The objective of the Age Pension needs to be determined before the retirement income system objective is determined, according to the Institute of Actuaries of Australia.
A key issue, it said in its submission to the Retirement Income Review, was to determine whether the Age Pension was a safety net or a guaranteed pillar that all retirees could depend on and build their retirement income plans around.
“On the one hand, there is a belief that the Age Pension is an entitlement, but on the other, there is a belief among younger generations that the Age Pension may not be there when they retire,” the submission said.
“Ideally, every Australian should have a confident answer to the question ‘what total income can I rely on receiving in retirement’.”
The submission noted that accumulation-based superannuation put inflation, investment, longevity, expense and other risks into the individual’s hands. In some cases, it said, there was a real risk that the Age Pension plus an individual’s super savings might not be sufficient to provide an adequate retirement income.
“Going forward, universal coverage for all workers should be a goal of the superannuation guarantee [SG] system whether people are employees, self-employed, or participate as part of the growing gig economy,” it said.
“Without this coverage, the only fall-back people will have where they have no made private provision, will be the Age Pension. This cost will be borne by all taxpayers, including those that saved through the SG and other voluntary savings.”
The submission also pointed to the benefits of pooling to spread longevity risk, reduce the risk burden on individuals and fall-back mechanisms (Age Pension). However, pooling could result in a faster drawdown of retirement incomes, increasing Government pension payments.
“Consequently, pooling will have an impact on the sustainability of the system,” it said.
The institute’s modelling found that retirement incomes had the potential to increase by 15-30% by combining an account-based pension with products that ensured (i.e. pool) longevity risk.
“…pooling may come at some additional cost in terms of reduced flexibility, reduced withdrawal benefits and/or death benefits, additional costs to administer the pool and potentially distribution costs for the product,” it said.
“This uplift income comes form paying lower death benefits in retirement (other than to the member’s spouse) and a partial reduction in flexibility i.e. it ensures superannuation is better channelled towards retirement income.”