Australia's retirement income system
A number of submissions recommended that the Australian Government
should undertake a comprehensive review of the retirement income system,
including the interrelationship between the social security, taxation and
This chapter discusses issues raised about the broader retirement income
system, including: the need for gender analysis of proposed policy changes; the
apportionment of risk under existing arrangements; determining benchmarks for
adequate retirement income; mechanisms to measure and assess changes; and
valuing unpaid care in the retirement income system.
Calls for a comprehensive review
COTA Australia called for a holistic review of the retirement incomes
system, recommending that the government commission an independent chair and
expert members to conduct the review. It argued that the review should include
a public engagement process involving key stakeholders. COTA Australia argued
that the review should 'cover pensions and allowances, all aspects of
superannuation policy (including the taxation treatment of superannuation
assets and income), issues affecting mature age workforce participation,
housing and the costs associated with aged care and health in older age'.
ACOSS noted that many stakeholders have been calling for a comprehensive
review of the retirement income system for some time. ACOSS argued that any
review should include careful consideration of superannuation tax concessions,
setting an appropriate income target for superannuation purposes, and the
'longer term structure of the Age Pension, including the rate, income and
assets tests, and the interaction with other income support payments'.
Noting that living standards and economic security in retirement do not rely on
income alone, ACOSS also made the point that any retirement income review
should also consider the significance of universal and affordable basic health
and aged care services; and secure and affordable housing.
National Seniors also called for a comprehensive review to:
...ensure that the income, taxation, superannuation and social
security systems are working together to maximise the retirement incomes of all
Australians, particularly women. This should involve modelling of the various policy
options to ensure that the impact of any changes on individuals, households and
the economy can be determined.
Industry Super Australia considered there was an urgent need for a dedicated,
review of all components of the retirement income system, including the social
security, taxation and superannuation policy settings. Industry Super Australia
also noted that measures to improve economic security for women should be
considered as part of this review, to ensure they improve rather than negatively
affect women's outcomes.
Gender analysis of retirement
COTA Australia considered that a retirement income system review should embed
in its goals and methodology an explicit recognition of the diversity of
experience and outcomes in retirement incomes for different groups in society,
particularly but not restricted to women.
It supported the findings of the OECD's 2012 report, Closing the Gender Gap,
which called for gender equality to be embedded in public policy, including
through gender disaggregated data collection and analysis, and outlining a
program of action to achieve better outcomes. As such, COTA Australia
Although the Australian Government has made significant
progress over a long period of time, it still needs to do more to develop,
monitor and evaluate public policies, such as those impacting on retirement
incomes, using a gender lens, to achieve more effective and fairer outcomes.
Strengthening the capacity, skills and mechanisms for regular
impact monitoring and evaluation of gender initiatives, including the capacity
for the collection and analysis of relevant gender-disaggregated data across
all policy areas;
Incorporating gender impact assessments in the design,
implementation and evaluation of laws, policies, regulations, programs and
budgets in a systematic and comprehensive way;
Strengthen incentives as well as compliance and accountability
measures to make the implementation of gender equality and mainstreaming
initiatives across government more effective.
The AIST also called for the application of a gender lens when assessing
policy, in particular when assessing superannuation policy.
The NFAW also supported systematic and comprehensive review of the retirement
income system, with particular emphasis on addressing the issue of an aging
population from a gender equity viewpoint. It stated that the 'challenge is to
make the retirement income system fairer and more flexible by targeting public
support more clearly at people who need it and by improving incentives to save
for the future'.
The Women and Work Research Group (WWRG) noted that while the Age Pension
serves to socialise the risks of old age, the other two pillars of the
retirement income system—compulsory superannuation and voluntary savings—are
Australia's superannuation system is unique as the system is based on
defined contributions rather than defined benefit accounts. Professor Siobhan
Austen, Women in Social Economic Research (WiSER), Curtin University,
Defined contributions have this particular feature that the
money is owned by the person whose superannuation account it is. Past the
preservation age, they can access that money and make decisions about its
use—take it as a lump sum or convert it into an annuity of one type or another.
Mr Ian Yates, COTA Australia, observed that Australia's emphasis on
defined contributions rather than defined benefits arrangements mean
Australia's retirement income system tends to individualise risk. He explained
further that Australia has a system that puts all the risks, a combination of
'investment and recycle risk', on the individual. Mr Yates cited the current
inflation risk which, according to Mr Yates, has 'not been a heavy issue';
'major event risk', which is 'the potential that I will have a major health
issue or need aged care and what if I do not have resources what am I going to
be able to do'; and longevity risks. He explained:
All of those risks in our system, with the exception of the
last, where government carries some of it through the pension system, are left
to the individual to carry. As we think about our retirement income system
going forward we need to think about ways that we can assist individuals to
manage that risk.
Professor Austen noted that countries such as Canada and the
Netherlands, which have defined benefits systems, perform much better than
Australia in terms of old age poverty. She explained that the Netherlands
provides an interesting example as:
...they have got these defined benefits systems, a lot of the
risks are pooled and there is a lot more centralised control over the design of
the pensions that are structured for participants, and quite often those
schemes have things like spousal benefits. There is greater regulation of what
people can do with their pot of money that they have accumulated through
COTA Australia recommended that its proposed retirement income system
review should examine ways to mitigate the risks the Australian system and
policies place on the individual.
Adequacy of retirement incomes
Ms Mary Delahunty, HESTA, argued that the conversation around the
superannuation system, and the retirement income system more broadly must 'come
back to that basis of dignity in retirement, with the knowledge that it really
is the interplay of the pillars and that genuine desire to have some faith in
the government age pension that will deliver retirement outcomes for women'.
ACOSS called for the establishment of an income benchmarking commission.
The proposed commission, an independent statutory expert body, would be
...to report and make recommendations to the Parliament every
five years on the adequacy and indexation of social security payments, to
prevent poverty and ensure that payments keep pace with increases in the cost
of living and improvements in community living standards.
ACOSS recommended that the role of the proposed commission should
include developing benchmarks for the adequacy of retirement incomes to inform
policy on public support through the superannuation system as well as social
security payments, including:
income targets for compulsory saving for retirement (transfers of
individual income from working life to retirement) taking account of the
relative living standards of typical low and middle income households before
and after retirement; and
income targets for public support through the tax system for
voluntary saving for retirement (transfers between taxpayers to support
retirement income), taking account of typical incomes provided by pensions and
compulsory superannuation, and typical living standards among taxpayers across
all age groups.
A recent report from the Centre for Applied Policy in Positive Ageing
(CAPPA) outlined the problems that arise when trying to determine the best way
to measure retirement income adequacy. It stated:
Among the many contested features of Australia's retirement
income system is how much money a person needs to get by. What a person 'needs'
is inherently subjective, depending on personal values and informed by a person's
income and spending patterns before retirement. What type of lifestyle the tax
and transfer system should support is open to debate. Beyond alleviating
poverty, what is the point at which the system is aiming? 
There are two main approaches to addressing adequacy in retirement
incomes: income replacement and 'minimum adequate retirement income'. These
approaches are discussed further below.
Income replacement measures retirement income as a percentage of
pre-retirement income. The principle behind this measure is that 'a person's
income in retirement should be a reasonable proportion of their pre-retirement
ACOSS observed that any income replacement benchmark should take into
account higher housing and child care costs during a working life. It noted:
It makes no sense to require people to save (reduce current
consumption) for their retirement if their current living standards are lower
than their expected living standard after they retire.
Minimum adequate retirement income
An alternative approach to income replacement for setting retirement
income targets is to set as a benchmark 'minimum living standards' above
poverty levels for different types of retired households.
ACOSS argued that setting minimum adequate retirement income as a benchmark
provides a 'better way to set a "ceiling" for the value of tax
concessions for superannuation, since few would support taxpayer subsidies for
people to achieve a living standard which is considered "luxurious"'.
The Association of Superannuation Funds of Australia (ASFA) has
developed two income standards—'modest' and 'comfortable'. According to the
A modest retirement lifestyle is considered better than the
Age Pension, but still only able to afford fairly basic activities.
A comfortable retirement lifestyle enables an older, healthy
retiree to be involved in a broad range of leisure and recreational activities
and to have a good standard of living through the purchase of such things as:
household goods, private health insurance, a reasonable car, good clothes, a
range of electronic equipment, and domestic and occasionally international
holiday travel. 
It is important to note that both the modest and comfortable retirement
standards assume that the retirees own their own home outright and are
ASFA calculates the lump sums required for a comfortable retirement
assuming 'that the retiree/s will draw down all their capital, and receive a
part Age Pension', as follows:
Savings required at retirement
Comfortable lifestyle for a couple
Comfortable lifestyle for a single person
The superannuation balances required to achieve a modest retirement are
Savings required at retirement
Modest lifestyle for a couple
Modest lifestyle for a single person
ASFA notes that the 'lump sums needed for a modest lifestyle are
relatively low due to the fact that the base rate of the Age Pension (plus
various pension supplements) is sufficient to meet the expenditure required at
this budget level'.
Dr Diana Warren, AIFS, expressed the view that policy should be targeted
at people at the low end of the retirement standards. She noted there is a big
gap between the modest and comfortable ASFA retirement standards and the 'evidence
from the HILDA survey shows that most people are not able to afford that
comfortable standard anyway'.
The Grattan Institute cautioned against adopting the ASFA comfortable
retirement standard as the benchmark for what the retirement incomes system
should achieve. It stated:
...the ASFA comfortable standard entails an 'affluent'
lifestyle in retirement that is more luxurious than what most households
achieve during their working lives. Such a high living standard is an
inappropriate benchmark for the retirement incomes system. The fact that many
households aspire to this level of retirement income is irrelevant. We would
all like to be rich. Given that average living standards before retirement are
less than the ASFA comfortable benchmark, the only way living standards can
reach this level in retirement is by many households living even less
comfortably before retirement.
ACOSS highlighted the importance of deciding what an adequate income
target should be as a benchmark for developing and reviewing retirement income
policies. It stated:
Setting the appropriate income target for superannuation
purposes is a core task yet to be undertaken through a sound public review of
the retirement income system. Resolving this question is essential before
designing the major structural changes required, which might then deliver
greater stability and certainty for the system in the future.
CAPPA's research found that widely used measures of retirement income
adequacy, including the ASFA standard, do not properly consider the growing
number of Australians either renting in retirement or still paying off their
mortgage. It observed:
The conversation has to include housing costs for the growing
number of Australians who don't find themselves owning their home outright in
retirement. This needs to inform both policy design and the public as they plan
How well Australia prepares for an older society is
determined in large part by the quality of policy design. This, in turn, is
dependent on an accurate discussion around the real income needs in retirement
which includes all groups of Australians, not just those fortunate enough to
own their home.
Measuring and assessing changes to
the retirement income system
Women in Super recommended establishing an independent publicly-funded
body to oversee and regulate superannuation.
In its view, such a body would reduce the number of changes and remove the focus
on short-termism which 'currently undermines the system and builds a level of
mistrust, stress and uncertainty'.
The AIST also recommended developing a governance mechanism to assess progress
on superannuation and to provide greater certainty and consumer confidence.
Ms Sarah Saunders, National Seniors, emphasised the need for a clearly
articulated retirement income strategy that is above politics and crosses
portfolios. She maintained that Australians want certainty in the retirement
income system. She stated:
As a nation we cannot allow ad hoc, random changes to prop up
budgets, as they undermine faith in the system for not just this generation of
retirees, but younger people and women, who are not convinced that by the time
they get to retirement the rules would not have changed and that it might have
been better to put that money towards something else—for example, the asset
test and taper rate changes that were announced in the 2015 budget—which people
were only given 18 months' notice of—will, based on current deeming rates, see
a single woman who has worked and saved living off less than the full age
Since 1992, almost every Federal Budget has contained changes to either
the taxation of superannuation or the rules regarding voluntary contributions.
Ms Saunders shared an email from a National Seniors member that
demonstrated the effect of constant changes within the retirement income
Over the last four prime ministers, the concessional
contribution limit has gone from $50,000 to $25,000 and then back to $35,000. I
have just heard now on the ABC news that there is a proposal to reduce to
$11,000 the amount that can be contributed annually to super...What a
Ms Catherine Nance, PwC Australia, outlined the need for monitoring and
evaluating any changes to the superannuation system. She observed:
There tends to be a lot of tinkering of the super system with
no real assessment of whether it achieved anything or what it was ever meant to
achieve. There are numerous examples in the past of changing tax in small ways
where the cost would have far outweighed the revenues or any benefits. It would
be nice if there was more rigour in the system going forward about measuring
success versus objectives.
Witnesses also raised concerns about changes to the Age Pension creating
instability and uncertainty, which is discussed further in chapter 8.
Ms Nance suggested that the New Zealand model for reporting against
their retirement policy objectives could be considered for Australia.
In New Zealand, the Retirement Commissioner is mandated under the Superannuation
and Retirement Income Act 2001, to review retirement income policies every
Ms Nance noted:
There are different types of models, but I think it needs to
be something like an independent agency that is reporting to parliament. The
other thing would be a regulatory check that, before anything was changed, it
was assessed as to what extent it was adding to those objectives, which would
The Financial Systems Inquiry did not consider that there was strong
evidence that a publicly funded independent body to assess the superannuation
system's performance and report on superannuation policy changes would
significantly improve incomes. It also acknowledged that establishing and
operating a new authority would involve costs to government.
The committee considers that the government needs to heed the call for
less tinkering with all elements of the retirement income system, including
both superannuation and the Age Pension. The committee believes there should be
greater focus on determining the adequacy of retirement income and strategies
to achieve this minimum level for all Australians. This determination should go
beyond retirement income and also take account of the costs of housing, health
and aged care. The committee believes that any changes to the retirement income
system should be based on the principle of 'dignity in retirement, with the
knowledge that it really is the interplay of the pillars and that genuine
desire to have some faith in the government age pension that will deliver
retirement outcomes for women'.
The committee recommends that the Australian Government ensure that any
changes to the retirement income system are measured against the guiding
principle of dignity in retirement and should:
deliver a decent standard of living for both men and women in
take into consideration the interrelationship between the
three pillars of the retirement income system—the Age Pension (including income
and assets tests); the superannuation system (with particular reference to tax
concessions); and private savings—as well as mature age workforce
participation, housing, health and aged care;
recognise the diversity of experience and outcomes in
retirement incomes for different groups in society, particularly but not
restricted to women;
adequately assess and mitigate the risks placed on the
determine mechanisms for developing benchmarks for the
adequacy of retirement incomes to inform future policy; and
introduce mechanisms to measure and assess reforms to ensure
they are meeting objectives.
Valuing unpaid care
Many submissions highlighted the fact that unpaid care, which is still
mostly undertaken by women, is not valued in the retirement income system. In
particular, the superannuation system, which is tied to paid work, does not recognise
that many women will take career breaks or work part-time to provide unpaid
care to their children, partners, elderly parents and other family members. The
Age Pension, which is not linked to paid employment, plays an important role in
ensuring carers have access to a decent retirement income (the significance of
the Age Pension is discussed further in chapter 8). A number of
submissions urged the committee to consider potential mechanisms that would
recognise and reward unpaid work in the retirement income system. The Victorian
Women's Trust observed that:
Over many decades, millions of Australian women have enjoyed
less economic security than others for their roles as unpaid primary carers
simply because our society has not validated their contribution and instituted
formal strategies for adequate financial recompense.
Without efforts to come to terms with the issue of unpaid
work, access to superannuation reinforces a social and economic divide between
the retirement incomes of those who work and the retirement incomes of those in
Carers Australia argued that assisting carers to increase their
superannuation savings should be viewed in the context of estimates by Deloitte
Access Economics that the replacement cost of informal care was $60.3 billion
A number of submissions supported recommendations to further investigate
the introduction of carer credits made in the Human Rights Commission's 2013
report, Investing in care: Recognising and valuing those who
Carer credits were proposed as a potential mechanism to recognise and reward
unpaid work in the retirement income system.
The Queensland Nurses Union supported further investigation of carer
credit systems that are used in other countries with social insurance-based
public pension schemes such as the UK, Sweden, Canada, Finland and Germany. It
'Carer credits' are a method of explicitly recognising in a
country's pension system years spent providing unpaid care for a child or a
family member with a disability, long term illness or frailty due to old age.
In most instances, the state credits an individual's (notional) pension account
while they are out of the workforce providing care. The value of the credits is
sometimes linked to the earnings of the individual prior to leaving the
workforce but in many cases is based on a proportion of a 'fictional' salary of
the minimum wage or average earnings during periods of workforce absence.
HESTA provided a number of international examples of how European
countries are using caring credits as a mechanism to acknowledge the value of
unpaid care in their various retirement income systems. It noted:
Over the last two decades, Europe has seen a move from the
reliance on social pensions—often called zero pillars by the World Bank – to a
multi pillar approach with a contributory element. Social pillars are often
more equitable for genders as they seek to equalise and do not carry a link to
labour participation. The projected increase in elderly population rates and
the decreasing birth rates puts pressure on the funding of both the zero and
first pillar pensions and has caused many European nations to re-examine the
financial sustainability of their systems.
Redistribution is still a guiding principle of many European
pension schemes and so there are many examples of mechanisms used to value the
unpaid caring work, we have chosen a few to highlight that are not often
Some of the examples of the various European approaches provided by
Belgium—qualification for a public pension in Belgium is related
to time in the labour force. To recognise the role of an unpaid carer in this
system they count 3 years caring for children as 'gainful employment' and make
a contribution matching this to the numerator of the benefit formula.
France—the French system combines a private sector with two tiers
and a public scheme with a safety net element. For children born or adopted
since 2010, a credit is given to the mother in the public scheme—this is
regardless of her labour participation. Periods out of work or working part-time
caring for a child are also credited in the public and occupational pension
schemes as if the parent had earned the minimum wage.
United Kingdom—recent changes to the system in the United Kingdom
have strengthened the recognition for carers. The public scheme has two tiers,
one flat and one earnings based. There is a large and growing private pension
sector. Both tiers of the public pension provide protection for periods out of
paid work caring for others. This covers those not in paid work at all but also
those earning below a lower earnings limit because of their caring duties. A
system of weekly National Insurance credits are awarded and count towards a
basic state pension and second pension entitlement.
Superannuation Guarantee for carers
allowance and paid parental leave
Carers Australia supported previous recommendations by the Australian Human
Rights Commission to:
Specifically recognise and reward unpaid caring work in the
retirement income system by providing superannuation payments for those on
Carer Payment, Parenting Payments and recipients of the government-funded Paid
The Age and Disability Discrimination Commissioner expressed a
preference for superannuation contributions rather than carer credits to be
paid at the time of retirement. She explained:
My own view is that it is better to get the payment as you go
along. If you were to go out of the workforce for three years to care, I think
it would be more helpful that every month you saw a certain amount—it would be
a small amount, but a certain amount—going into your superannuation account.
That is my own preference, rather than waiting till the retirement point, with
a system of credits. But I do think the carer credit idea could be further
investigated. The problem with delaying benefits up to the point of retirement
is that we know, particularly with our young workers, that people do not think
in a very long-term way.
Superannuation Guarantee for carers
Many submissions recommended including superannuation payments in the
Commonwealth Carer Payment.
The Hon Susan Ryan AO, Age and Disability Discrimination Commissioner,
advocated the payment of the superannuation guarantee to people receiving carer
allowance. She noted:
Carer allowance is quite a low allowance, as you would all be
aware, but there is no SG. Again, you are in the workforce, you have your SG
going in, things are going well, but you have to leave to care. Not only do you
lose your salary and go to a very reduced carers payment, but you have no SG.
If parliament could see fit to extend the payment of SG in that case, I think
that would be a significant way to keep women buoyant, if you like, in the
retirement savings area. It would also encourage in them the possibility that
they could return to work, because they can see their super growing, whereas
the alternative is either to go on Newstart, if they are under 65—now moving
up—or to wait until they are 65 and go on the age pension. The committee will
be aware that the majority of Australians on the full age pension are women
and, within that majority, the majority of those women are single women—that
is, women without partners.
Mr Daley outlined the ACTU's view on recognising unpaid care by
providing the superannuation contributions to carers. He stated:
...there are a number of people who, across the entire spectrum
of Australian society, are not receiving adequate contributions to their super
even though they exist substantially in unpaid work these days. We think that
the carers area is one that simply stands out as an area of worthy significance
at the moment. We would identify that as an area where we think an early move
should be made in respect of payments to ensure that people who act as carers
receive some payment towards their superannuation. But we also think that
consideration is needed across a wide range of areas, particularly in respect
of workers compensation, long-term disability payments and the like. I
understand that these things are a cost to the government, but there is a
balance between what is right and fair and proper in the payment of money to
people in those situations.
Superannuation Guarantee for paid parental
Many submissions and witnesses supported including superannuation
payments in Commonwealth Paid Parental Leave (PPL).
COTA Australia submitted that the exclusion of superannuation payments
on PPL highlighted the 'gendered cultural and structural bias of the
superannuation system'. COTA Australia considered that 'it is highly
anachronistic, unfair and inefficient to view Parental Leave as an illegitimate
break from working life, with the short and long term costs of it largely to be
carried by individual women'.
The Financial Services Council noted that the government's initial PPL
policy included superannuation. It noted that the current PPL scheme could be
amended to include a superannuation component at a much lower cost than the
government's original policy.
The McKell Institute, an independent, not-for-profit, public policy
institute, supported providing the Superannuation Guarantee (SG) on
Commonwealth PPL, arguing that PPL should be considered no differently to
income generated from paid employment. It estimated the cost of applying the
Superannuation Guarantee to PPL in 2015–16 as follows:
The current paid parental leave scheme is expected to cost
government $2.1 billion over 2015–16. This is excluding any superannuation
payments as part of the PPL scheme. However, if government paid maternity leave
was inclusive of the 9.5% Superannuation Guarantee, the cost to government
would increase by approximately $199.5 million in 2015-16, bringing the total
forecast expenditure to approximately $2.3 billion over 2015–16. Such a
contribution would go a long way to ensuring the 8 month gap with no super
contributions by many new mothers is partially offset.
The ACTU argued that not applying the SG to PPL 'unfairly discriminates
against primary carers (predominantly women) and is a small, though still
significant, factor contributing to the discrepancy between male and female
The CPSU noted that applying the SG to paid parental leave could have a
significant effect on women's retirement savings. It noted that 'even just six
months of superannuation on the paid parental leave of a 35-year-old woman
earning $50,000 could add an extra $10,000 to her final balance.'
Industry Super Australia's modelling indicated that paying the SG on
paid parental leave for a woman who earns average female earnings and follows a
typical disrupted pattern of participation in paid work, 'will increase
retirement savings by 1.7 per cent, and will boost overall retirement
income (including Age Pension) by 0.4 per cent'.
The committee supports the view that the retirement income system should
better acknowledge and value unpaid care. Carers who take extended breaks from
the workforce, and often return to work part-time, are significantly
disadvantaged in a system that only values paid employment. The committee
considers it is time that the government acknowledges the contribution that
unpaid carers provide to this country and to explore mechanisms that would at
the very least recognise the importance of including superannuation payments in
the various carers' payments and PPL schemes.
The committee recommends that the superannuation guarantee should be
paid on the Commonwealth Paid Parental Leave Scheme.
The committee recommends that mechanisms for improving the retirement
incomes of carers be examined.
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