If you are a retiree in Australia, your funds depend on Australia’s retirement income system. Understanding the system may be challenging, but that is where the retirement income report comes in. The Review will provide you with the information to get a basic understanding of the system.
Summary: Retirement Income Review
The Review analysed the retirement income system in Australia, including three pillars: Age Pension, Compulsory Superannuation, and Voluntary Savings. The three pillars are made to work together to fund their retirement. The Review found it is already “effective, sound and broadly sustainable” overall, but there was also room for improvement.
It will be a while before the federal government to change policies based on the report. Josh Frydenberg has said he wouldn’t decide whether the Superannuation Guarantee (SG) increase will go ahead from 1 July 2021 until the May 2021 Federal Budget.
How the Retirement Income System came about
The review began in September 2019. It was recommended to the government by the Productivity Commission in their 2018 paper, Superannuation: Assessing Efficiency and Competitiveness. It was suggested for Australians to obtain knowledge about the financial system, especially now with the standard of living during the COVID 19 pandemic.
The Biggest Changes from the Review
Changes of the retirement income system aimed to reduce the inequity in retirement outcomes between men and women and improve understanding of SG coverage. These included:
- The transfer balance cap
It limits the total amount of superannuation transferred into the salary streams, including most pensions and annuities.
- Disclosed superannuation balances in divorce settlements
Superannuation is generally divided in family property settlement following a divorce. Although, it is challenging to ensure that all superannuation assets are disclosed. A measure that has yet to be implemented states that ATO could provide accurate information on superannuation balances.
- Reduced superannuation tax concessions for higher-income earners
Superannuation tax concessions predominantly benefit high-income earners, and there are more in men than women. Reducing superannuation tax concessions for higher-income earners will lessen the gap between genders.
Age Pension and Other Key Takeaways
There’s a lot going on in the Review, but here are some of the following key things:
- The pension is here to stay
Some people fear Age Pension and aged care would become unsustainably expensive for the government.
The report showed Age Pension provides a safety net to people who retire with small super balances and effectively supplements allowance for about 65% of Australians.
- Higher super, lower earnings
Defenders of high compulsory superannuation often argue the legislated increase is the only guaranteed path to a pay rise after years of lower wages growth.
- Renters are in hot water
The document found that about 60% of single retirees who rent their homes are in poverty, compared to about 10% of single home-owner retirees. And that number will only grow as home ownership falls. The government should boost the rate of Commonwealth Rent Assistance by enough to pull people out of poverty.
- Efficient use of savings has a bigger impact than increasing the super guarantee
On the point about the ‘trade-off’ between a high SG rate and wage growth, the report stated that more efficient use of savings in retirement would have a more significant “impact on improving retirement income than increasing the super guarantee.”
Accessing the home’s equity was a way to increase retirement incomes, and it was identified as an important part of voluntary saving. The report said few people use the equity in their home to support their standard of living in retirement, with choices available, including family home loans.
- Australians can expect a comfortable retirement
The report points out that retirees have lower financial stress rates than working-age Australians. And the Age Pension keeps low-income retirees out of financial ruin.
Workers today can look forward to living standards in retirement on par with their living standards or the working life.
The report defines “adequate” retirement savings as 65-to-75% of workers’ pre-retirement, post-tax earnings. And the account’s modeling shows that many Australians can expect to meet that benchmark.
With the exposition on the Retirement Review, Australians can have the necessary knowledge of how the superannuation system works and plan a much better retired life. For more reads about retirement, browse through Aged Care Weekly.