1. Managing Australia’s Ageing Population
Topic 3: What existing policy settings could be changed, or new
policies implemented, to better insulate Australia from the future
economic impacts of an ageing population?
12 AUGUST 2013
DATE
Candidate: Stephen Flegg – Australian Mutual Providence Society
2. AMP CAPITAL
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Contents
Acknowledgements 1
Abstract 2
Introduction 3
The Economic Impacts Will Be Significant 4
A Single Direction for Public Policy 5
Inadequate Superannuation Savings 6
Current Superannuation Levels Aren’t Adequate – and it’s a Problem 6
Exacerbating Labour Market Dynamics 7
Government Assistance is not Solving the Issue 7
A Double-Pronged Reform is an Attractive Policy Solution 8
Reform will Foster Further Policy Initiatives and Innovation 9
Inadequate Regulation of Superannuation Post-Retirement 10
Accessing Superannuation is Unregulated 10
Policy Remedies are Numerous, and so are the Challenges 11
Restricting Access to Superannuation Post-Retirement 11
Product Innovation in the Financial Services Industry is Needed to Support Reform 12
Inadequate Features of the Aged Pension 13
Age Pension Shortcomings 13
A New Age Pension Architecture 13
Conclusion 15
Bibliography 16
Acknowledgements
Special thanks must go to my mentor Brad Matthews, AMP Chief Economist Shane Oliver, Deloitte Superannuation
Advisory Partner Russell Mason, AMP Manager of Public Policy Norman Lee, FSC Senior Policy Manager Andrew
Bragg, AMP Multi Asset Group Director Sean Henaghan, AMP Risk Manager Kendal Bayley, AMP Technical Advice
Specialist Benjamin Martin and AMP Senior Portfolio Manager Gary Burke for their feedback, assistance and support
throughout the research and production of this report.
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Abstract
Australia’s population continues to age. This ageing is placing a growing burden on the finances of the state – with
government budgets fast approaching breaking point. An additional 4 million Australians are estimated to retiree before
2023. We are now entering the critical decade in which we need to get the public policy settings right, so that the country
can properly manage the economic challenges brought changing demographics.
In order to better manage the ageing of the population, policy makers need to address three key short-comings in the
current system:
1. Inadequate saving rates among the working population.
2. Inadequate safeguards and regulations pertaining to the spending of superannuation money post-retirement.
3. Inadequacies in the age pension which discourage employment among those aged over 65, burden individuals
with longevity risk and don’t provide sufficient financial support for the elderly.
Reform in these three areas will be paramount for the country’s future economic prosperity. This paper will outline these
problems in further depth. This essay will also discuss a number of policy proposal that address these issues and will
focus on the areas of reforming concessional contribution caps, financial assistance in the superannuation system, post-
retirement superannuation regulation and restructuring the age pension.
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Introduction
“Population ageing over the coming decades will threaten future economic
prosperity.” OECD1
The importance of the economy, government finances and the issue of Australia’s ageing population are difficult to
overstate. A strong economy brings prosperity to all aspects of society. It enriches the arts, education, healthcare, sports,
social welfare, technological innovation, domestic security, community services and working conditions. It elevates living
standards across the community. Australia’s ageing population poses a substantial threat to our economy and, indirectly,
every aspect of society which relies upon it.
Australia’s population is ageing. In 1960, only 8.5% of the population was aged over 65. In the 2011 census this figure
had already increased to 13%. Forecasts anticipate it will reach 20% by 2030.2
Falling birth rates, decreasing rates of
immigration and longer life expectancy, as shown in figure 1, are all factors driving this historic demographic shift. In the
near future, these demographic realities will begin to cause substantial challenges for the economy.
Source: ABS Source: ABS
Source: ABS Source: Department of Immigration
1
OECD (1998) “Maintaining prosperity in an ageing society.” Accessed via: http://www.oecd.org/els/public-pensions/2430300.pdf (12/7/13)
2
Australian Bureau of Statistics (2013) “1301.0 – 2012 Year Book Australia.” Accessed via:
http://www.abs.gov.au/ausstats/abs@.nsf/Lookup/by%20Subject/1301.0~2012~Main%20Features~Population%20size%20and%20growth~47 (13/7/13)
20
30
40
1970 1980 1990 2000
MedianAge
The Ageing Population
Males Females Persons
1.0
1.5
2.0
2.5
3.0
3.5
4.0
1950 1960 1970 1980 1990 2000
BirthsPerFemale
Falling Birth Rates
65.0
75.0
85.0
1971 1989 1998
LifeExpectancyatBirth
Improving Life Expectancy
Males Females
0.0%
0.5%
1.0%
1.5%
2.0%
1950 1960 1970 1980 1990 2000
NetMigrationtoPopulation
Declining Net Migration
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The Economic Impacts Will Be Significant
Labour force participation is predicted to crumble as a result of the population ageing, falling from the current rate of 65%
to 56% by 2044-45.
3
As a result, the Commonwealth Treasury anticipates that trend GDP growth per capita will slow,
falling from 1.9% p.a. to 1.5% p.a. - wiping out approximately $7 billion of annual economic growth.
4
The Productivity
Commission expects this fall to be even larger, with trend GDP growth dropping to as low as 1.25% per annum.
5
Australia’s ageing demographics are also set to create a crisis in public finances. Health and welfare spending by
governments is set to accelerate exponentially, as ageing ‘baby boomers’ leave the work force, claim pension
entitlements and demand more health services. These spending increases will be accompanied by weak tax revenue
growth on the back of a slowing economy, falling workforce participation and, arguably, weaker asset price growth.
6
Over
time, a structural fiscal gap will emerge. By 2050, core government spending will exceed revenue by 2.5-3.5% of GDP
per year – equivalent to approximately $100 billion (current dollars) annually. Without major intervention, government
finances may be in systematic disarray as early as 2025.
7
3
Committee for Economic Development of Australia (2004) “Australia’s Ageing Population: Meeting the Challenge.” Accessed via:
http://www.ceda.com.au/media/5519/ageing_policy_statement.pdf (2/7/2013)
4
Commonwealth Treasury (2010) “The 2010 Intergenerational Report” Accessed via: http://archive.treasury.gov.au/igr/ (2/7/2013)
5
Productivity Commission (2005) “Economic implications of an Ageing Australia” Research Report, Canberra, 2005, pg12.
6
Bank For International Settlements (2010) “Ageing and Asset Prices” Monetary and Economics Department Working Paper. Accessed via:
http://www.bis.org/publ/work318.pdf (2/7/2013)
7
Commonwealth Treasury (2007) “The 2007 Intergenerational Report.” Accessed via: http://archive.treasury.gov.au/igr/ (2/7/2013)
Source: Treasury, Intergeneration Report
Source: Productivity Commission
Source: Treasury, Intergenerational Report Source: Treasury, Intergenerational Report
1.90%
3.30%
1.50%
2.70%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
Real GDP Growth Per Person Real GDP Growth
Falling Economic Growth
Past 40 Years Next 40 Years
52
54
56
58
60
62
64
2010 2020 2030 2040 2050
ParticaptionRate(%)
Falling Workforce Particpation
Projected Particpation Rate
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
2010 2020 2030 2040 2050
SpendingasaPercentageofGDP
Increasing Health and Pension
Spending
Health Spending Intergeneration Report 2010
Age Pension Intergeneration Report 2010
-5.0%
-4.0%
-3.0%
-2.0%
-1.0%
0.0%
1.0%
2.0%
2010 2020 2030 2040 2050
FiscalGapAsaPercentageofGDP
Growing Fiscal Gap
Intergeneration Report 2010
Intergenerational Report 2007
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A Single Direction for Public Policy
These dire forecasts for government finances and the economy highlight the need to curb the growing numbers of
retirees who are financially dependent on government assistance. Aversion policies – such as incentives designed to
increase birth rates (i.e. Baby Bonus, Family Tax Benefits, Parental Leave Entitlements etc.) or markedly increased
immigration levels - have proved to be historically ineffective
8
or unsustainable.
9
In practice, the government has been
unable to reverse these entrenched social trends (i.e. low birth rates). Therefore, the primary direction for public policy
must be towards managing the effects and encouraging retirees to be more financially independent.
In order to ensure greater financial independence in retirement, governments need to address three endemic problems in
the current system. These are:
1. Inadequate superannuation savings: Millions of Australians have insufficient retirement savings, particularly
those who are/have been stay-at-home parents, self-employed, or unemployed for extended periods,
2. Inadequate regulation of superannuation post-retirement: Currently, no meaningful regulatory safeguards
ensure that money accumulated within superannuation’s concessional tax environment are preserved and
properly directed into the provisioning of retirement incomes.
3. Inadequate features of the aged pension: Changes to aged pension are needed so the government can
sustainably provide care for the elderly, incentivise employment after age 65 and support individuals to manage
longevity risk.
A meaningful contribution by governments in addressing these shortcomings will result in significant gains being made
towards insulating Australia against the potential negative economic impacts brought by the ageing of the population.
8
May J.F (2012) “Effectiveness of Population Policies.” World Population Policies. Springer Netherlands. ISBN: 978-94-007-2836-3.
9
Commonwealth Treasury (2004) “Australia’s Demographic Challenges.” Accessed via:
http://demographics.treasury.gov.au/content/_download/australias_demographic_challenges/html/adc-04.asp (4/7/2013)
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Inadequate Superannuation Savings
“Working age people not in employment or self-employed have the highest
risk of having low retirement savings” NATSEM10
Current Superannuation Levels Aren’t Adequate – and it’s a Problem
Deloitte Access Economics and AMP publish an industry benchmark annual report on retirement adequacy in Australia.
Since being first published in 2006, the report has consistently found that, on average, workers have a 30% shortfall in
their superannuation savings.
11
In response to this shortfall, the Commonwealth government announced in the 2013
budget, a plan to increase the rate of compulsory superannuation guarantee (SG) contributions from 9% to 12%, by
2019.
12
Justifiably, the decision was met with strong public and industry support. Worryingly, however, beneath these
headline statistics lies a more pronounced and severe adequacy crisis affecting millions of Australians which won’t be
effectively combatted by the proposed SG rate increase.
Numerous groups in society - including women, indigenous Australians, the self-employed, immigrants and low income
earners - have much worse superannuation adequacy than the rest of the population. Average balances of women are
32% lower than men. Indigenous Australians have balances 50% lower than the average. 30% of Australia’s 1.9 million
self-employed have no superannuation savings at all.
13
These groups represent some of the millions of disadvantaged*
Australians who have vastly inadequate private retirement savings.
* The term disadvantage is used with reference to the adequacy of an individual’s superannuation balance. It is not intended to refer to any other physical
or financial attribute of the person.
10
National Centre for Social and Economic Modelling (2009) “ Reform of the Australian Retirement Income System” Accessed via:
http://www.bsl.org.au/pdfs/NATSEM_BSL_Reform_of_Australian_retirement_income_system.pdf (7/7/2013)
11
AMP & Deloitte Access Economics (2013) “The AMP Retirement Adequacy Index” Accessed via:
http://media.amp.com.au/phoenix.zhtml?c=219073&p=irol-news&nyo=0 (19/06/2013)
12
Commonwealth Treasury (2013) “The 2013-14 Budget” Accessed via: http://www.budget.gov.au/2013-
14/content/overview/html/overview_key_initiatives.htm (12/07/2013)
13
The Association of Superannuation Funds of Australia (2012) “Equity and Superannuation – the real issues” Accessed via:
http://www.superannuation.asn.au/policy/reports (12/7/2013)
Source: Association of Superannuation Funds Australia Source: Association of Superannuation Funds Australia
50%
60%
70%
80%
90%
100%
WorkingPopulation
Women
RecentlyDivorced
Women
LowIncomeEarners(<
$28,000p.a.)
Self-employed
IndigeousAustralians
VeryLowIncome
Earners(<$5,400p.a.)
PercentagewithSuperannuation
Superannuation Coverage
$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
$35,000
WorkingPopulation
Women
IndigeousAustralians
LowIncomeEarners(<
$28,000p.a.)
RecentlyDivorcedWomen
VeryLowIncomeEarners
(<$5,400p.a.)
MedianSuperannuationBalance
Median Superannuation Balance
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Improving the level of private superannuation savings among the disadvantaged is of the utmost importance because, if
left unaddressed:
1. These individuals in retirement place the largest burden on government finances, as they will be highly
dependent on government assistance from a young age.
2. “Financial disadvantage is magnified after retirement”;
14
once exiting the work force, these individuals have little
personal income, fewer assets and a higher likelihood of slipping into poverty.
Exacerbating Labour Market Dynamics
The issue of disadvantage in the superannuation system is expected to grow as the labour market evolves. Not receiving
regular and sufficient SG contributions - due to protracted absences from work, being self-employed or earning a low
income - is the greatest cause of disadvantage. Work is becoming more casual, more part-time and more self-employed.
Frequency of movement between employers is also increasing– while SG contributions are less consistent. Since 1992,
when compulsory SG contributions were first introduced:
• Labour market turnover (the percentage of people who have changed employers in the last 12 months) has
increased from 14% to 21.5%.
15
• Part-time employment, as percentage of the workforce, has grown from 23% to 29%.
16
• Casual employment has risen from 11% to18%.
16
Economists at the University of Sydney have labelled these developments as the “rise of the non-standard worker’.
17
Trends of increasingly irregular work patterns and self-employment are most pronounced among already disadvantaged
groups.
Government Assistance is not Solving the Issue
Currently, the Commonwealth Government has two flagship initiatives designed to target disadvantage in the
superannuation system:
1. The Low Income Super Contribution: A bonus government contribution of $500 p.a. is made to workers earning
less than $37,000 annually.18
2. Superannuation Co-contributions: Personal contributions of low income earners are matched one-for-two by a
government contribution, up to an annual limit of $500.
19
Though a step in the right direction, these assistance policies are too small to deal with the severe and wide spread
disadvantage experienced across the system.
14
The Australia Institute (2013) “What’s Choice Got To Do With It – Women’s Lifetime Financial Disadvantage and the Superannuation Gender Pay Gap”
Accessed via: https://www.tai.org.au/index.php?q=node%2F19&pubid=1199&act=display (14/07/2013)
15
Australia Bureau of Statistics (2013) “Australian Labour Market Statistics – July 2013.” Accessed via: http://www.abs.gov.au/ausstats/abs@.nsf/mf/6105.0
(14/07/2013)
16
. Australia Bureau of Statistics (2012) “Measures of Australia’s Progress – 2012.” Accessed via:
http://www.abs.gov.au/ausstats/abs@.nsf/mf/1370.0.55.001 (14/07/2013)
17
Van Wanrooy Et al (2012) “Australia at Work: In a Changing World.” Workplace Research Centre. – University of Sydney. Accessed via;
www.australiaatwork.com.au (12/07/2013)
18
Australian Taxation Office Website (2013) Accessed via: http://www.ato.gov.au/Individuals/Super/In-detail/Contributions/Low-income-super-contribution/
(14/07/2013)
19
Australian Tax Office Website (2013). Accessed via: http://www.ato.gov.au/Individuals/Super/In-detail/Contributions/Super-co-contribution/?page=12
(14/07/2013).
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A Double-Pronged Reform is an Attractive Policy Solution
One way to address these issues is to reform contribution arrangements, with dual focus on changing the way
concessional contribution caps are set and how assessments for government assistance are calculated.
Reforming Financial Assistance
Government assistance should be directed to those with the greatest need (in a superannuation context, those in the
greatest need have the most inadequate amount of savings). Financial assistance contributions given by government
should be assessed on the basis of superannuation adequacy, and be paid to eligible recipients upon reaching the
preservation age. Assistance payments should be made directly into *restricted access products which deliver a
retirement income stream without allowing lump sum withdrawals. Dollar-for-dollar matching from private superannuation
money also should be a prerequisite for the payment. New assistance payments should replace the Low Income Super
Contribution Scheme as well as the Superannuation Co-contribution scheme. Dependent upon the fiscal circumstances
facing governments, these payments should be generous and in the order of $40,000 - $60,000.
The advantages of this proposal, over current financial assistance schemes are:
• It recognises that low income is not the only cause of disadvantage in the superannuation system – and
provides assistance directly to those who will likely be the largest burden on the government during retirement.
• It directly helps to lower the government’s age pension liability as none of the assistance can be received as a
lump sum by recipients.
• It incentivises those with low superannuation balances to allocate their superannuation into products offering an
income stream – rather than taking their accumulated superannuation as a lump sum.
• The payment size is sizeable enough that it makes a meaningful contribution towards reducing an individual’s
disadvantage.
Reforming Concessional Contribution Caps
Concessional contribution caps need to be more flexible and encourage large one-off contributions from individuals with
inadequate superannuation balances. Rigid annual caps on concessional voluntary contributions are a barrier, stopping
many from making tax effective voluntary contributions. Most people don’t have personal finances that allow sizeable
regular annual voluntary contributions, though often many can make meaningful one-off contributions due to financial
windfalls (such as inheritance, workers compensation payouts, home/ business sales, remuneration bonuses, etc.).
Currently, a uniform non-indexed annual concessional limit of $25,000 - which unlike the non-concessional limit does not
allow the quota from future years to be brought forward - discourages large voluntary contributions. Caps on
concessional contributions are needed, as the government forgoes revenue on concessional contributions. But they
shouldn’t be prohibitive, preventing those who are behind from being able to ‘catch up’.
A new scheme should be adopted, whereby concessional caps are set for multi-year periods. A number of industry
bodies, including the Financial Services Council,
20
already support the implementation of concessional contribution caps
being applied over a three-year period. However, these recommendations do not go far enough. If a policy of multi-year
contribution caps is implemented, it should be based on a longer 5 year period. A 5 year as opposed to a 3 year period
has the benefits of:
• Placing the same administration costs onto the system.
• Providing individuals re-entering the work force, after an absence, with a longer period to make ‘catch up’
contributions.
21
• Improving the flexibility of the system accommodates for individuals who have highly volatile
income/contributions.
20
Financial Services Council (2013) “Financial Services Council Policy Agenda.” Accessed via: http://www.fsc.org.au/policy/superannuation.aspx
(14/06/2013)
21
Associations of Superannuation Funds of Australia (2013) “Submission on Exposure Draft and Superannuation Laws Amendment.” Accessed via:
http://www.treasury.gov.au/~/media/Treasury/Consultations%20and%20Reviews/2013/Superannuation%20concessional%20contributions%20caps/Submis
sions/PDF/ASFA.ashx (1/08/2013)
*Restricted access products refer to any financial product which does not allow investors to make lump sum withdrawals.
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Provisions also need to be built into non-concessional contribution caps which allow individuals with drastically
inadequate superannuation to catch up. The easiest way to administer such a policy would be to allow any unused
portions of the non-concessional limit accumulate over time. Industry bodies, including the AFSA, support a similar life-
time cap scheme.
22
The success of such policies will hinge on the efficiency of their implementation, with the
administrative fiasco of the reasonable benefits limit (RBL) regime serving as a cautionary tale.
Reform will Foster Further Policy Initiatives and Innovation
As superannuation adequacy improves, a host of exciting policy initiatives become more viable. One potential initiative
which could greatly benefit the system is introducing a facility whereby individuals could pay their private health
insurance and other health expenses directly from superannuation money. With immense success, Singapore – which
has a rate of compulsory contributions of 20% - has already implemented a similar scheme, through its Central
Providence Fund.
23
Such a private-health initiative would greatly increase the private funding of health expenses.
Increased health spending makes up two thirds
24
of the additional fiscal burden being placed on governments, due to the
ageing population.
22
ASFA Website. “Policy & Research.” Accessed via: http://www.superannuation.asn.au/policy/super-reforms (13/07/2013)
23
Central Providence Fund Board Website. “Providing for Your Healthcare Needs.” Accessed via: http://mycpf.cpf.gov.sg/CPF/my-
cpf/Healthcare/PvdHC2.htm (13/07/2013)
24
Commonwealth of Australia (2010) “Super System Review – Final Report (The Cooper Review).” Accessed via:
http://www.supersystemreview.gov.au/content/content.aspx?doc=html/final_report.htm(13/07/2013)
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Inadequate Regulation of Superannuation Post-
Retirement
“There’s got to be a consequence for taking a lump sum, and there’s got to be
a clear benefit to taking an income stream” Pauline Vamos, Chief Executive
of AFSA25.
Accessing Superannuation is Unregulated
In the coming decade, approximately four million Australians will leave the workforce and enter retirement. Most of these
people will begin retirement with some amount of accumulated superannuation. Since 2001, approximately 65% of all
superannuation money being withdrawn was paid out as a lump sum.26
Close to 47% of people nominate to take their
entire balance as a lump sum payment. If this high demand for lump-sum withdrawals continues, it is unlikely that the
nation’s pool of private superannuation savings will produce enough retirement income streams to take sufficient
pressure off governments - or avoid the predicted crisis in government finances27
.
25
Fernyhough J. (2013) “Breaking Australia’s Love Affair With The Lump Sum.” Financial Standard. Published 29th
July 2013. Accessed via:
http://www.financialstandard.com.au/news/view/33506144/ (30/07/2013)
26
KPMG (2012) “Evolving Superannuation Industry Trends.” Accessed via:
http://www.kpmg.com/AU/en/IssuesAndInsights/ArticlesPublications/Documents/evolving-superannuation-industry-trends.pdf (17/07/2013)
27
Commonwealth Government (2011) “A Tax Plan for Our Tomorrow.” Accessed via:
http://www.futuretax.gov.au/content/taxforum/statements/super/Mercer_Australia.pdf (13/07/2013)
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
Withdrawals(MillionsofDollars)
Lump Sum vs Pension Withdrawals
Lump Sum Allocated Pension
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Currently, superannuants are given few incentives to keep their savings in the superannuation system, drawing down
their funds over time, in the form an allocated pension or annuity income stream. Upon reaching the preservation age,
and satisfying some basic work conditions, retirees can access the full amount of their superannuation as a lump sum
without any regulatory impediment or tax. Once this money leaves the confines of the superannuation structure, it
becomes:
• Difficult for governments to identify and regulate, in order to compel individuals to spend the money prudently,
on providing an income stream for retirement.
• Easy for retirees to spend or invest in non-assessable assets (such as caravans or home refurbishment) so as
to become eligible for the age pension at an early age.
Policy Remedies are Numerous, and so are the Challenges
This issue of unsustainable lump-sum withdrawal rates is well known by policy makers and throughout the financial
services industry. Subsequently, many potential policy solutions to the problem have been mooted by public figures, the
superannuation industry, academics and politicians, including lump-sum withdrawal limits and tax disincentives.
Powerful political forces make it immensely difficult to change lump-sum regulation. Many workers approaching
retirement ferociously defend the status quo because they want - and believe they are entitled – to have discretion over
their own superannuation balances. Some industry players are worried changes could cause voluntary contributions to
dry up. Others believe further rule changes would hurt the system’s integrity, discouraging contributions.
Restricting Access to Superannuation Post-Retirement
The government must regulate the access retirees have to superannuation post-retirement. Introducing a hard cap on
the size of lump sum would be effective, but is particularly politically unpalatable and unduly denies retirees access to
money which they rightfully own. Hence, the preferable policy response to this problem will involve discouraging lump
sum withdrawals through taxation.
A 15% tax should be levied on withdrawals which are above either 75% of an individual’s total superannuation balance,
or $600,000. If an individual’s balance is less than $50,000, it should be possible to be fully withdrawn, free of tax. This
change should come into effect 12 months after the passage of the relevant legislation through Commonwealth
parliament. These 75% and $600,000 limits should be reduced by 5% and $50,000 per year respectively, until reaching a
stable long-term level of approximately 30% and $150,000 – a decade after the policy’s initial announcement.
Simultaneously the tax rate of lump-sum withdrawals should incrementally rise from 15% to 30% over the period, so as
to introduce a more substantial disincentive for taking a lump-sum drawdown.
Tax reform should be accompanied by similar sized incentives for investing in restricted-access income stream products.
Revenue raised by the government from the tax on lump-sum withdrawals should be directed into providing substantial
financial assistance – to enable those most disadvantaged in the superannuation system to take out an income stream.
Proceeds from the taxation of lump-sum withdrawals should be used to provide those receiving an income stream more
relief from restrictive age pension income deeming provisions, so as to encourage more retirees to remain employed.
The success of these reforms will hinge on their gradual implementation. A staggered implementation will help soften the
political resistance and will give industry time to prepare for the new regulatory environment.
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Product Innovation in the Financial Services Industry is Needed to Support Reform
Historically Australian investors have, of any country, received some of the highest investment returns on their
superannuation, as shown below.
28
Currently, the Australia financial services sector only provides 2 restricted-access
income stream products which are available to new customers – annuities offered by Challenger and Comminsure. Both
of these products are low yielding, delivering similar returns to that of a sovereign bond. To compliment regulatory
reform, the financial services industry needs offer a more diverse array of restricted-access products, to better
accommodate the needs of investors.
Three products which the Industry should seek to further develop, to accompany regulatory reform are:
1. Restricted-Access Allocated Pensions: Investors would have total discretion over the investments. However, the
provider would restrict lump sum access to the pool of assets. The provider would also deliver income payment
facilities and administration services – similar to a traditional allocated pension.
2. Mutli-Asset Backed Annuities: Traditional annuities are usually backed by highly rated fixed income products,
which results in investors receiving a low return on their investment. The industry, working in conjunction with
regulators, should develop annuity-like products which are backed by higher yielding assets such as
infrastructure and long term leased property.
3. Multi-Asset Objective Orientated Funds:
29
The investment objectives of typical retirees differ greatly from those
in the accumulation phase. Hence, the industry needs to offer a wider array of products which are explicitly
managed to meet retirement outcomes (i.e. stable income, low volatility, low drawdown).
28
OECD (2012) “Global Pension Statistics” Accessed via: http://www.oecd.org/finance/financial-markets/globalpensionstatistics.htm(1/08/2013)
29
Cousins S (2013) “Post-retirement assets need to be managed differently.” Accessed Via: http://www.morningstar.com.au/funds/article/managed-
differently/5701 (1/08/2013)
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
7%
Rate of Return for Pension Funds
in OECD Countries 2002-11
14. AMP CAPITAL
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Inadequate Features of the Aged Pension
“The age pension is now the largest item of expenditure in the Federal
Budget each year”30
Age Pension Shortcomings
The 1908 passing of the Invalid & Old-age Pensions Appropriation Act through Australia’s Commonwealth parliament,
31
brought about the age pension regime which has continued intact to the present day. The age pension and caring for the
elderly are, rightly, a source of national pride. Since 1908, times have changed, with the population’s life expectancy
rising from 56 years to more than 80 years today. However, during that time the eligibility age for the pension has
remained constant at 65. Unsurprisingly, the government has struggled to keep payment rates in line with the increasing
cost of living.
32
In 2013, a couple with full pension entitlements receives a miserly $28,756 a year – with singles receiving
$19,058 p.a. This unacceptably pushes 38% of Australia’s age pensioners below the poverty line.
33
Australia’s age
pension is already in crisis and the situation will worsen as the problem of the ageing population grows more acute.
A New Age Pension Architecture
If Australia is to continue its strong tradition of generously providing for the elderly, the age pension needs to be
drastically reformed.
Comprehensive Financial Support for the Elderly.
The first step is to substantially increase the support payments made to the nation’s elderly (>80 years old). This initiative
would be costly, and would need to be funded by making other spending cuts. Public commentators often suggest that
such funding cuts could be achieved by lifting the retirement age up from age 65. The problem with this policy is many
workers aren’t capable of continuing work past age 65 – particularly those employed in manual occupations (i.e.
tradesmen).
A more preferable way to sustainably fund more comprehensive financial support for the elderly is through the adoption
of a tiered pension scheme. This scheme would allow those over 80 to qualify for generous full pension payments, with
some loose eligibility requirements. Those aged between 65 and 80 would qualify for a part pension. This scheme would
result in shifting the primary financial responsibility for the years between 65 and 80 off the government and onto
individuals. During the years between 65 and 80, individuals should have full access to their accumulated
superannuation.
This scheme would also rely on the lifting of punitive income tests for the part-pension between 65 and 80. Currently, if
an individual earns more than $78 a week they lose 50 cents from their pension for every extra dollar they earn. Also,
they potentially lose their concession card. This effective rate of tax is greater than the 45% top marginal tax rate for
regular income earners – and discourages work for those aged over 65.
30
Rice Warner Actuaries (2012) “Reforming the Age Pension” Accessed via:
http://www.ricewarner.com/images/newsroom/1346029730_Reforming%20the%20Age%20Pension.pdf (1/08/2013)
31
Australian Government CommLaw Website. Accessed via: http://www.comlaw.gov.au/Details/C1908A00018 (1/08/2013)
32
Department of Families, Housing, Community Services and Indigenous Affairs (2010) “Pension Review Background Paper.” Accessed via:
http://www.fahcsia.gov.au/our-responsibilities/seniors/publications-articles/pension-review-background-paper?HTML (1/08/2013)
33
Australia Council of Social Service (2012) “Poverty in Australia – Paer 194” Accessed via:
http://www.acoss.org.au/uploads/ACOSS%20Poverty%20Report%202012_Final.pdf (1/08/2013)
15. AMP CAPITAL
// 14
The advantages of this scheme are:
• It lifts longevity risk off the individual and fosters better retirement planning. Under this scheme the primary
concern of individuals will be making their superannuation assets last until age 80, when they receive their full
pension eligibility.
• It places the primary financial responsibility for years between age 65 and 80 onto the individual and gives them
greater flexibility in how they support themselves (either through continued employment, superannuation
income stream, other asset sales etc.).
• It allows those unable to continue employment post age 65 - due to the nature of their occupation - to retire,
contingent on their accumulated superannuation.
• It strongly incentivises individuals to spend their accumulated superannuation prudently, in retirement.
• It ensures that the nation’s elderly are properly cared for.
16. AMP CAPITAL
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Conclusion
“Super’s Flaws Need an Urgent Fix”
Journalist, TONY NEGLINE34
Australia needs to reform some aspects of its superannuation system in order to better manage the economic impacts
brought on by an ageing population. New policies are needed which encourage more saving prior to retirement,
particularly among those who are most disadvantaged. Reform of how superannuation is released post-retirement is also
required. Superannuation enjoys beneficial tax treatment, as it has been designated for providing an income stream in
retirement; regulations now need to change, to ensure that superannuation savings are prudently spent in line with their
designated purpose. Changes to the age pension are also needed to better incentivise work among able retirees, lift
longevity risk off individuals and properly care for society’s elderly as their health deteriorates.
The time to act on all of these reforms is now. Over the coming decade the number of Australians aged over 65 will grow
by a net 1.4 million people.
35
As shown below, post-retirement superannuation savings are expected to grow
exponentially by approximately 650 billion dollars, to comprise 43%
36
of all superannuation assets in the system. The
benefits from superannuation reform will be lagged. The next 10 years will be the critical decade, which dictates how well
Australia manages the ageing of the population.
34
Negline T (2013) “Compulsory’s Super’s flaws need urgent fix”. The Australian. Published June 18th
2013.
35
Australian Bureau of Statistics (2008) “3222.0 – Population Projections.” Accessed via: http://www.abs.gov.au/ausstats/abs@.nsf/mf/3222.047 (13/7/13)
36
Rice Warner Actuaries (2011) “Rice Warner Retirement Projections.” Accessed via:
http://www.ricewarner.com/index.php?option=newsroom&action=subpage&cid=2 (17/07/2013)
Source: ABS Source: Rice Warner & Deloitte
0
2
4
6
8
10
12
14
16
18
2006
2013
2020
2027
2034
2041
2048
2055
2062
2069
2076
2083
2090
2097
Millions
Australians Aged Over 65
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
0
100
200
300
400
500
600
700
800
900
1000
2011 2015 2020 2025 %ofTotalSuperannuationAssets
Assets(MillionsofDollars)
Growth in Post-retirement
Superannuation Assets
Total Post-retirement Superannuation Assets
Post-retirement Superannuation Assets as a %
of Total Superannuation Assets
17. AMP CAPITAL
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