third pillar provides an opportunity to access significantly higher income replacement rates.

  2. The superannuation guarantee broadly should continue to cover employees. While those who derive business income should make provision for their retirement during their working lives, the diverse and varying risks and circumstances of business and entrepreneurship argue for allowing full flexibility in their saving and investment decisions. The voluntary superannuation system is available to small business people for contributing to meeting their retirement needs. However, there can be a fine line between those who are self-employed and those who are performing contracted duties similar to an employee. This distinction arises in a number of areas of policy. In its final report, the Panel will consider further how to distinguish the self-employed, including whether the scope of the superannuation guarantee could be extended to include with greater clarity and certainty arrangements that are close in nature to a formal employer-employee relationship. The $450 per month threshold should continue to apply, as the compliance costs to the employer of providing superannuation guarantee contributions to marginally attached workers are outweighed by the benefits to the employee.

  3. 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.

  4. 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.

  5. 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.

  6. 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.

  7. 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.

  8. 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.