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Designing a 21st century retirement income system requires a more thoughtful debate

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  Published: 17 Mar 2016

Tax expert Geoff Carmody argues that a flat-rate pension for all would be a cheaper, fairer, simpler and more efficient retirement income policy than the current mix of the age pension supplemented or replaced by super, bolstered by tax concessions.

Certainly the retirement income system could be more efficient, no argument there. We can start by re-allocating over-generous tax breaks enjoyed by those on the highest income rungs to boost the super savings of those who would otherwise depend heavily on the age pension – particularly women and others on lower incomes.

The wider argument is around the standard of living we’re hoping for in our later years -  and most would be expecting to retire comfortably, well before 70.

With that community expectation in mind, how do we best deliver an adequate if not comfortable retirement to as many Australians as possible?

Would a flat-rate pension at 70 deliver this quality of life? And would it really be cheaper, simpler and fairer for all?  Simpler maybe. Cheaper, fairer, comfortable - no.

Australia’s current age pension is set below the OECD poverty line. As result, we have the second highest poverty rate for retirees in the OECD after Korea, with women over-represented. Abandoning compulsory super would see the vast majority of people subsisting on the most meagre of government hand-outs, unless of course the new universal pension proposed by Mr Carmody were raised to match the higher living standards currently provided by super system.   

However, his plan ignores the budget costs of increasing the pension to the level of income our current three pillar system will deliver. For a middle income women earning $45,000 a year earnings, the age pension would need to be a whopping 40% higher to deliver the same amount provided by super plus a means-tested pension, in a mature system.

The proposal, as it stands, would lead us down the European path where the public would place unsustainable pressure on governments to lift the value of the publicly funded pension. Think Greece, Italy and France.

As for fairness, the Carmody plan would result in extraordinary intergenerational inequity. If we switched off all super concessions and compulsory super overnight, the big winners would be older, high wealth individuals who don’t currently receive or need a pension and the big losers would be 70-80% of the current workforce.

Grandfathering would allow baby boomers to double dip the system with many retirees or those close to retirement enjoying the benefit of super tax concessions as well as a universal age pension. Younger generations in contrast would have universal super taken away and replaced with a miserly pension safety net.

Also unrealistic is a universal retirement age of 70.  Most people leave the workforce before 65, with disability and health issues significant factors. The 2006 Census tells us that labour force participation of 64 year olds is less than 40%, dropping to 15% at 68.

Scrapping the super system would also dismantle the wider economic benefits we reap from compulsory savings. The many billions that are invested in hospitals, ports, railways, airports, major roads and property across Australia would no longer be available. Major works and services would suffer and our productive capacity would diminish. A shrunken economy, lower living standards and a retired population subsisting on pension payments is hardly a 21st century vision for Australia.

We already have more than the makings of a high quality system of retirement income. The real question is how we streamline the mix of super, tax and pensions to optimize the outcomes.  A number of measures are at hand:

  • Increase the Super Guarantee to 12% as soon as possible
  • Re-direct tax breaks to the people who most need them – middle and lower income workers, most of whom are women
  • Introduce a 25% rebate on contributions for all income earners (capped), limiting total contributions (concessional and non-concessional) to $50,000 per year, rather than $210,000 currently
  • level earnings taxes to 15% in accumulation and the retirement phase, with a rebate for earnings under $50,000 per annum in retirement
  • Introduce a ‘super seed’ for younger workers, to address adequacy for those with lower levels of lifetime earnings
  • And last but not least, a fairer age pension asset test with a taper of no more than $2 per $1000 of assets

In the era before universal super, the inequities were clear to see. In 1987 only 39% of employees had access to super – mostly white collar men. Women and part time workers were severely disadvantaged. In 2016, 90% of Australians have super and the system is now a central to our economic wellbeing.  With the right reforms we will bring everybody up to a higher standard and continue to significantly narrow the socio-economic and gender-based gaps in our society. 

*The above material, whilst correct at the time of publication may include references or statements which are no longer current.

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