Superannuation and retirement incomes

Phillip Hawkins and Robert Anderson, Economic Policy
Geoff Gilfillan, Statistics and Mapping

Key issue
A review of retirement income policy has been announced by the Government. This article provides background to Australia’s retirement system and examines some of the issues that the review might examine.

Australia operates a ‘three-pillar’ retirement income system to provide income support to older Australians. This consists of:

  • a means-tested Age Pension
  • compulsory superannuation savings, and
  • voluntary private savings both inside and outside the superannuation system. 

The superannuation system requires and assists individuals to save for their own retirement, while the Age Pension provides a safety-net income for those who require it. Tax concessions are given in recognition of income forgone for compulsory superannuation, and to incentivise additional savings in superannuation. The Commonwealth revenue lost to these concessions is expected to be offset in the long term by lower and more sustainable age pension expenditure. The means testing of the Age Pension, which is based on both income and assets tests, limits the cost to the Commonwealth while ensuring that the pension is targeted to those who need it.

Many individuals will rely on a combination of all three pillars (including the potential to receive a partial Age Pension) at some point during their retirement.

The superannuation system

Until the early 1990s the Age Pension and private savings were the primary source of retirement income for most Australians, with superannuation covering a minority of mostly white-collar professionals and public service employees. 

According to the Treasury, compulsory superannuation started to emerge in the mid-1980s when it began to be incorporated into awards as part of the 1985 Prices and Incomes Accord. This was expanded with the introduction of the Superannuation Guarantee (SG) in 1992, which required employers to pay a minimum contribution to their employee’s superannuation fund.

According to the Productivity Commission in its 2018 report Superannuation: Assessing Efficiency and Competitiveness:

At the time the SG was introduced, the broad objectives were to provide an adequate level of retirement income, relieve pressure on the Age Pension, and increase national savings.

Between 1992 and 2002, the SG requirement was increased from 3–4 per cent of ordinary time earnings (OTE) to 9 per cent of OTE.  The SG amount is currently set at a minimum of 9.5 per cent of OTE (from 1 July 2013). It is scheduled to increase by 0.5 percentage points each year from 1 July 2021, up to 12 per cent from 1 July 2025 onwards.

The total amount of superannuation assets in Australia has grown significantly since the early 2000s. The latest Australian Prudential Regulation Authority (ARPA) annual fund-level superannuation statistics shows that, at June 2018, there were around $2.7 trillion in superannuation industry assets. Proportionate to Australia’s GDP, industry assets have grown from 67 per cent at June 2004 (the first year of APRA data) to 145 per cent at June 2018.

Private sector forecasts aggregated by the Australian Superannuation Fund Association (ASFA) suggest that superannuation assets could grow to over $9 trillion by 2040. By the 2040s, the vast majority of individuals retiring will have been subject to compulsory superannuation their entire working lives.

The cost of the retirement income system

Supporting individuals’ retirement, both through the Age Pension and through the superannuation system, comes at a significant cost to the Commonwealth Budget.

According to a recent report by the Parliamentary Budget Office, Australia’s Ageing Population: Understanding the fiscal impacts over the next decade, age pension expenditures accounted for around 10 per cent of total government expenditure (or $45 billion) in 2017–18; and are expected to be a significant contributor to growth in expenditure over the next decade.

Australia’s maturing superannuation system and the already legislated measures—such as increasing the SG rate to 12 per cent—will increase superannuation balances and reduce reliance on the Age Pension expenditure. However, increasing the SG rate will also increase the amount of income which is subject to concessional tax rates through the superannuation system, to the detriment of Commonwealth revenue.

Released by Treasury in January 2019, the latest Tax Benchmarks and Variations Statement showed that, even before increases in the SG rate, tax concessions on superannuation are among the Australian Government’s largest tax expenditures. Together, concessional tax treatment of superannuation contributions and earnings in superannuation funds cost the Commonwealth around $37 billion in foregone revenue in 2017–18.

The ‘superannuation objective’

Some issues for policy makers in considering retirement income policy settings include: the degree to which the Government has a role in mandating and encouraging people to save for retirement; the level of retirement income that the Government, on average, should seek to encourage (in addition to the Age Pension); and, consequently, the level of tax concessions that should be provided and the extent to which these should be targeted.

Superannuation policy that seeks to facilitate as much saving as possible, or seeks to achieve a ‘comfortable’ retirement income, would imply more concessions and a higher SG rate than an objective that sought to minimise the number of individuals reliant on a full rate Age Pension for their retirement income.

In order to guide superannuation policy, the Government sought in 2016 to legislate a ‘primary superannuation objective’. The proposed primary objective was based on a recommendation of the 2014 Financial System Inquiry:

to provide income in retirement to substitute or supplement the Age Pension.

The Senate Economics Legislation Committee report on the Superannuation (Objective) Bill 2016 highlighted that, while most stakeholders agreed on the benefits of legislating an objective, there was no clear agreement on how the objective should be defined. Some stakeholders considered that the objective should reflect the retirement income system as a whole rather than just superannuation, while others considered that the objective should reference the adequacy of retirement income that superannuation policy should seek to achieve. Agreement was not reached and the Bill lapsed at the end of the 45th Parliament.

Retirement income review

The Productivity Commission’s 2018 report, Superannuation: Assessing Efficiency and Competitiveness, recommended that the Government establish an independent public inquiry into the role of compulsory superannuation within the broader retirement income system.The Commission stated that the inquiry should examine:

  • the net impact of compulsory superannuation on public and private savings
  • the distributional impacts of compulsory superannuation
  • the impact of compulsory superannuation on public finances and
  • the economic and distributional impacts of the $450-minimum monthly contributions threshold.

Distributional analysis, in a public policy sense, refers to the degree to which policy affects different cohorts with specific characteristics. Examples of characteristics may include gender, income level, geography or age. 

The Commission recommended that any review should be conducted prior to any increase in the SG rate beyond its current level. (The next increase in the SG rate is scheduled to commence from 1 July 2021.) In an interview with the Australian Financial Review, published on 25 May 2019, the Treasurer indicated his intention to establish a review in line with the Commission’s recommendation, subject to Cabinet endorsement.

What is an appropriate SG rate?

The Productivity Commission did not make any explicit recommendations about the rate of the SG.

ASFA, in a March 2019 media release, argued strongly in favour of the increase in the SG rate and for it to be increased earlier than scheduled. ASFA argue that, without the legislated increase, people will fail to save enough to achieve an adequate standard of retirement.

However, a recent report by the Grattan Institute, Money in Retirement: More than Enough, argues that the SG rate should remain at 9.5 per cent. The Grattan institute argues that a 9.5 per cent SG rate will provide an adequate retirement income for most Australians and that increasing the SG rate would lower living standards during a person’s working life. Grattan also argues there are better, more targeted ways that retirement income inadequacy can be addressed—for example, through changes to the rate of Rent Assistance and to the Age Pension.

Low-income threshold

Employers are currently required to pay compulsory superannuation only to employees who have more than $450 in OTE in a month. This threshold has been in place since the commencement of the SG in 1992, and has not been indexed since that time. Prior to the 2019 election, the Australian Labor Party (ALP) proposed phasing out this threshold.

One of the issues that an inquiry could consider is the effect that removing this threshold would have on low-income earners, both on their current standard of living and their income at retirement.

Tax concessions

Superannuation is taxed at concessional rates. This includes the contributions that are made into superannuation funds (both compulsory and additional voluntary contributions) and earnings on the investments made in the fund, which are typically taxed at 15 per cent (subject to caps). Additionally, once a person reaches preservation age, withdrawals from superannuation are generally tax free.

In 2014, the final report of the Financial System Inquiry argued (p. 90) that tax concessions in superannuation were not well targeted at improving retirement incomes. Poor targeting, it argued, both unnecessarily increased the costs to taxpayers and distorted the savings decisions of people who would otherwise invest outside super.

Changes made in 2016 through the Treasury Laws Amendment (Fair and Sustainable Superannuation) Act 2016 limited a number of the available tax concessions for superannuation. The ALP proposed to further limit these concessions  in its policy platform for the 2019 election.  

In looking at the distributional impact of superannuation, an inquiry may further consider whether tax concessions, following the Government’s changes, are now better targeted towards broadly improving retirement income. 

The gender gap in superannuation

Another issue that a distributional analysis of superannuation policy could examine is the significant gender gap in superannuation balances at retirement.

Data from the Australian Bureau of Statistics shows that, on average, women have significantly lower superannuation balances than men (although this gap has been declining). Figure 1 shows that, on average, superannuation balances for women aged over 15 years were 33.5 per cent lower than men in 2015–16. This compares with a gap of 42.0 per cent in 2005–06.

Superannuation gaps vary between age cohorts, with gaps lower for younger age groups and much higher for those close to retirement age. Figure 1 shows the biggest reduction in superannuation gaps in the decade to 2015–16 occurred for those aged 25 to 54 years. In contrast  the average superannuation gap for people aged 15 to 24 years (at 15.2 per cent in 2015–16) was little changed from 2005–06 and the gap for those aged 55–64 years only narrowed slightly to 36.7 per cent.

Figure 1: Superannuation gender gaps by age, 2005–06 and 2015–16

 Superannuation gender gaps by age, 2005–06 and 2015–16

Source: Australian Bureau of Statistics, Household Income and Wealth, Australia, 2015–16, cat. no. 6523.0, Table 15.3.

The Workplace Gender Equality Agency, and the Human Rights Commission, amongst others, identify several factors leading to lower superannuation balances for women. These include:

  • The labour force participation rate for women is lower than for men. However, this gap has narrowed over time and is one of the major factors that has driven declines in the superannuation gap.
  • The widening of gender wage gaps over the life cycle. The size of gender wage gaps are driven partly by women being more likely to be employed in lower wage industries such as retail, hospitality, aged care and child care. Women are also more likely to work part–time hours compared to men.
  • Women are also more likely to have fragmented work patterns—for example, taking paid and/or unpaid leave around the birth of a child and in the months following—which restricts their participation in the labour force and the number of hours they work.
  • Men who retire now are more likely to have received superannuation for a longer period during their working lives.

As a result of the gender superannuation gap—and the fact that they live longer on average—women are at a greater risk of living in poverty in retirement than men.

Other factors affecting retirement income adequacy

The amount of superannuation that a person accumulates during their working life may be adversely affected by a number of other factors, including:

  • any time spent out of the workforce (during periods of unemployment, or time taken off, for example, to raise children). As discussed above, this is one factor that disproportionately affects women
  • high fees and charges applied by superannuation funds. This may be exacerbated if an individual has multiple superannuation funds
  • poor investment performance, either by the superannuation fund itself or, general economic and market conditions.

Fees and charges in superannuation

The Productivity Commission notes that fees and charges in superannuation can have a significant effect on member balances. In its 2018 report, the Commission estimated that an increase in fees of just 0.5 percentage points can reduce a typical full-time worker’s balance by 12 per cent (or $100,000) over their working life (p. 14).

In 2005 reforms introduced by the Howard Government through the Superannuation Legislation Amendment (Choice of Superannuation Funds) Act 2005provided employees the option of choosing the fund that their superannuation contributions were paid into. This was designed to enhance competition in the superannuation industry.

However, there is low active involvement by Australians in the superannuation industry, especially among younger cohorts and many new employees opt for their contributions to be made into a default fund chosen by their employer. The MySuper reforms, enacted in 2012, sought to address the issue of individuals being placed into high-fee default superannuation accounts by their employer. MySuper accounts are default superannuation funds that have low fees and simple investment structures. 

In its 2018 report, the Commission stated that the MySuper reforms have been a step in the right direction to improve superannuation balances. However, the Commission argued that:

  • some funds, including default funds, continually underperform
  • there is still evidence of excessive and unwarranted fees across products and
  • current default arrangements enable multiple default accounts for one member to be created where the member changes jobs and the prior and present employers’ have different default arrangements.

The Commission recommended that the Government should introduce a ‘best in show’ list of the best performing funds. Under this proposal an independent expert panel would create a shortlist of up to ten high-performing funds that new employees could choose from as their default fund, rather than being placed in the employer’s choice of default fund.  

Multiple superannuation accounts

The issue of fees eroding member balances is exacerbated when individuals have multiple superannuation accounts. The Productivity Commission estimates that over a third of superannuation accounts are unintended multiple accounts, unnecessarily eroding member balances by around $2.6 billion a year through excess fees and insurance premiums.

To address this issue the PC recommended that employees should only ever be defaulted into one superannuation account to avoid the proliferation of multiple accounts and that the Government should take action to reduce the number of multiple accounts by introducing legislation to require the automatic consolidation of any account with a balance less than $6,000 and more than a year of inactivity. The consolidation measure was legislated in the Treasury Laws Amendment (Protecting your Superannuation Package) Act 2019.

Longevity risk

Longevity risk in retirement incomes is the risk that the amount of superannuation assets that a person accumulates during their working life, as well as the way they draw them down in retirement, will mean their savings are insufficient to support them through their retirement without recourse to the Age Pension.

Following a recommendation of the 2014 Financial Systems Inquiry, the Government commenced developing a Retirement Income Framework. Central to the Government’s proposed retirement income framework is the legislation of a ‘Retirement Income Covenant’, and the development of a requirement for superannuation funds to provide access to comprehensive income products for retirement (CIPRs). A retirement income covenant would require trustees of superannuation funds to assist their members develop a retirement income strategy that takes into account longevity risk; the costs and risks of various possible strategies; and a member’s potential eligibility for the Age Pension. CIPRs are retirement income products that seek to provide broadly constant incomes for individuals and assist in managing longevity risk while retaining some access to capital. The Government has proposed mandating that all superannuation funds provide access to CIPRs.

Housing and retirement

A significant factor that influences an individual’s wellbeing in retirement is whether or not they own their own home. Rental costs in retirement can be a significant proportion of individual’s expenses, and can be a significant driver of poverty in retirement. The Grattan Institute’s report,Money in Retirement: More than Enough, advocates an increase in Commonwealth Rental Assistance by 40 per cent. It argues that an increase in Rent Assistance for those on low incomes could be one of the most effective and targeted ways to address retirement income poverty (page 58).

Further reading

Productivity Commission, Superannuation: Assessing Efficiency and Competitiveness, Productivity Commission report no. 91, Canberra, 21 December 2018.


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