Bruce Brammall, 24 October, 2018, Eureka Report
SUMMARY: Australia’s retirement income system scores a B, losing our spot on the podium to Finland.
Ballooning household debt and tougher testing for government pensions have seen Australia’s retirement incomes system marked down in an international survey.
Australia gave up the third spot on the podium this year to Finland, after our rating tumbled nearly 5 per cent in Mercer’s critique of global pension systems.
The Netherlands and Denmark were the only countries surveyed to score an “A” for achieving a score of higher than 80 in the 10th year of the Melbourne Mercer Global Pension Index.
The MMGPI survey this year ranked 34 countries on a comprehensive test of the overall health and quality of national retirement incomes system.
Australia has ranked as high as second in recent years. But the fall down the rankings this year was caused by some measurements being tweaked, including those that related to household debt and the assets test for the government age pension.
This year, Australia’s score slipped from 77.1 to 72.6, giving it fourth spot or a B grading. Also with B ratings were Sweden, Norway, Singapore, Chile, New Zealand, Canada, Switzerland, Ireland and Germany.
The six worst countries, scoring a D, from the bottom, were Argentina, India, Mexico, China, South Korea and Japan.
A further 15 countries, including the UK, France, US, Hong Kong, Austria and Italy scored Cs and C-pluses.
The survey ranks countries across three broad areas – adequacy, sustainability and integrity – of the various limbs of their retirement incomes systems.
Adequacy is given a 40% weighting, with sustainability getting 35% and integrity 25%.
Australia’s score was virtually unchanged in the last two categories, but tumbled from 75.3 to 63.4 on adequacy. While related to Australia’s high debt levels, the question that cost us was more around our levels of saving (which is inversely proportional). The second element related to the changes to the assets test in 2017 for the government age pension.
The survey’s authors said Australia’s retirement income system could be improved in five key areas:
- Changes to the asset test for government pensions to improve incomes for average income earners.
- Improving household saving and reducing household debt.
- Forcing those who are moving into pension phase with their super into taking a portion of their lump sum as an annuity.
- Increase participation for older workers, particularly as life expectancies rise.
- Increase the pension age as life expectancies rise.
On the last issue, plans to take Australia’s age pension age to 70 have been scrapped, in one of the first decisions made by new Prime Minister Scott Morrison.
On the first four … there does not seem to be much in the way of official consideration of the topics from government at present.
Table 1: Ranking 34 leading nations on retirement income systems
The MMGPI survey outlines that it considers there are roughly five pillars to a retirement income system.
The first (called “Pillar 0”) is a basic public pension that provides a minimal level of protection.
Pillar 1 is a public mandatory and contributory system linked to earnings, while Pillar 2 is a private mandatory and fully funded system. Pillar 3 is a voluntary and fully funded system and Pillar 4 is a “financial and non-financial support outside formal pension arrangements”.
There is one element of the survey that concerns me, probably more than most.
Australia scores very highly for “integrity”. Integrity measures “regulation and governance; protection and communication for members; and costs”.
On this, Australia scores 85.7, the fourth highest of the 34 countries surveyed.
Anyone who has followed superannuation in Australia in recent years, particularly this year with the Royal Commission, would struggle to think that we score an “A” for “integrity”.
But there we are.
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 strongly advised to consult your adviser/s, as some of the strategies used in these columns are extremely complex and require high-level technical compliance.
Bruce Brammall is managing director of Bruce Brammall Financial and is both a licensed financial adviser and mortgage broker. E: email@example.com . Bruce’s sixth book, Mortgages Made Easy, is available now.