Australia’s pension system gets a B+, here’s how to get an A

Australia’s pension system ranks very well compared to other pension systems around the world, but some improvements are needed to better distribute its benefits and give it an “A” grade alongside the best, experts say.

Australia’s pension system is ranked 6th out of 44 systems studied in the Mercer CFA Institute Global Pension Index, which ranks retirement income systems around the world. The Australian system has a B+ rating, said David Knox, the index’s lead author and senior partner and chief actuary at Mercer Australia.

Only Iceland, Netherlands and Denmark earned an A grade, Knox said, pointing to three areas for improvement, in particular, that would help Australia’s system move into A-grade territory.

First, there needs to be a greater focus on retirement income beyond just accumulation, Knox said, speaking on Conexus Financial The Future of Super Podcast, hosted by Editor-in-Chief Julia Newbould, in a discussion of super equity, specifically age equity, gender equity, income equity and intergenerational equity.

Second, the system needs wider coverage, especially for the self-employed and third, the Super Guarantee (SG) needs to be higher than its current level of 10.5%, with the best systems at 12% or even more.

There is a significant gender gap in supers, Knox said, caused by a range of factors that boil down to different employment patterns between men and women. On the positive side, the means-tested old-age pension reduces this gap because more women than men receive the old-age pension, and this gap is smaller in a household situation where a couple works together.

But there’s clearly a gap and there are things that can be done to close it, Knox said, including paid SG on parental leave, but additionally carer credit for people caring for babies. and young children – who could take six or 12 months out of the workforce without any pension contributions.

“By having the kid, they’re doing something very beneficial to the community in the long run,” Knox said. “Therefore, their retirement years should not be sacrificed with this lower retirement pension. So what we’re arguing here is that there should be a super baby bonus, if you will, given to the primary caregiver, and we’re suggesting something in the range of four and a half to five thousand dollars .

This figure is essentially the SG rate multiplied by the minimum wage for one year and would be paid to all those who are primary carers as a credit towards their future pension benefits, he said.

There also remains a gap in the system for middle-income people, Knox said. With the means-tested retirement pension aimed at low- to middle-income earners and retirement tax breaks going mainly to high-income earners, middle-income earners receive less government support because of the way the test assets works and his exclusion from the family home.

Government support could be better balanced by changing the reduction rate of the asset test, Knox said, and he also questioned whether the family home should be excluded from the asset test, while admitting it was a politically charged topic.

Deborah Ralston, a veteran business executive and professor at Monash University, and also a member of the Reserve Bank of Australia’s Payments System Council and the Future Fund Guardian Council, also spoke on the podcast.

Ralston said the purpose of the super is to ensure people enjoy a standard of living in retirement comparable to what they enjoyed during their working lives. But equity is a particular point of attention due to lower average scores for women, single people, renters, involuntary retirees, Aboriginal and Torres Strait Islander people, people with disabilities and potentially younger generations. .

Super is becoming more gender-equitable, Ralston said, with a greater focus on childcare, helping women play a bigger role in the workforce. There have also been a series of other positive developments, she said.

“One was about disclosure of super balances in divorce proceedings,” Knox said. “Quite often there is an inequitable distribution of assets because not everything is obvious, and that has been resolved.”

The $450-a-month threshold for SG payments was also a big problem for women who were often low-income casual workers, and that has been resolved, she said. And the recent announcement that paid parental leave would be extended from 18 to 26 weeks will also help, she said.

However, areas for improvement remain, particularly the significant incidence of retirement poverty for those without homes, Ralston said, calling for much higher levels of funding for public housing.

“Because the cost of housing has gone up so much, Commonwealth rental assistance really isn’t helping at all,” Ralston said. “And even if you were to double that amount, it still doesn’t quite match market rates.”

Greater help is also needed for people who are forced into early retirement, as this cohort is also among the most likely to face poverty in retirement, Ralston said.

“We used to help people who were taking early retirement due to health issues by giving them the disability pension which is considerably better than Newstart,” Ralston said. “But right now there don’t seem to be a lot of options to help in that way.”

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