What can we learn from other retirement income systems?

Treasury has finally released a consultation paper as part of the Retirement Income Review.

National Seniors Australia will be making a submission. Over the coming months, we will look at some of the issues in the consultation paper.

In last week’s edition of Connect, we featured an article about Australia’s high ranking on the 2019 Melbourne Mercer Global Pension Index. It is timely that the first question in the review’s consultation paper is:

Are there aspects of the design of retirement income systems in other countries that are relevant to Australia?

In this article, we take the opportunity to do just that.

How does our retirement income system compare?

Not surprisingly, there is significant variation in the different retirement income systems around the world.

The Organisation for Economic Co-operation and Development (OECD) compares these systems in its regular Pensions at a Glance report.

You can view a complete breakdown in this table.

Eligibility for a public pension is determined either by residence and/or with respect to the amount of contributions made to a scheme throughout one’s lifetime.

Residence-based schemes

Eligibility for the Australian pension is determined primarily by residence.

For those that meet the residence requirements, the pension delivers a flat rate regardless of an individual’s previous salary (those that do not meet the full residence requirements can be eligible for a partial pension).

Like Australia, residence-based pension schemes operate in Canada, Chile, Denmark, Germany, Iceland, Israel, Netherlands, New Zealand, Norway, and Sweden.

Interestingly, most of these are among the highest ranked retirement income systems, according to the Mercer report.

Residence-based schemes can be broken down further into what is defined as basic or targeted.

Four OECD countries - Greece, Israel, Netherlands and New Zealand - provide a residence-based basic pension which is not means tested.

In New Zealand, everyone gets a pension regardless (they recoup some of the cost of delivering the pension through the taxation system).

In contrast, Australia, Chile, Finland, Germany, Norway and Sweden have targeted residence-based pension schemes.

A targeted scheme uses a means test to determine the level of pension a person can get. This is usually based on a retiree’s income or the level assets held. So, while Aussies are means tested, Kiwis are not.

Five countries, including Canada, Denmark, Iceland, Norway and Sweden deliver both a basic and a targeted scheme.

In these systems, everyone gets a basic pension if they meet the residence requirements. There is a means tested pension that sits on top of this.

According to the OECD report, both Norway and Sweden are moving away from having a basic and targeted scheme to just having a targeted scheme.

Contribution-based schemes

Australia, like New Zealand and other OECD countries, fund the public pension using general revenue.

This protects those who have been disconnected from the labour market for periods of time, through either caring responsibilities or disadvantage.

In contrast, contribution-based schemes determine retirement income based on your earnings, which in poorly designed schemes can exacerbate inequality.

All OECD countries, except New Zealand, have some type of contribution-based scheme. This is used instead of, or as a complement to, a residence-based scheme.

There are a range of variations, from earnings-related contribution schemes to public pay-as-you-go defined benefit schemes.

Australia is one of only eight OECD countries with a defined contribution scheme that is privately funded.

Countries with a similar scheme include Chile, Denmark, Estonia, Israel, Mexico, Norway and Sweden.

Do we have a good retirement income system?

The Australian retirement system, with its combination of a public pension and compulsory private savings is one that should be protected.

The pension provides a basic income and compulsory superannuation encourages greater self-reliance.

However, it is not without its faults.

Poverty rates in Australia are high compared to other OECD countries. Almost one quarter of those aged over 65 in Australia were in poverty, compared with only 10 per cent in New Zealand and 3 per cent in Denmark.

Another issue is the immaturity of the superannuation system.

While some politicians claim that increases to compulsory super will damage the economy, Australia’s compulsory superannuation rate of 9.5 per cent is much lower than most other countries.

This is indicated in the graph below.

OECD Pensions at a Glance

For more information, including the source of the above graph, visit this link.