(03) 9020 2905PORTFOLIO POINT: Hmmm, not bad Australia. Our retirement incomes system is “back on the podium”. Now, how do we get to pole and, more importantly, into the “A” grade?
In the last 12 months, I wouldn’t have thought that too much has changed in Australia’s retirement income streams system.
That is, the things that I’ve been moaning about have actually been in place for several years. But it’s still worth complaining about.
However, something has changed. We’ve clearly improved. (Or others have got worse as we’ve stayed the same.)
An annual study (it’s now in its third year) by the Australian Centre for Financial Studies and Mercer has found that “Australia’s retirement and income system” has bounced back from a stumble it took last year to again reclaim its previously held position as the “second best” financial retirement system in the world.
Well, not quite the world. It’s a survey of 16 nations, although it does cover half the world’s population. But that’s not hard when you’ve got both China and India included. (When you’ve got those two to start, you could almost add Tuvalu and Liechtenstein to get you over the line for 50%.)
Australia ranked 2nd in the survey’s first year (2009), 4th in the second year (2010), but has managed to regain 2nd spot in the survey, released last night.
For a start, whatever we’ve done has been good enough, or less worse than Switzerland and Sweden, to jump two spots.
But we’re fighting the Dutch. The Netherlands has topped the table for all three years of the survey.
(Neither Greece nor Italy, the generosity of whose government-funded retirement income systems have been under question during the GFC and European debt crisis, are in the survey. In fact, not one of the PIIGS – Portugal, Italy, Ireland, Greece and Spain – are part of this survey, despite the number of countries rising from 14 to 16 this year.)
The survey covers retirement income streams from three perspectives – adequacy, sustainability and integrity. So, it takes in the superannuation system and the age pension and the level of private savings from a personal financial viewpoint.
The index uses a school report card system. In coming second, Australia scored an overall mark of 75, which saw it sneak in above a B to score a B+. The Netherlands scored 77.9, meaning they’re a fair bit closer to achieving an A, which cuts in at 80.
Of the three components, Australia’s score remained stagnant on “integrity” and fell marginally on “sustainability”.
So, what has Australia got right in the last 12 months, according to the Melbourne Mercer Global Pension Index?
The big movement was in “adequacy” category, where we rose 5.5 points to 73.6. This was primarily due to two factors: the real rise in Australia’s aged pension base payments; and a higher overall level of personal savings.
Now, what does it argue Australia could do to lift its rating to get into the A grade?
There are five things, some of which are already in the pipeline, and the rest of which are being discussed.
Raising mandatory contributions
Mercer says the first thing Australia could do is to raise the minimum mandatory contributions.
This is planned, with the Gillard Government intending to push ahead with lifting the 9% Superannuation to 12% over time. However, the legislation to lift the rate is tied to the successful introduction of the Mineral Resources Rent Tax (which is moving glacially).
Compulsory income streams
Mercer says there would be benefit to forcing Australians to take a part of a superannuation benefit as an income stream – that is, an annuity.
One problem with Australia’s super is that once you turn 65, you can access your whole super, put it on black at the casino, lose your dough, then go on the government age pension.
I’ve looked at this issue in this column before. It’s something that has been raised, most prominently by annuity provider, Challenger. For a column on the potential benefits of this, click here (15/7/09). Forcing members to take any part of their super benefits could be tough politically.
Work longer and delay retirement
Increasing labour force participation for older workers would provide retirees with more money in the way of income and more benefits into their super. Also, delaying access to the age pension to deal with increases in life expectancy.
In essence, the government has acted on this also, in a long-term sense, with the increase in the government age pension access age increase from age 65 to 67 between 2017 and 2023.
Reduce super costs
Mercer would like to see the costs of the provision of retirement income streams reduced.
Here, the government is also acting, by introducing parts of Jeremy Cooper’s Super System Review, including MySuper.
The rest of the field …
After The Netherlands and Australia with their B-pluses, the rest of the field ran like this:
- B: Switzerland, Sweden, Canada, UK
- C+: Chile
- C: Poland, Brazil, USA, Singapore, France, Germany
- D: Japan, India, China.
Report author David Knox, a senior partner at Mercer, said the best pension systems in the world combine income streams, or pooled savings, from the government, employers and workers.
The government’s age pension is a safety net and employers are forced to provide Superannuation Guarantee payments for workers. However, outside of tax incentives to encourage workers to put away for retirement, there is no compulsive element to workers putting away for their post-work years.
“Australia is very much in reach of becoming the first in the world to receive an A-Grade score if we can address the issue of adequacy by raising the level of compulsory savings via superannuation and continue reforms to reduce costs,” Dr Knox said.
“Our superannuation system is in the midst of significant reform, some of which is likely to boost our score in the index in the future but our current B-Grade is an important reminder that our world-class retirement savings system is in danger of falling short of our needs unless we take action now,” he said.
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The information contained in this column should be treated as general advice only. It has not taken anyone’s specific circumstances into account. If you are considering a strategy such as those mentioned here, you are advised to consult your financial adviser.
Bruce Brammall is director of Castellan Financial Consulting and the author of Debt Man Walking.