Which way forward for pension reform?

Recently Mark Davis reported in The Age (August 13, 2009) on plans canvassed by the Henry tax review to reform superannuation and aged pensions.

According to Davis, the plan suggests that: “… lower income earners retiring with low superannuation lump sums would be given the opportunity of handing the money to the government in return for guaranteed income payments indexed to the age pension.”

To clarify: “For a retiree with $100,000, the top-ups could be worth 20 per cent of the age pension and would come in addition to the means-tested entitlement to the pension.”

Finally, according to Fiona Reynolds, the chief executive officer of The Australian Institute of Superannuation Trustees: “There are not a lot of lifetime annuity products, and the ones around are pretty highly priced, especially for retirees with small amounts of savings. If someone with a lump sum of $60,000 could buy a top-up to the age pension from the government, it might provide an extra $2000 a year.”

The demand for such lifetime annuity “products” reflects what some call “longevity risk” - the prospect that retirees will live longer, and that their superannuation and savings will not last them.

Importantly though, for those profiting from private provision of “lifetime annuity” products, and even private superannuation funds, there is a motive to undermine a universal aged pension system.

While it is desirable to improve retirement incomes and national savings, there are dangers in the possible marginalisation of the aged pension and those dependant on it.

A single public “life-time annuity” product might play a potentially legitimate role in supplementing pensions for some. But aged pensioners must have the flexibility to reclaim this from the government when there is a real and immediate need. Meanwhile there are many for whom even a modest $60,000-$100,000 in lifetime savings is “out of reach”. What will become of these people with the stratification of retirement schemes and incomes?

Private self-funded retirement products, specifically superannuation, are also exposed to risk - as evident in the current financial crisis.

Retirees ought to enjoy financial security regardless of financial market trends. The element of “risk” could - and should - be “hedged” against collectively by citizens and tax payers through a public pension fund (with returns supplemented by tax as a last resort - and hence secure).

Earlier this year, in the Left Focus blog, I considered the need for sweeping reform of public pensions.

While the 2009 Australian Budget provided for a degree of distributive justice, further change is desirable. Pension reform is necessary as a matter of social justice - in addition to any public “lifetime annuity” scheme.