Some policy suggestions to improve the affordability of retirement

The traditional focus of governments is on those who have become ill but preventative medicine would take some pressure off the doctors and hospitals who treat the sick, and mean the sustainability of the system as a whole would be enhanced. Most importantly, it would bring benefits in terms of improved quality of life for individuals, with consequent benefits for workforce participation and productivity.

Labour force participation largely results from choices by individuals and families. These choices, however, are influenced by tax arrangements, provision of income support and retirement-incomes policies.

Our income-support system provides people with assistance during times when they are finding it hard to support themselves. The current system was set up at a time when full-time work was the norm for men but many groups, such as women and people with disabilities, were not expected to have a job. Today, opportunities and expectations are different.

Around 2.7 million working-age Australians are on income support - over one in five adults of working age. Forty years ago just under one per cent of the population was on an Invalid Pension. In 2002 we had over three per cent of the population on the Disability Support Pension (DSP). Many remain on income support for long periods of time, and we have one of the lowest rates of employment for disability pensioners and lone parents in the developed world. We now have more than 225,000, about one in every eight, men aged between 50 and 64 receiving DSP.

Forty years ago, the workforce was dominated by men who started work when they turned 15 or 16 and worked till they retired at 65 onto the Age Pension. Many spent 50 years in the workforce. Some full-time workers now spend as little as 30 years in the workforce, yet life expectancy is increasing rapidly. In 1964, the average 65-year-old man could expect to live for a further 12 years. For women, the corresponding figure was 16 years. By 2004, life expectancy for a 65 year old man had increased by 50 per cent, to 18 years. Women today can expect to live for a further 21 years after reaching age 65.

Preservation rules that allow access to superannuation as a lump sum before Age Pension age can encourage people to prematurely retire. They can send the signal that this is the de-facto retirement age. We need to guard against this. In 1997 the government decided to increase the preservation age to 60 years by 2024. However, even these changes still allow many of the babyboomer generation to access superannuation lump sums before Age Pension age.

Looking forward, the retirement-income system also needs to consider changing preferences for work by older Australians. The government has already made it easier for people over age pension age to continue to work if they wish to. The Senior Australians Tax Offset and the reduction in the age pension income test taper rate from 50 per cent to 40 per cent mean that people who continue to work will pay less tax while retaining more of their age pension.

However, the superannuation system is still largely built on historical principles that a person must be in the workforce to make superannuation contributions and retire from the workforce to receive their benefits. The concept of a set retirement age must change in line with the demographic changes occurring in Australia.

The opportunities for older Australians to remain in the workforce are likely to grow as the population ages. Older workers are also expected to want to retain a connection with the workforce but gradually wind down their hours of work. The superannuation system needs to cater for these changing workplace arrangements. To this end, the government will amend the superannuation laws to allow people to access their superannuation from preservation age as an income stream. This will allow people to take advantage of opportunities to work part time and supplement their income with their superannuation.

To broaden the choices for financing retirement, the government will extend complying status (thus allowing generous tax and social security concessions) to new market-linked income stream products which require an orderly draw down of capital over a person’s life expectancy. These products will be non-commutable and will restrict payments to a set proportion of the account balance.

At the same time, a 50 per cent social security assets test exemption for particular income stream products will apply so that it is more consistent with the intended role of the age pension as a safety net for people who have not been able to fully save for their retirement. The higher pension reasonable benefit limit and a 50 per cent assets test exemption will apply to these products purchased on or after 20 September 2004. This will allow industry time to develop and have these products on the market.

The combination of age pension, superannuation and associated tax concessions provides a firm base for most people’s retirement incomes. This year, taxpayers will provide almost $19 billion to fund age pensions and a further $11 billion for superannuation tax concessions. These arrangements provide Australians with higher levels of retirement incomes than ever before.