The latest in a series of research papers commissioned by the Productivity Commission discusses the efficacy of the superannuation system in Australia when confronted with changing demographics.
The Superannuation Policy for Post-Retirement Productivity Commission Research Paper complements the Commission’s 2013 flagship paper, An Ageing Australia: Preparing for the Future, which examined a growing elderly population in Australia and the pressure that places on each state and territory. This paper particularly examines incentives for staying employed for longer, reducing pressure on the Age Pension and growing superannuation balances further.
It has been observed that in the current scenario there exists disincentives to staying employed using current Age Pension access arrangements, since access to superannuation and access to the Age Pension are set at different ages. The discussion revolves around the preservation age for superannuation being set at the same age as access to the Age Pension.
How people choose to spend, save or invest their superannuation balances is also examined in some detail, with a focus on the drawing down and specific use of lump sums, as opposed to a drip-fed pension.
A new model was created by the Commission, the Productivity Commission Retirement Model (PCRM), to discuss the outcome of increasing the preservation age and assess when and how people use their superannuation, and how this impacts the system as a whole.
Key findings of the PCRM
The Commission found that increasing the preservation age will encourage some people to work for longer, and as a result, accumulate more superannuation to support them in retirement.
- There will be a modest increase in the participation rate of older workers (two per cent in 2055), particularly amongst wealthier individuals, or those nearing retirement.
- Those delaying their retirement are likely to do so by around two years, having by that time 10 per cent more in their super balances in real terms at retirement.
- There will be an increase of around $7 billion in 2055 largely due to tax revenue from wealthier households.
- Upping the preservation age will have very little (if any) impact on employment by those who involuntarily retire, which amounts to over half of the men and a third of the women who retire between age 60 and 64.
Does it matter how retirees use their lump sum?
Retirees have a lot of choice when it comes to how they use their superannuation savings once they hit preservation age, with concerns raised that receiving a lump sum of cash encourages people to spend it all quickly, resulting in greater reliance on the Age Pension. This, however, seems to be an unwarranted concern, since most retirees are very careful with their funds, and additionally, less than 30 per cent of all super balances are taken as a lump sum.
This lump sum drawdown is not taken straight to the casino, but in fact is most often directed towards paying off debts on homes and cars to free up future funds from interest-bearing debt, investment in income stream products, and to buy retirement items.
The people most likely to draw down a lump sum were those with balances of less than $10,000, which in and of itself has very little impact on Age Pension use, since it is a negligible amount.
Investigations for the future
Policy areas identified as needing further investigation include:
- involuntary retirement and its impact on policy outcomes;
- incentives inherent in the retirement income system and how this impacts decision-making by retirees;
- in what ways the system can cater to the huge range of circumstances retirees face – one-size-fits-all is not effective; and
- ways to manage longevity risk during the demographic transition we find ourselves in.
The Commission has recommended an holistic review to more clearly define the objectives of the Australian superannuation system, so as a broad community, we can be guided by a common set of objectives that are informed by sustainability and efficacy. Extensive consultation will be essential.