Experts call for pension certainty

Experts at our recent ‘Is the pension fair?’ webinar described the Age Pension as a critical base for delivering income adequacy in retirement.

The webinar is the first of a pre-election series covering issues of concern to older Australians and was hosted by Chief Advocate Ian Henschke and featured key retirement income experts Noel Whittaker, Dr Debra Ralston and Dr David Knox. 

Discussing the ins and outs of the present pension system, the panellists argued the government (and opposition) should do more to alleviate fears it might someday disappear. They noted the pension in its current form is fiscally sustainable.

As Dr Deborah Ralston noted, “One of the strengths of the Age Pension is that it is targeted well at people who really need it and improves equity in retirement for those who haven’t been able to save much.”

This was supported by Dr Knox who commented that while we are facing additional costs from other related spending areas such as aged care, Australia is headed towards having the “lowest cost Age Pension of any OECD country” by 2050.

Panellists agreed Australia’s pension system is very complex. It was also acknowledged that while the system works well for some, it doesn’t for others.

As Dr David Knox pointed out “the current age pension system is incredibly complicated in Australia. Very few people understand it and therefore people do miss out as it’s hard for people to get all the benefits available to them.”

While many retirees enjoy a much higher standard of living than past generations, the reliance on savings derived from employment to top-up the pension means some people have limited savings and income in retirement.

As was highlighted in the webinar, retirees may have limited savings to supplement the Age Pension if they haven’t worked or been forced out of the workforce early through ill health, been divorced, worked in low paid jobs or jobs where the superannuation guarantee doesn’t apply, may have limited savings to supplement the Age Pension.

Poverty in retirement is also exacerbated if a retiree cannot afford their own home and rely on the rental market.

“The people doing it tough are the single people having to rent,” said Noel Whittaker.

This point was echoed by Dr Ralston, who said the Retirement Income Review (of which she was a panel member) found renters were a key concern because support was not keeping pace with rental costs.

“When we did the review, we found that Commonwealth Rent Assistance has not kept pace with the cost of housing, which is a serious concern.”

With the superannuation system still immature and in need of further refinement, it could be some time before the savings and incomes of most retirees are adequate.

The panellists offered several ideas to help solve the riddle of retirement.

The first was the need for better information for pre-retirees and retirees to help them navigate the system and make better choices without necessarily getting expensive financial advice.

Dr Ralston pointed to National Seniors own Money Hub as one useful resource for older Australians that can help them understand the system’s rules.

However, as Noel Whittaker added, it is still important to consider paying for dedicated financial advice, commenting “if you get financial advice, you’ll get a much better outcome."

Panelists also acknowledged one of the key challenges is making better use of the family home as a store of wealth, and to live more comfortably in retirement.

One option is to encourage older Australians to downsize into more suitable housing in later life, a point acknowledged by Dr Knox, who noted we need to find ways to make downsizing into a smaller residence more attractive.

This is something that National Seniors has been promoting for some time. We would like to see the political parties consider the idea of a downsizing incentive for those in home care in the lead up to the next election.

Dr Ralston put forward the idea of making better use of the equity in the family home by utilising either private or public reverse mortgage products.

“One of the things that became very clear to us during the Retirement Income Review is that the wealth in your house is important and we should have ways that you can flexibly draw against that in a safe way to supplement your income in retirement.”

Similarly, Noel Whittaker argued there are products on the market that can help to deal with the risk of outliving your savings and noted these products have been given much more favourable means testing arrangements, which can boost a retiree’s pension income.

The Pension Loan Scheme is one such example and yesterday it was announced that the interest rate for the scheme will fall to 3.95% from 1 January 2022. Read our article to find out more about the scheme and changes.

Another solution discussed was the need to make it more attractive for older people to continue working while on the pension if they need to.

It was noted that currently only 3% of pensioners earn employment income, yet other countries like New Zealand have workforce participation rates of over 20% among the pension age population.

According to Noel Whittaker the “people don’t know that if you’re assets tested you can earn more income than a person who is income tested”, thus, pointing out the inconsistent treatment of retirees under the present rules.

Dr Knox added there was merit in changing the punitive income test rules to allow people to work.

“If you don’t have an income test, you’ll encourage people to work a little bit more if they want to.”

On the idea of a universal pension – a concept National Seniors supports – Dr Knox argued the pension and superannuation “don’t work well together”.

“Government support comes in for retirement income in two major ways. One is the direct payment to the Age Pension and the other is taxation concessions to superannuation. It is well known that the taxation concessions are skewed towards higher income earners. The Age Pension is skewed towards lower income earners.

“If we were to give everyone the Age Pension, which is taxable, we could afford to do that by lowering the taxation concessions in the super space, which is primarily received by high income earners. By adjusting the tax on super we could give a little bit of money back through the Age Pension which I think would be a lot simpler than the current mechanism.”

However, Dr Ralston cautioned that any change to the pension system has to be fiscally responsible.

“What you have to keep remembering about the Age Pension, is that it has to be sustainable. It’s our kids and our grandkids coming through who are paying the cost of the Age Pension – an intergenerational bargain – and that burden mustn’t be unreasonable on other generations.”

That’s why National Seniors is calling on each of the major political parties to commit to undertaking a feasibility study in the next term of office to understand the costs and benefits of a universal pension and to put forward options to make any transition to a universal pension fiscally sustainable and fair.

You can support this call by signing up to the Fairness in Retirement Income campaign.