The recently-released Committee for Economic Development of Australia (CEDA) report, The super challenge of retirement income policy, has called for a retirement policy overhaul with pre-tax mortgage repayments and superannuation balances being suggested as funding options for home purchases.
There has been some debate regarding retirement outcomes and the best way to get more people living comfortably in their older years. Ageing Australians and home affordability are the key issues presented in the paper, since fewer Australians are owning their own homes these days, resulting in more retirees without the house as a freehold asset to be used where necessary as a form of voluntary savings.
CEDA’s report indicates that without a good hard rethink about the looming oldies-without-homes/savings crisis, the current superannuation system won’t hold up adequately, leaving many retirees in poverty and putting extra pressure on the government purse.
Disadvantage is rife amongst older Australians, with a previous CEDA report showing that up to 1.5 million Australians live in poverty, with the elderly who don't own their own homes very much at risk. The poverty rate in older people in Australia is embarrassingly high, over three times that of the OECD average, one of the highest. That number will only grow if systems don’t see a makeover soon, the report makes very clear.
CEDA is calling for a full review of the superannuation system, and while constantly changing policy is an area of great concern for many retirees, it may solve a few issues before they get an opportunity to reduce the standard of living in the older age of future generations.
CEDA’s chief executive, Professor the Hon. Stephen Martin, said that while tax arrangements for superannuation were benefiting the rich and would need to be managed adequately to benefit the poor better, the family home could be put up for discussion – using superannuation savings to invest in a house would create a savings safety blanket for retirement for many. The idea is to make the family home part of the assets test for the Age Pension, and change superannuation payments to an after-tax payment. All other tax concessions would be removed.
Another version of this idea includes mortgage payments on the family home being made pre-tax, or alternatively, that superannuation account balances could be used directly to buy owner-occupied housing.
Any of these options allows superannuation and the family home to be treated as equals, instead of one as an investment (the home), and superannuation being based solely on private savings.
The issues with these ideas
There are naturally several major issues with these ideas, particularly that adding incentives to home-buying could in fact drive already-high house prices up further, making this particular property purchase problematic and still unattainable for many. In spite of this, with the right checks and balances in place, Professor Martin says the goal of every Australian retiring with dignity is the purpose of the superannuation system, not to save the government money, and for this reason these ideas must be investigated. He also mentions the impact of the current superannuation system on women, the most disadvantaged by the current scheme. It has been discovered by the most recent ANZ Women's Report that 90 per cent of Australia women retire without sufficient savings to get them through to the end of their lives.
Findings of the report
The number of people over 65 for every person aged 15 to 64 is supposed to double over the next 40 years, says the 2015 Intergenerational Report. Home ownership is also decreasing amongst younger Australians. This means, eventually, more retired people without the largest asset most Australians will acquire over their lifetime (their home) will create a dependency on the Age Pension, which by then will be more of a pittance than it already is after being sucked dry by the Baby Boomers and their many offspring. The dwindling taxpayer pool could cause a major funds drought affecting the quality of life of unprepared persons and their families.
Currently, older Australians have a rate of home ownership of 85 per cent, and therefore nobody is very worried about older renters, who, this report states, are at the mercy of the rental market and are much more likely to live in poverty. The ratio between those with homes and those without is declining, but nobody is talking about it. Until now.
Why confirmation of the objectives of the superannuation system is so important
It continues to be repeated amongst various reports: the system needs a clear objective, identified and loaded into legislation, so everyone knows which way to head, what the rules are, and what the point actually is. This report is no different. The word ‘tinkering’ is used often in relation to the superannuation system policy changes, and this changeability causes uncertainty and insecurity for retirees at all stages of the game, and it reduces the uptake of policy incentives.
The report outline
The four chapters of the report have been written by experts in their respective fields.
Chapter 1 was written by Dr Diana Warren, and takes a look at Australia’s current retirement system and how it developed, taking into consideration the Age Pension, the superannuation system, and personal savings. Warren's view is that inconsistent government regulation and superannuation system policies has caused difficulties for Australians, who may struggle to make the informed choices they require to adequately plan for retirement. Warren is calling for greater policy stability and certainty, and a simplified system. Warren is a research fellow at the Australian Institute of Family Studies.
Chapter 2 was written by Professor Stephen King and Dr Rodney Maddock, and reviews the market failures and behaviours – myopia, agency, taxation, free riding and risk aversion – that underlie the retirement system. The pair discuss their findings, which include that the compulsory superannuation system should help people to fund their retirement, and not exist just to save the government money. Their thoughts include that superannuation should be an after-tax payment for equity reasons, and that real and financial assets should be treated similarly. King is a Professor of Economics at Monash University, with Maddock the Adjunct Professor of Economics at Monash University, Vice Chancellor's Fellow at Victoria University, and the President of the Economic Society of Australia (Vic).
In Chapter 3, Dr David Knox, a Mercer senior partner, takes a much closer look at 25 different international pension systems and compares them to Australia’s, while looking at ways Australia can improve, despite Australia being ranked second-best globally. Knox’s recommendations for improvements include legislating retirement income system objectives, which he believes should include a reasonable pension for the poor, and provisions of reasonable retirement incomes so as to maintain standards of living for all. Other recommendations include focusing on providing a lifetime retirement income, and encouraging workers to keep working, and retire later.
Chapter 4 covers Dr Judith Yates’ discussion on the vital contribution that housing plays in sustaining living standards and removing the risk of poverty in old age. Yates’ recommendations include short-term increasing the Commonwealth Rent Assistance, and in the longer-term, making adjustments like improving the supply of affordable rental properties and housing affordability. Yates is an Associate Professor at the School of Economics