- Retirement system promotes a DIY approach
- Many retirees struggle with the complexity of the system
- Retirees need confidence to spend in retirement
If you’re like many retirees with superannuation, shares and other investments, then you will be regularly watching the markets to keep an eye on your assets and income.
Unlike those with Defined Benefit Schemes, market risk is a thing that keeps many of us up at night. It’s a product of our unique system in Australia.
Rather than having large and reputable pension schemes offering secure defined benefits as many OECD countries do, Australia takes the do-it-yourself (DIY) approach to retirement incomes. The proliferation of self-managed super funds underscores this DIY approach, where older Australians take their financial lives in their own hands or put them in the hands of an advisor or pension product peddler.
Yet, it’s not just because Australians have a DIY culture. It’s because the system itself promotes a DIY approach. This DIY approach places the risk onto the retiree, who is often ill prepared for this burden.
And yet, when review after review complains about older people failing to spend down their capital, they don’t blame the system, they blame the retiree. And then they wonder why no one’s listening.
Older Australians want to live a happy life. They want to spend their hard-earned money. They don’t care so much for leaving an inheritance. But while they want to SKI, the system does not give them the confidence to do this.
Take the Age Pension for example. As a rationed safety net it undermines and vilifies those who rely on it. It does not give older people confidence to save or spend because, if you do, you risk undermining your income.
That’s because of the way the means test works. By setting income and asset limits which restrict you from, first getting a pension and, second limiting your entitlement, it punishes you for having more.
The government and Treasury’s response goes something like this - well, we give you super and tax concessions, and there’s free health care, private health insurance rebates, and subsidised age care, so of course we have to ration the pension.
Really! Retirees can’t quantify all that. Maybe we are just ungrateful?
No, of course not.
But therein lies the problem. When you have a system that relies so much on so many moving parts, it’s no wonder retirees are not confident and hold on to their money rather than spend it as they head towards the end of their lives. And remember no one knows when that will be. It could be tomorrow or in twenty-five years.
Take aged care. What a disaster this is. It’s no wonder we hear stories of people holding on to sums of $500,000 or more to pay for aged care for a spouse. That’s because they want the best for them and are nervous they won’t get the care they need.
And then there’s the market.
If every year, you worry whether the market will give you enough or not, you have little choice but to be conservative. I’m sure many retirees feel this way, having lived through two of the biggest market downturns in the recent history. It’s a terrifying financial rollercoaster you really don’t want to get on.
But there is another way.
If retirees knew they had a year-on-year safety net regardless of how their assets or income performed, then maybe, just maybe retirees wouldn’t be so worried about the future. And maybe they would be more inclined to spend their money.
But this can only happen if you dismantle the means test and reform the tax system.
If retirees knew they had a guaranteed income from the pension every fortnight and they would only repay this through the tax system, if they earned a sufficient amount every year, wouldn’t they be more comfortable spending?
That’s the beauty of a properly designed universal pension. It takes away the year-on-year risk but ensures its fiscally sustainable and fair.
The question is, are people ready to back the reforms needed to implement a universal pension? National Seniors thinks they are and is calling on retirees to back this reform and SKI with confidence.