Danish example could make retirement in Australia fairer

Although the level of the full age pension in Australia is reasonable compared to those in other developed economies, the retirement system’s outcomes for the average income worker should be improved, according to Mercer’s David Knox.

Presenting at the Actuaries Institute Financial Services Forum this week, Knox said that bettering such outcomes would both improve the adequacy and fairness of the system.

He said the core question in doing so was “how this can be done in a simple and sustainable manner”, advocating the Danish approach as a solution.

In Denmark, part of the public age pension is paid to everyone as taxable income, with the balance then being paid on an income-tested basis.

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Knox said that this could be done by dividing the current age pension into two components:

• A universal pension equal to 10 per cent of the average wage; and
• An income-tested pension equal to the balance, namely 17.6 per cent of the average wage.

Benefits of such a system would include:

• The universal pension would include a health card, thereby encouraging retirees to maximise their assets and income as they would not need to receive a pension to get a health card as they did at present;
• The universal pension would improve retirement income for average earners but have a reduced effect at higher incomes;
• A single income test could be applied, including deemed income on all assets, meaning a dual means test wouldn’t be needed; and
• Full pensioners wouldn’t be affected.

While Knox acknowledged that there would be an increased cost for the Government, as there would be more part pensioners, he said that it would be counterbalanced.

“This expense would be offset, at least to some extent, by additional income tax from those with higher taxable incomes and possibly, a reduced demand on Government services due to the extra income and the changed behaviour as additional saving would be clearly rewarded,” he said.