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10 ways to fix Australia’s broken retirement income system

I heard about the concept of VUCA mentioned on radio the other day. It was used in the context of geo-political instability, but as my passion is helping ordinary Australians understand the almost impenetrable rules of retirement income, VUCA struck a chord.

What is it? According to the Harvard Business Review it’s an acronym which captures the thought, ‘Hey it’s crazy out there’. More specifically, it refers to:

  • Volatility,
  • Uncertainty,
  • Complexity and
  • Ambiguity.

Australia’s retirement income system in a nutshell, methinks! Too many changes to the rules, and too many options, poorly explained and then seemingly at odds with each other when decumulation kicks in.

My strong, long-held, belief has been that a lack of financial literacy is the main factor preventing many Australian retirees from overcoming such VUCA and ‘living their dream’. Not too few savings, nor using super as an estate-planning vehicle, nor spending too little, nor spending too much. Rather, an inability to grasp the full breadth of their choices across the five funding pillars (Age Pension, super, private savings, work income and home equity) and the sea of complexity in which they exist.

Is it really as straightforward as this?

Having canvassed some thought leaders in the retirement industry, I’ve now modified my thinking. But more about that later.

I asked two simple questions of four highly respected industry leaders. I chose these commentators because their different areas of activity offer as close to possible a 360-degree view of retirement income needs. Those who responded to these questions are:

  • Think tank founder and researcher, David Bell (Conexus Institute)
  • Policy expert, now consumer superannuation advocate, Katrina Ellis (Super Consumers Australia)
  • Former investment manager now advice solutions founder, Jeremy Duffield (Retirement Essentials)
  • Policy expert with specialisation in later life funding needs, Louise Biti (Aged Care Steps)

The questions posed were:

If asked about ways to improve Australia's retirement income system, which two things would you change or initiate? What is a quick win and a longer term or structural reform?

Here’s what they had to say about what’s needed to improve Australia’s’ retirement income system.

David Bell, Executive Director, The Conexus Institute

Quick win:

Super funds need to engage with their members more in the lead-up to retirement, introducing them to the decisions they will face and some information materials that they can engage with. Helping future retirees prepare for big, possibly complex, and, in many cases, confronting decisions can only be beneficial. Some funds do this really well as part of what they call their member journey mapping. Funds could establish, say, engagement prompts at ages such as 50, 55, 60, and 65. Best practice at age 50 could include:

  • A retirement income projection with links to a more interactive calculator
  • A checklist of things to think about around your retirement planning, including:
    • retirement age
    • how retirement is financed (how savings are used, type of products, the role of Age Pension etc.)
    • further information required, including access to interactive tools
    • pathways for further assistance (how the fund can help or access to a financial adviser)

Longer-term or structural reform:

All the data points and anecdotes indicate a large dispersion in progress being made by super funds in developing their retirement capabilities. Some funds have made great progress and others are lagging. Not every super fund should be ‘entitled’ to transition their members into retirement just because they were members during the accumulation phase. Conexus has proposed a retirement licensing regime as a solution, and we continue to work on this idea. Simply, set high capability-based standards that super funds must reach to be a licensed retirement fund, and only allow licensed retirement funds to service Australian retirees. That would greatly accelerate the super industry and ensure better retirement outcomes for all retirees.

Katrina Ellis, Deputy CEO, Super Consumers Australia

Quick win:

Remove Account-Based Pension (ABP) minimums so anyone who is over 60 can start an ABP if they want. Most large funds are keeping members with low balances from moving into the tax-free phase of super by setting a minimum balance required to open an ABP. This is unfair and means that people are stuck in an accumulation account paying 15% tax on their investment earnings. Everyone should be able to access an ABP and enjoy zero taxes on earnings once they hit age 60, regardless of their account balance.

Longer-term or structural reform:

Establish performance-tested Account-Based Pensions and create a comparison tool so people can find good products.

The performance test has been successful at removing bad MySuper products in the accumulation phase. No such test exists for ABPs. Currently retirees are in the dark about the quality of their fund's ABP options and have no way of comparing returns or fees. The Government needs to do more to protect customers from ending up in a dud retirement option.

Jeremy Duffield, co-founder, Retirement Essentials

Quick win:

Most people apply late for the Age Pension...and the Age Pension is much more important than the industry appreciates, given that over 50% of people in retirement get more than 50% of their retirement income from the Age Pension. Many people also fail to apply for the Commonwealth Seniors Health Card (CSHC). So, I'd say something easy for the government to do is to contact people before they reach 67 to let them know that they may become eligible for government benefits, either the Age Pension or the CSHC.

Another very practical thing the government could do is to make ongoing compliance with the Age Pension less onerous. The requirements for keeping Centrelink up to date are impractical. I'm also in agreement with the Grattan Institute on the need for increased Commonwealth Rental Assistance since it's so apparent that older renters, particularly women, are the worst-off segment of the retirement population, with no relief in sight.

Longer-term or structural reform:

Obviously, implementing the Quality of Advice Reforms (Delivering Better Financial Outcomes). We must make quality affordable advice available to the massive wave of retirees. Beyond that, I think a review of the means testing criteria is needed. Taper rates are too tough.

Louise Biti, Founder Aged Care Steps

Quick win:

Support at home and aged care involve complex and important decisions but emerge at an age when clients are often less capable of making these decisions, and family may have conflicting views and priorities. Objective and qualified financial advice can make a difference. It would be great to see the Government include frailty planning and aged care advice as a service that can be paid for out of the Home Care Package budget.

Longer-term or structural reform:

Frailty risk is the forgotten pillar in retirement planning and needs a greater focus throughout all stages of retirement planning. This extends beyond just how to fund a move into aged care. It also involves planning where a person chooses to live as they age, an understanding of how they will live there, the support needed to remain in that home, and strategies for how to fund these choices. This journey often requires swapping the family home for a more appropriate home in a community setting (e.g. retirement village) or residential care. I would like to see a focus on product development to extract equity from the home that innovates away from the traditional loan product.

True innovation means reimagining the products – possibly through a life insurance option that is used to pay the Refundable Accommodation Deposit (RAD), with the RAD returned to the insurance company to minimise the cost of premiums. I am not sure that I have the solution, but it would be good to see some discussion and innovation. This may require some legislative change to allow RADs to be repaid to the insurance company rather than the person’s estate.

My take

And what was my change in thinking? At times of peak VUCA, when it really is ‘crazy out there’, the best way to respond is surely to ‘go hard or go home’. So I’m thinking big when it comes to tackling the many problems associated with the Australian retirement income system. It’s still way too complex and those with the median super savings (or lower) are not likely to try to access a full comprehensive financial plan, so they are essentially DIY retirees.

Quick win:

My ‘quick win’ would be to equip pre-retirees (those aged 55-60) with the resources they need to understand how the ‘bits’ fit together at retirement, through workplace education two years before Preservation Age, and standardised tools (educational slides and calculators) that step them through the basics. These tools would be Government-designed but provided by each and every super fund. I really believe that, after thirty-plus years of mandatory super, it’s well past time for the Government to step up and provide some simple, plain English retirement income guidance that must be shared with everyone in the country as they approach Preservation Age.

Longer-term or structural reform:

Initially I thought – in line with suggestions over time from Dr. David Knox (former Mercer partner and actuary) that we need to scrap the means test for the Age Pension. And maybe no longer exempt homes above the value of $3 million from an assets test. But this is still fiddling around the edges given the bloated bureaucracy of Age Pension assessment and delivery. So I now believe that the best long-term solution is to establish a Universal Age Pension. It will be much cheaper and easier to deliver – no rules apart from age and residency will ensure that! We could then encourage retirees to work as much as they like – without penalties to their entitlement – but require them to pay tax on earnings at current rates. There would be no tax favours to older workers as they would already have a guaranteed base income.

Then there’s a second, bigger task to tackle in winding back concessions on super, but that’s for another article, another day.

It was a fun exercise to ask people with big brains and expertise from decades of experience to redesign the policy settings for the way we fund our later lives. I believe there are some really good ideas in here. But have we missed something? If so, what is it?

 

Kaye Fallick is Founder of STAYINGconnected website and SuperConnected enews. She has been a commentator on retirement income and ageing demographics since 1999. This article is general information and does not consider the circumstances of any person.

 

40 Comments
tom taylor
March 05, 2025

I have a novel idea. How about we ban all political input into superannuation. Ban all past politicians and labour members from being directors. Stop all taxation of super. Remove all limits on how much money you can put into super after paying you payg tax.Allow people who want to have a SMSF to manage it themselves and remove most of the oversight. Once you have paid your payg tax anything you want to put into super is yours. No taxation until you retire then the income you receive is taxed at your marginal rate.

Disgruntled
March 06, 2025

That's a dumb idea.

Superannuation was never meant to be a wealth creation tool.

It needs a Cap

Revenue forgone over all those years of tax free won't be made up with marginal tax payments on withdrawals. Wealthy won't withdraw, they'll bequest it.

Chris Thaler
March 02, 2025

Too many self professed experts having a say in our remaining life(style) at a high cost to us.
We made the decision to retire at 57 & 56 years of age, 20 years ago and live on our accumulated SMSF funds. With appropriate spending and great fun, inc int'l travel, we ,after 12 years, had organised our finances to enjoy a $21.00 aged pension via c/link along with the extra (state & federal) financial benefits available. Still a good life with 2 cars, caravan, house etc. all without any involvement of vulture super (mis)managers.
Planning on another 15 or so years of ongoing enjoyment due to our own decisions.

Winston
March 02, 2025

The simplest and most effective solution would be a universal income from age 67.
No means test, no asset or income thresholds.
This would be the full age pension.
If you have accumulated money for retirement or want a higher standard of living downsize the house.
This simple approach is more effective than trying to educate people on the complexity of retirement planning.
Billions would be saved in admin and everyone would be treated equally.

GT
March 02, 2025

I like this idea - that way all tax payers are entitled to the same outcome, and not missing out because they have prepared for their retirement (like current self-funded retirees).

john
March 02, 2025

Agree with both of you 100%. Govt would not miss out as more tax paid and eliminates much of the asset test bureaucracy.

Olli Price
March 02, 2025

The way to go. The inequity in the the present system is galling. Responsible self funded retirees are "penalized" for doing the right thing. If New Zealand can grant universal pensions, why can't we?

GeorgeB
March 05, 2025

"The inequity in the the present system is galling.Responsible self funded retirees are "penalized" for doing the right thing. "
The politics of envy never rests because "penalized" on one side of the fence called "assets test" looks pretty much the same as "entitlement" on the other side.

Jazz
March 03, 2025

Yes...
$34,000,000,000 in fees charges this' and that's.

Remember the book....where are all the clients yachts...?

Harry
March 03, 2025

Do we really want to fund a pension on some dude in a 20 million dollar house and another 30 million in assets?

Dudley
March 03, 2025

Do we really want some dude in a 20 million dollar house and another 30 million in assets to fund our pensions? Or trust in the tooth fairy?

Samantha
March 01, 2025

A correction. Gough did not fund free University Education. The taxpayers did, including those of us who had to leave school at 15, and by the time our kids were in Tertiary studies, Bob and Paul introduced more pain for us.
One good thing PK did as Treasurer was allow part time and casual workers - predominately women - to contribute to Super. I just wish Governments would run programs to help all workers understand their Super and stop fiddling with it by changing rules, regulations, and taxation.

Steve
February 28, 2025

I still feel that a great missing opportunity is to have a national non-profit annuity programme. Maybe industry super funds, maybe govt guaranteed, but as far as I can see the only annuities are provided by for-profit insurance companies or the like. And that is the problem - far too much of the potential return is taken as profits and the value is pretty mediocre. If people could access not just the earnings but their underlying capital of their savings and remove the "fear of running out" issue I am sure many could have more comfortable lifestyles, rather than die with many hundreds of thousands left unspent "just in case". But the offered returns of the for-profit industry are underwhelming to say the least. Address this problem and you will go a very long way to helping solve the retirement income question. Is it too much to ask - a half decent return (commensurate to a moderate-balanced super fund account), guaranteed for life. Can any investigative journalist examine how much impact moving from for-profit to non-profit could make for annuity holders? My hunch is of the order of 40% greater income......

Dudley
February 28, 2025

"national non-profit annuity programme":
'Universal' Age Pension.

"access not just the earnings but their underlying capital of their savings":
"Is it too much to ask - a half decent return (commensurate to a moderate-balanced super fund account), guaranteed for life.":

Access to all capital can result in no capital and no earnings as may adverse risks eventuating; which may result in demand for additional welfare.

Steve
March 01, 2025

Dudley you're way smarter than saying "Access to all capital can result in no capital and no earnings as may adverse risks eventuating; which may result in demand for additional welfare". I was talking about annuities where by definition the concept of underlying capital is removed and replaced by a lifetime income stream. The point is how much of a potential income stream is lost to the profit margin of the annuity provider. Information provided on a website from another commenter on this site suggested to me the difference could be 40%. That is a $50,000 annual payment from a for-profit insurer could become a $70,000 income if the profit was zero. That to me looks a very attractive improvement if it could be realised.

Dudley
March 01, 2025

"If people could access not just the earnings but their underlying capital of their savings":

Perhaps you meant access to capital to invest in annuities - where capital is then not accessible, at least until end of term annuities.

Also you may be referring to indexed annuities:
https://www.investopedia.com/terms/i/indexedannuity.asp

Even Future Fund has costs to cover and reserves to maintain to reduce apparent volatility.

JB
March 02, 2025

Whatever is currently taken as profits by a retail annuity provider would quickly be surpassed by inefficient costs and management should a government become responsible.

John
February 28, 2025

If the Government wants to change super yet again to pay for its profligacy, please leave those of us who have already retired to enjoy our few remaining years in peace, under the current rules and policies. Yeah, wishful thinking, I know.

Graham W
February 28, 2025

The Age Pension is taxable but rebates make it tax free if it is your only income or you have modest non super income ( over 60). A person receiving a part pension and a good level of say rent and interest could.need to pay tax.

Michael
February 28, 2025

Tax on both accumulation assets and pension assets needs to be equalised - it is crazy that one is 15% and the other is 0%. To avoid any adverse immediate consequences or outcry, it could be done over many years (just like the SG contribution rate rose very slowly over many years). Someone would have to do the sums to ensure revenue to the Government did not fall (and maybe it could be used to increase revenue in conjunction with a universal, non-means tested Age Pension?), but something like 10% tax on investment income across all super assets (and on contributions to accumulation) might be the long term goal. None of this would be retrospective. This should have been done years ago in my view. With more and more money moving into pension phase, soon tax revenue from super assets may start to fall. Again, the sums need to be done, but this equalisation will do away with account-based pensions and allow fund members to draw down an income from their super account when and as they see fit. Too many unnecessary things to think about in the current system. I wonder how many other countries have different tax rates on investment income between accumulation and pension - my guess is few if any, for good reason.

Disgruntled
February 28, 2025

I believe the TBC is fair for the Zero tax environment from your Super in Pension phase..

I just think it should be called Total Balance Cap, not Transfer Balance Cap.

Cap Super at the TBC, no additional funds, once you reach the TBC, other monies need to be invested outside of Superannuation.

Dauf
March 01, 2025

Agree, there has to be a limit to how much is in the tax advantaged super (accumulation and/or pension)…Just pick the amount…$3 tax fee? Other bids? Get the rest out of super as thats enough to advantage people

Make house values above a level also assessable…residue over $1m or even $2m assessable for pensions etc. You can always use a reverse mortgage if you really refund=se to move/downsize

Michael
February 28, 2025

And just to add to my earlier comment - I believe any additional tax on pension asset investment returns (i.e. raising the tax from from 0% to say 10%) could be partly offset by making the Age Pension non-means tested after a certain age e.g. make it universally available from age 90 (note that it's hard for anyone in their 90s to regularly deal with Centrelink - this would remove the regular reporting). That way no-one runs out of money (albeit not a huge income but it is enough to live off frugally) and there is less (or no) need for a annuity. Let's keep everything in the system simple, subject of course to costings. The problem I see with annuities is that you can generally only get them via a financial adviser, even if you want one via your industry super fund. And that complicates things for the vast majority of retirees. The industry seems to saying "let's better educate the population about retirement options" when I say "let's simplify the system so that it's easy to navigate without having to run projections, use online calculators, see a financial planner etc". The problem is vested interests will want to stop this. Is anyone out there REALLY working for a simple system for retirees?

stephen
February 28, 2025

Applaud your efforts to fix the "system" Kaye!

I worked in the Superannuation "industry" for over 40 years, the last 23 of them as a financial adviser mainly helping Baby Boomers prepare then action their retirement. Here are a few key observations from that experience:

1. Most people can afford to retire earlier than they think - this is mainly because they overlook/misunderstand the significant value of the part then full age pension they will be eligible for down the track (to Jeremy's point something approaching 90% of retirees eventually get some age pension - only a small minority remain self-funded)

2. The age pension, in my view, is our worst example of middle-class welfare - you start getting a part pension as a couple when your assets (excluding your home) fall under $1.045m! Again, most people don't know this until they get to age pension age (67.)

3. Most people don't start thinking about retirement planning until their mid-50's - they are too focused on their work, paying down their (increasingly large) mortgage and supporting their offspring who don't/won't leave home until their mid-20's. It doesn't matter how much or how attractive the education or fancy tools you offer on your website - these only gain real traction when the recipient is ready (mid-50's at earliest.)

4. Most people need someone (a human not a robot) to help not just with advice but how to action it (forms etc) This requires an army of Helpline Consultants, Intra-fund Advisers and Comprehensive advisers. I agree with Jeremy (Quality of Advice Reforms) and David that not every fund should be "entitled" to transition their members into retirement. The cost to provide this service/support is enormous so the smaller funds are kidding themselves if they think they will be able to genuinely look after members properly once they reach retirement.

5. The biggest wealth destroyer is divorce/separation particularly after age 50 :( - unfortunately it is impossible to plan for this!

Keep up the great work.

Dudley
February 28, 2025

"worst example of middle-class welfare":

There should be no retired middle-class.

Those home owner couples with Age Pension Assessable Assets greater than $470,000 and less than about $1,500,000 should spend all but $470,000 of said assets, preferably on home improvement, and claim full Age Pension there by converting themselves to low-class deserving of welfare.

Ray Cameron
February 27, 2025

To support Kaye's quick fix recommendation, in 1985 I attended a mandatory pre-retirement seminar run by Defence Force Retirement Benefit Fund (DFRDBF) for all eligible Defence Force members in their 19th year of service. The Defence pension was available after 20 years service. It was a great help to have the various options and outcomes laid out by knowledgeable people.

Aussie HIFIRE
February 27, 2025

I'm wondering how exactly we are supposed to afford to fund a universal age pension? Even assuming some savings from removing the bloated and inefficient bureaucracy that is Services Australia, it is going to cost a tremendous amount of extra money to give everyone an aged pension. And there is absolutely zero chance of the amount of the age pension reducing, so no savings there either. I guess the answer will be that we just pass the debt down to future generations, which in fairness is the current system, just for lesser amounts.

Kaye
February 27, 2025

Hi Aussie HIFIRE (love to hear the derivation of this name), I would be looking at the concessions on superannuation as well as the reduction in Services Australia delivery costs. The cost to the country of super concessions have (or are about to) overtaken the cost of the Age Pension. Yet the benefits are disproportionately allocated to those with enough to live a reasonable retirement. That doesn't seem logical or fair. I realise there is an argument that those with a lot have worked hard to get it, and those with not much simply didn't try hard enough. But I don't buy that, and research tends to suggest otherwise when it comes to life course disadvantage. warmest Kaye

Aussie HIFIRE
February 27, 2025

Hi Kaye,

I’m a member of the FIRE movement and want to lead a pretty comfortable life in retirement rather than a more modest one. The acronym stands for High Income Financial Independence Retire Early.

If we were to look at the concessions on superannuation presumably in the interests of fairness we would also consider eliminating mandatory contributions to super for employees? I believe part of the original bargain with superannuation was that you were forced to contribute, but in order to make up for being forced to do something you received a concessional rate of tax on the contributions and earnings in the fund. Certainly this or some other tax concession is the standard in most other major developed economies around the world. If that bargain is to be restruck and there are to be no tax concessions, or at least less generous ones, why should employees be forced to give up money now that they can’t touch again until 60-65 depending on their circumstances?

Peter
February 28, 2025

I"m with you Kaye. Firstly having had the benefit of a free uni education courtesy of Gough, now to get these super concessions on top, courtesy of Costello, puts me and others in too favourable a position compared to the younger generation coming through.

Dudley
February 27, 2025

"zero chance of the amount of the age pension reducing":

'Mercer senior partner, Dr David Knox, said a universal Aged Pension with the right tax structure would be feasible without a substantial impact to the budget.':
https://www.moneymanagement.com.au/news/superannuation/universal-age-pension-will-incentivise-aussies-save

The change required is a few thousand dollars per year over all Age Pension eligible; less per taxpayer. Tax reform could result in increased economic activity, incomes and tax.

Aussie HIFIRE
February 27, 2025

So basically it would be funded by taxing the age pension, as well as more tax on superannuation in pension phase.

Given that the current age pension is a fairly basic standard of living as things are (it's liveable but if you don't have anything else and you need to buy a new car or replace a roof etc then you're in trouble) taxing it would mean needing to increase it so that the poorest Australians still have enough to live on, in which case we're back where we started but with more complexity. And then taxing the money in pensions that people were assured would be non taxable upon retirement.

I don't see either of those as being politically popular, but I suppose that some grand bargain might be possible. Or more likely we do what governments have traditionally done, kick the can down the road and leave it for some future government to solve.

Dudley
February 28, 2025

'making the government pension “universal” would increase the cost of Age Pensions from $24b to $35b' [ 2008 +$11b ]
https://actuaries.asn.au/Library/MELB%20FINAL%20Paper.pdf

'Nearly 20.5 million active tax file numbers (TFNs) were registered to individual taxpayers in Australia as at 30 June 2022. Of those, around 15.4 million were registered to individuals not in business.29 Oct 2024'
https://www.ato.gov.au/about-ato/research-and-statistics/in-detail/research-for-individuals-and-families/tax-and-individuals-not-in-business

= 11,000,000,000 / 15,000,000
= ~$700 / registered taxpayer.

Aussie HIFIRE
February 28, 2025

From a very quick skim of the paper, the figures that those costings were based on are nearly 20 years old now. So the dollar figure would definitely be higher due to inflation, and I believe that although the proportions of retirees receiving a full/part/no age pension are still roughly the same, the population as a whole is older so the dollar figure would also be higher due to that factor.

And given the current cost of living crisis, I doubt very much that anyone is lining up to pay more tax, particularly if much of the proceeds are going to go to retired couples who own their own home and have a million dollars in investments!

Dudley
February 28, 2025

"higher due to that factor":
Plausible but needs greatly more data to know to what degree. A change in one area can have difficult to predict effects in another due to many variable interdependencies.
The abolition of means tests might be all that is required to generate more economic activity and tax greater than the former 'savings'.
Requires modelling not supposition to be better informed.

"And given the current cost of living crisis, I doubt very much that anyone is lining up to pay more tax, particularly if much of the proceeds are going to go to retired couples who own their own home and have a million dollars in investments!":
Likely, so the money must come from those who will benefit: oldies; future ones in particular. Sounds like taxes on Super.

Dudley
February 27, 2025

"funds are keeping members with low balances from moving into the tax-free phase of super by setting a minimum balance required to open an ABP":

If they have too little after consolidating super, their returns are likely less than the personal tax free threshold.
They could withdraw the lot from super.
Advice should be: 'No need for a disbursement ('pension') account.'

Ian Nettle
February 27, 2025

Almost no comment that will save the country money. Plenty of ideas that will cost more.

Our current tax system rewards passive income and smashes hard work.

Necessary change will not make everyone happy but for younger Australians it is an absolute necessity.

Dudley
February 27, 2025

"save the country money": 'Universal Age Pension' + other tax reform could make the country money.

GeorgeB
February 28, 2025

"Our current tax system rewards passive income and smashes hard work"
Isn't it the other way around because income from passive investments (bank interest, dividends,etc.) gets added to income from hard work and is taxed at the marginal rate of the recipient, ie. the tax free threshold can only be used once.

OJ
March 03, 2025

I agree with GeorgeB. Could Ian Nettle elaborate or at least give an example to support his claim?

 

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