Politicians know people don’t like constant changes in superannuation and so they usually promise no change – until they get into power. Then they find the bureaucracy and industry want just a few improvements to the system. This means tension between pleasing a public unhappy with change and keeping up-to-date a system still far from perfect.
Pain versus politics
So recent calls by the Productivity Commission and the Grattan Institute think tank to increase the retirement age to 70 have caused cries of pain and inevitable government denials of any plans. The media, of course, headlined that people will have to work until they are 70 – ignoring the fact that most people already are retiring well before the current retirement age of 65 (now rising in small steps to 67 in the next decade).
For the Grattan Institute, it was ground hog day: it also made the suggestion in June 2012, only to have the Gillard government rule it out, echoed by then opposition leader Tony Abbott. Joe Hockey, whose office last month denied any current plans, actually said in 2012 the idea should at least be on the table.
The Financial Services Council (representing the retail superannuation sector) thought that the Commission for Audit was the right vehicle to consider changes and urged a new Intergenerational Report. The national super body, the Association of Superannuation Funds, focussed as much on the social implications of such a move (including policies to help older workers and boost contributions into super).
The retirement age needs to rise
Just calling for a debate, however, will make inevitable adjustments harder and won’t solve the problem of retirees with not enough savings. The continued rise in life expectancy means the retirement age needs to rise. It would be a smart move by the government to introduce indexation of the retirement age, linked to life expectancy rises, which would remove the need periodically to lift the age limit.
Actuaries and demographers have been forecasting problems for years with the bulge of retiring baby boomers not having enough time in compulsory super to save enough. However, it won’t improve: the Actuaries Institute recently warned that official Australian Bureau of Statistics “life expectancy at birth” figures – now 79.9 and 84.3 years respectively for men and women – understate things. Using figures for people who have reached 65, improvements in longevity will increase those numbers to 86 for men and 89 for women.
So, on average, people may need to fund between 21 and 24 years in retirement. Actuaries Institute president John Newman says those are only averages, and one in three 65 year olds will live past 90 and one in five will live past 95. And, he adds, with rapid advances in medicine, “it is conceivable . . . that half of all healthy 65 year olds will live past 100.”
Switzer Super Report subscribers probably are among the lucky ones who have their retirement savings well secured, but the demographics represent a ticking time bomb for a continued, nasty political debate about the “haves” and “have nots” in retirement.
We’ve already seen the new government remove assistance for low-income earners’ contributions and indicate changes to Future of Financial Advice legislation to help financial services providers, rather than fund members. It also will ignore the ill-conceived Labor plan to penalise high incomes from self-managed funds.
But both political parties have contributed to the problems – Labor initially by taxing contributions and earnings rather than taxing benefits and the Coalition later by making pension fund payments tax-free. As long as these basic settings remain, we will face regular swings in policy as successive governments attempt the complex task of encouraging enough contributions to lower the drain on the age pension while managing the impact on the budget by tax concessions.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
Also in this Switzer Super Report
- Peter Switzer: “Shut up! What are you whinging about?” [1]
- Paul Rickard: BHP beats RIO by a whisker [2]
- James Dunn: The benefits of unlisted property for your SMSF [3]
- Penny Pryor: Why we don’t buy airlines [4]
- Rudi Filapek-Vandyck: Buy, Sell, Hold – what the brokers say [5]
- Penny Pryor: Hot spring, leads to cooler Christmas [6]