Key observations from the Retirement Income Review

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It’s quite a challenge to succinctly summarise the 233,117 words of the Retirement Income Review, and the report itself will be dwarfed by the coverage it receives in the coming weeks, months and years.

The report is “a fact base of the current retirement income system in the context of an ageing society. Its objective is to improve understanding of the system’s operations and the outcomes it is delivering for Australians.”

Somewhat reassuringly, the shortest possible summary is that the system is “effective, sound and broadly sustainable. But it can be improved.”

The report was commissioned by the federal government and the key aim is to inform and frame policymaking around income for Australians through their retirement. We wouldn’t necessarily encourage SuperGuide readers read the whole report, and over the coming months we will draw out the most useful facts to help you better plan or manage your retirement.

Frustratingly there are no recommendations, but there are some suggestions throughout. For the time being, here are the key observations from the report, which are well worth a read.

The Australian retirement income system is effective, sound and its costs are broadly sustainable. This is reassuring in a time of economic uncertainty associated with the COVID-19 Pandemic. But the evidence suggests there are areas where the system can be improved.
The retirement income system is complex. There is a need to improve understanding of the system. Complexity, misconceptions and low financial literacy have resulted in people not adequately planning for their retirement or making the most of their assets when in retirement. Adding to complexity is the interaction with other systems, such as the aged care and the tax systems. People need better information, guidance and good, affordable advice tailored to their needs.
- A major misunderstanding is the view that ‘retirement income’ involves the return from investing superannuation balances rather than drawing down those balances to fund living standards in retirement.
There are competing interests in the system. In what is often a highly contested environment, it is important to gather the facts and establish the evidence so that objective decisions can be made about the direction of policy and what is in the best interests of the community.
A clear objective for the system, agreed by the Australian community through the Government, is needed to guide policy, improve understanding and provide a framework for assessing performance of the system.
It is suggested that the objective for the system be developed around the goal:
- ‘to deliver adequate standards of living in retirement in an equitable, sustainable and cohesive way.’
What constitutes an ‘adequate, equitable, sustainable and coherent’ retirement income system needs to be clear and preferably legislated. Suggestions of the elements to be covered include:
- Adequacy
  - The system should ensure a minimum standard of living for retirees with limited financial means that is consistent with prevailing community standards.
  - The system should facilitate people to reasonably maintain their standard of living in retirement.
- Equity
  - The system should target Government support to those in need.
  - The system should provide similar outcomes for people in similar circumstances.
- Sustainability
  - The system should be cost-effective for taxpayers in achieving adequate retirement outcomes.
  - The system should be sustainable and robust to demographic, economic and social change.
- Cohesion
  - The system should have effective incentives to smooth consumption and support people in taking personal responsibility for their retirement incomes.
  - The system should interact effectively with other systems.
  - The system should not be unnecessarily complex for consumers.
As at June 2019, around 71% of people aged 65 and over received Age Pension or other pension payments. Over 60% of these were on the maximum rate. For most households aged 65 and over, the family home is their main asset. Superannuation makes up a small share of their net wealth. This will change as the superannuation system matures.
The Age Pension, combined with other support provided to retirees, is effective in ensuring most Australians achieve a minimum standard of living in retirement in line with community standards. Retirees receive health, aged care and other Government services worth more than the maximum rate of the single Age Pension.
Some groups do not achieve this goal.
- A significant number of older Australians who are renting in the private market need additional assistance. Increasing the rate of Commonwealth Rent Assistance will only have a small impact. A new approach is required.
For many who retire involuntarily due to job-related reasons, the adequacy of their living standards before Age Pension eligibility age depends on the level of the JobSeeker Payment. Renters and involuntary retirees experience higher levels of financial stress and poverty than the working-age population.
The Age Pension is more than a safety net. It plays an important role in supplementing the superannuation savings of retirees and allowing them to maintain their living standards. It also provides a buffer for retirees whose retirement income and savings fall due to market volatility, and for those who outlive their savings.
Compulsory superannuation allows people to achieve a retirement income that better reflects their pre-retirement income. As the superannuation system matures, people will increasingly fund more of their own retirement. Nevertheless, the Age Pension will continue to supplement the retirement income of a large proportion of people, but to a lesser degree.
Voluntary superannuation provides the flexibility for people to save more than is mandated by the Superannuation Guarantee (SG) and to make catch-up savings after periods out of the workforce. It also provides an opportunity for those not covered by the SG to make superannuation savings.
Superannuation savings are supported by tax concessions for the purpose of retirement income and not purely for wealth accumulation. Yet most retirees leave the bulk of the wealth they had at retirement as a bequest.
The home is the most important component of voluntary savings and is an important factor influencing retirement outcomes and how people feel about retirement. Home owners have lower housing costs and an asset that can be drawn on in retirement. If the decline in home ownership among younger people is sustained into retirement, there will be an increasing number of retirees who rent. The system favours home owners, such as through the exemption of the principal residence from the Age Pension assets test.
The appropriate adequacy objective for a system based on compulsory superannuation is to balance living standards across a person’s working life and retirement.
Saving for retirement involves forgoing consumption in working years. With voluntary saving, people decide on this trade-off. When there is compulsory superannuation, the rate should be set at a level that balances pre- and post-retirement living standards for middle-income earners. It is challenging to set a single SG rate that suits all Australians given the variety of people’s circumstances and experiences.
A rate of compulsory superannuation that would result in people having an increase in their living standards in retirement may involve an unacceptable reduction in living standards prior to retirement, particularly for lower-income earners. This is based on the view, supported by the weight of evidence that increases in the SG rate result in lower wages growth, and would affect living standards in working life.
Other than for lower-income earners, replacement rates that compare income in retirement with income while working are the most appropriate basis for assessing whether the retirement income system delivers adequate retirement incomes. Replacement rates align with the objective of achieving a reasonable balance between living standards in working life and retirement. The suggested benchmark replacement rate is 65-75%.
Most recent retirees are estimated to have adequate retirement incomes. Surveys suggest retirees generally have higher levels of financial satisfaction and lower rates of financial stress than working-age people.
Under the legislated increase in the SG to 12%, the projected replacement rate for future retirees with typical working lives exceeds the suggested 65-75% benchmark rate across most income levels.This assumes people draw down their savings in retirement. If they only draw down their superannuation at the legislated minimum rates, which many people currently do, those in the upper half of the income distribution will not achieve the 65-75% replacement rates.
More efficient use of savings in retirement can have a bigger impact on improving retirement income than increasing the SG. If the SG remained at 9.5%, and retirement savings were used more efficiently, most people would achieve 65-75% replacement rates. Most would also achieve higher replacement rates than with the SG at 12% and drawing down balances at the legislated minimum rate.
The focus of superannuation has often been on building larger superannuation balances through increased contributions. But lower fees and higher investment returns will increase superannuation balances. Crucially, there has been insufficient attention on assisting people to optimise their retirement income through the efficient use of their savings.
- Retirees are generally reluctant to draw down their savings in retirement due to complexity, little guidance, reluctance to consume funds that are called ‘nest eggs’, concerns about possible future health and aged care costs, and concerns about outliving savings. Currently adding to concerns is uncertainty around the impact of the COVID-19 Pandemic.
Using superannuation assets more efficiently and accessing equity in the home can significantly boost retirement incomes without the need for additional contributions.
- A range of measures could help people have the confidence to use their assets more effectively, including focusing retirement planning on income streams rather than balances, better quality and more accessible advice and guidance, and advancing the concept of the Retirement Income Covenant so funds guide members into effective retirement strategies.
- The Pension Loans Scheme is an effective option for accessing equity in the home for both age pensioners and self-funded retirees. The current exemption of the principal residence from the Age Pension assets test is a disincentive to using the equity in the home to support retirement incomes.
Many stakeholders pointed to inequitable retirement outcomes for various groups, such as women, Aboriginal and Torres Strait Islander people, those with disability and those not covered by the SG.
The Age Pension helps to reduce income inequality for these groups in retirement compared with working life. But an individual’s superannuation balance, and retirement income, largely reflects the extent of their engagement in the workforce, both income and years worked. Those on higher incomes make more superannuation contributions and have larger superannuation balances. For example, the gap in superannuation balances at retirement between men and women is the accumulation of economic disadvantages faced by women in working life, particularly the gap in earnings and time spent in the workforce.
Some groups are more adversely affected than others by aspects of the design of the system. Changes raised by stakeholders that could improve the fairness of the retirement income system include removing the $450-a-month threshold when the SG is paid; paying the SG on employer paid parental leave and the Government’s Parental Leave Pay; giving greater visibility of superannuation balances in divorce settlements; extending the SG earnings base to include overtime; and ensuring people receive the SG they are entitled to, such as by paying the SG at the same time as wages and better enforcing sham contracting laws. The impact of some of these changes on people’s retirement incomes may be small.
While the Age Pension helps offset inequities in retirement outcomes, the design of superannuation tax concessions increases inequality in the system. Tax concessions provide greater benefit to people on higher incomes.
Government expenditure on the Age Pension as a proportion of GDP is projected to fall slightly over the next 40 years to around 2.3%. Higher superannuation balances reduce Age Pension costs. The cost of superannuation tax concessions is projected to grow as a proportion of GDP and exceed that of Age Pension expenditure by around 2050. This is due to earnings tax concessions. The increase in the SG rate to 12% will increase the fiscal cost of the system over the long term.
Voluntary superannuation contributions are largely concentrated among those nearing retirement, and particularly at the higher end of the income distribution. The evidence suggests that tax concessions encourage saving in tax-preferred forms, but they may displace other forms of saving and have a limited impact on overall saving.
There are areas where superannuation tax concessions are not a cost-effective way to help people achieve adequate retirement incomes. In particular, the cost of the earnings tax exemption in retirement will grow faster than the growth in the economy as the system matures and provides the greatest boost to retirement incomes of higher-income earners.
Many very large superannuation balances were built up under previous high contributions caps and are expected to stay in the system for several decades. At June 2018, there were over 11,000 people with a balance in excess of $5 million. People with very large superannuation balances receive very large tax concessions on their earnings.

So what can you do about this?

It’s going to take a while for the federal government to change policies based on the report. Josh Frydenberg has even said he won’t decide on whether the SG increase will go ahead from 1 July 2021 until the May 2021 Federal Budget. That adds an unnecessary headache for businesses, who won’t know if they need to budget for a 0.5% higher wage bill until less than 2 months before.