With the government planning to introduce legislation defining super’s objective as providing income in retirement, the reform focus will now shift to the retirement phase. This has the potential to be as profound a change for our system as was the introduction of the superannuation guarantee a quarter of a century ago.
Millions of baby boomers will retire in the next few years, and people are living longer in retirement, yet our system is still geared around getting people to 65 with a pot of money and leaving them to it.
Research shows that even under a mature superannuation system, most people will not have saved enough to meet their aged-care costs and will have income well below what is required for a comfortable retirement. People with average full-time incomes will struggle to have a comfortable retirement unless they make voluntary contributions to superannuation.
Without reform, many older people will live precariously, especially those without their own homes or who for health and other reasons are unable to keep working until pension age.
While Australia’s superannuation system is well regarded internationally, serious weaknesses remain in translating accumulated funds into secure income streams that last a lifetime.
In its final report, the Murray inquiry concluded that a major issue is the absence of financial products to help retirees manage the risk of outliving their savings.
While the government has promised to remove overly prescriptive regulation for new income products, the system retains a bias towards maximising returns rather than providing secure income.
The government has accepted the Murray inquiry recommendation that super fund trustees be required to preselect an income product in retirement. It now faces the challenge of implementing it.
Treasury is currently looking at the post-retirement regulatory framework, including the design of new “Comprehensive Income Products for Retirement” (CIPRs) as proposed by David Murray’s Financial System Inquiry.
Treasury’s paper is expected to be launched at the CSRI’s leadership forum on October 12-13, at which Murray, Financial Services Minister, Kelly O’Dwyer, along with industry and community leaders are due to speak.
Faced with the complexities of longevity risk, market risk and inflation risk, many pensioners are living frugally for fear of outliving their savings. Others are drawing on their super at unsustainable rates.
Many women end their working lives with a fraction of the savings of men. As well, a lack of financial literacy mean millions entering retirement are ill-equipped to face the risks associated with making their money last.
Other challenges include the lack of sound financial advice, the minimum requirements for comprehensive income products, and finding the right balance between the efficiency of default models and the need for personal flexibility.
Moreover, superannuation represents only one component of the retirement income system, alongside the age pension and housing. If Australians are to have adequate income in retirement, policy needs to look beyond the superannuation system and consider how all the components of the retirement income system work together.
While the public is rightly tired of constant tinkering with super, the real need is for holistic reform that goes beyond the political cycle and that incorporates super, the age pension, housing, health and aged care.
The challenge of improving the living standards of millions of Australians facing retirement in the coming years is to be taken up by a leadership forum involving some of the nation’s top policy, industry and community leaders.
These issues will be considered at the CSRI’s Leadership Forum on 12-13 October in Canberra.
Patricia Pascuzzo is the managing director and founder of the Committee for Sustainable Retirement Incomes.