The distortions in our retirement system

So many comments. Wonderful, now all we need is to define "Enjoyment in Retirement".

The Abbott Liberal Government announced including part of the family home value as an asset for the age pension. I recall seeing Amanda Vanstone argue that to her it seemed inequitable that someone in $4m house could still get the full age pension. My recollection is she challenged viewers as to what value someone's family home could be before they felt getting Government money was unfair.
Anyway, the point is one Government has had the courage to include part of the family home value.
That Budget failed as it tried to do too much at once. Media stories with little old ladies living in the same home for 60 years didn't help either.

Superannuation was/is meant to provide retirement income and should only be paid as a pension!. Government pension should only be paid to those below a certain income which should include income from other sources. One simple income test.
Only available lump sum should be on death of the superannuent(s) with tax to be paid by recipients(beneficieries)

Brian, I can't disagree more.
Yes, the main intent is to provide for people to have a comfortable retirement - as comfortable as possible given their income earning capacity during their working life, at least.
But that does not mean that the capital accumulated over that working life should then be locked up forever! We live in a country and economic system that does well in large part because it values freedom of choice. Start taking that choice away and we all become poorer.
And why should you limit the possibility of someone, having worked for say 40 years, taking some of their super as a lump sum to have a 6 month trip around Australia or further afield when they retire? That's still super providing for someone's retirement income. Or would you rather they went into debt to pay for their holiday and then used a limited cash flow from super over the next few years to pay it off? Why would the government want to start dictating like that in a democratic society?
As for the pension - there is a simple incomes test. But it's not enough, because an assets test is also a key part of fairness, to try to discourage people from holding too much of their wealth in non-income producing assets.
As I said, I can't disagree with you more.

We need a bipartisan National Longevity Strategy, and we need it quickly. Bipartisan so that the outcome is about long-term fiscal prudence, what's for the good of the country, and not about vote getting. Both sides of government need to announce it, make it clear to the public why it's needed, what it's trying and achieve, and follow through on the recommendations. It should be a roadmap to allow recommendations to be phased in in an attempt to be as fair as possible. Wishful thinking maybe but we need it.

I agree Rick, however I'm not particularly excited about the possibility of anything bi- or even multi- partisan happening along these lines. There is the government, and then there is the opposition, the Greens, the Teals, assorted independent senators - all with their own agendas and axes to grind, as can be seen every day in Parliament. Getting agreement on anything within those stakeholders would be difficult indeed.

As for the original comment - that would be changing the rules, and changing the rules shouldn't be done with the stroke of a legislative pen, because people have based their futures on the rules and they way they work at the time. I'm actually firmly of the opinion that a certain amount of any superannuation should only be available as a pension, however what amount / percentage that is, and how you bring that into effect I don't know. As always, the law of unintended consequences regarding human behaviour may play a part. The complete absence from the legislative field of any considerations about decumulation is a sad indictment of all sides of politics - they only seem interested in the topic if they can find a way to siphon some more $$ into the coffers.

Brian, the people that need lump sums the most typically are low-income earners.

Your policy stance impacts the most venerable of our society.

They system fundamentally works just needs a few tweaks

One aspect I am surprised you did not mention, because it creates two classes of retirees. A pension which pays a salary for life, possibly quite a high one, because it cannot be cashed in, is not included in the pension assets test.

This leads to situations where those privileged with a substantial pension from past employer(s) also receive a part government pension. Whereas someone with far less assets than it would take to return the same substantial income, who gets far less income from their investments, gets no government pension.
The pension income test is quite generous but the assets test is not and is designed to strip assets. In slashing the pension assets test Liberal governments changed government pensions from a well earned right to something akin to social security.

When this inequality is widely understood people with either put all their superannuation into the family home or blow it so they can get a government pension. Current super policy is not sustainable as retirees do not get equitable consideration of their financial situation.

Great article and interesting comments. I realise that there are a lot of people who genuinely need help. However, the system should somehow also take into account those who spend all their earnings earlier in life. I know many people - same job, same incomes, some spend up big - eat, drink and party like there’s no tomorrow. They end up getting pension benefits while those who planned for their futures and lived a more modest lifestyle get nothing!

Wow, the article certainly kicked the hornets nest! The comments are as interesting as the article. The answer - there is no answer, there will always be inequities as life itself isn’t fair. My financial advisor, and many others, are universal - try and fund your own retirement because you don’t know what the government will do to super or the pension. Sure, your strategy might be to live it up and then live off the government but what if there is a war in the future and you have no savings? Anything can happen in the future - the system is what it is - be prudent.

Solution is a ubi and a progressive tax rate on both income n assets.

Universal payment is a more sensible solution for pensioners ..
How is it fair that two individuals could work same job earn the same pay but make different choices. 1 of them forgoes things in life like new cars holidays etc by saving and investing while the other spends ever dollar they earn gets a full pension?
Even socialist NZ pays the piper in this case..

Most of these comments are spot on. The whole welfare system needs a good going over, from families earning well over $200pa getting childcare subsidies and taxpayer funded parental leave, to the assets and income tests for pensioners (note that Costello doubled these tests in 2007! and Libs later reduced the thresholds slightly. No couple with nearly a $1m in assets should get any pension or health care card. New limits for seniors health care card are absurd. Couples on $144,000 (often entirely tax-free) do not need Government support. Jon does not mention aged home care packages which are ridiculously easy to get (I know a couple on Level 2 & 3 packages who managed to paint their own house - when I asked how they got them, they just said they lied about what they can do!). What’s more if you are a full pensioner you pay nothing towards the cost. So said couple can get $40,000 pension, carers allowance and two home care packages (about $50,000) over $90,000 total. How can this be justified or sustainable. Likewise, the lifetime income contribution to aged care of under $80,000 is also simply unsustainable. These are just more reasons to put all your money into your house and live off the government. Downsize when the $400,000 runs out and start again. Having saved when working, accumulated a decent amount of super (so that I am fully self funded (no concessions at all) and a relatively modest house, I regret doing the right thing setting myself up to get a full age pension. Someone made the comment that the age pension used to be universal. I don’t think that this was ever the case, there was always at least an income test on this.

Dear reader, I have great news. Transfer your home and all of your assets to me - in return I will pay you the Equivalent of the age pension, along with a bit extra to cover all of the concessions you should get. In 5 years you will be eligible to live the dream on the age pension.

Good to see at least someone with a wicked sense of humour! Overall, we are, perhaps understandably, a very serious lot on here! A bit of levity and a good laugh is appreciated. Thank you. Kudos!

I agree re subsidies for children and parental leave. There should be a cut off with subsidies (if at all) for no more than two children. The planet is overpopulated as it is.

We are in the same situation as Frustrated Citizen, and endorse his comments re the current welfare system needing an updated overhaul. the only exception being the Health Care Card. Being in good health most of our lives, but a few medical conditions creeping in now and it would be a help with costly scripts. There is a lot of difference between $6.80 and $42.50 per script. I also believe that there is a yearly maximum spend of $245, and thereafter it is supplied free. The entitled should be on their knees everyday thanking the poor taxpayer for this generosity.
But back to your querie about the universal age pension scheme. This was the reason given several years after the depression and prior to WW11 for an increase of income tax rates to flow to a special fund for all taxpayers to receive a retirement pension, the fund was in place and had funds,but as usual, it never happened in reality, but the increased income tax charge was never removed, possibly even increased to cover war outlays.

Another point which rarely seems to raise its head is that in relation to housing, exemptions and the failure to tax capital gains on the principal place of residence create considerable inequity in society, eventually flowing through to retirement income policies. It is beyond belief that capital gains tax is not applied to the principal residence. Instead the full profit remains in the economy thereby compounding increasing property prices. It is clear, therefore, that at some levels it is far better to upgrade the family home with untaxed gains than to put them into superannuation or other investments which may be subject to tax in the future. The effect is worsened by the non-existence of any form of inheritance tax other than some capital gains (other than in relation to the principal residence). This subject is of course anathema to politicians of any persuasion!

My last comment wasn't published. I used to work in the industry. RBLs got so complicated (a balance between 800-900 000) was considered real wealth. The system was replaced by something simpler and it now costs the govt >1 mill to support a pensioner couple. We are a country that has put aside funds for this, unlike others who pay unfunded benefits in currencies that can only depreciate, as is ours now. The reward for locking up your savings for years to provide for yourself was the promise of it being tax free at the end. After all, we don't have young fit bodies anymore. Keep taxing it. You'll find the wheel will go full circle. Young people will rebel when they realise that the more they put away in super, the more they will lose, because they will keep tampering with the system, and they'll wake up that they'll never see their savings. It will be eaten up by fees and increasing rules as to what age you can access it. The system was good as designed. I won't go into the earlier history, where everyone was granted a pension until this was deemed 'unfair'. Keep messing with the system. My advice to the young is don't contribute. Get your own home instead, however humble.

"However, they can access their total super balance, tax-free, from age 60 if they are FULLY RETIRED."

Is this correct? My understanding is that I just need to retire from one of my multiple jobs at 60 and don't need to be fully retired and can continue working. I believe that someone working only one job could also retire and then pick up a new job shortly after converting their super to pension mode. Please clarify.

This is not correct. You can easily overcome this by “intending” to retire - take a holiday and then go back to work. Easier still is setting up a business where you are not “employed”. There are even easier ways but can’t publish them.

Jon, you stopped short of explaining the incomes test. This makes old age pension recipients very high marginal tax rate payers!
My brother in law earns the princely sum of $71,000 as a factory worker. He is 60. His wife is older and gets a part-pension of about $8,000 a year. They have a very modest mortgaged house valued at about $400k in the suburbs of a city that isn't Sydney. They have whatever super he has accumulated, which couldn't be much given how low his income has been all his life.
When he gets a pay rise not only does he pay some tax from it (fair enough) but her pension is reduced by 50 cents for every dollar extra he gets (gross). So as a very low income couple they get whacked 70% for every pay rise he gets!

That totally sucks.
It can't be right.

Excellent explanation of the system. Clear and concise. Thanks Jon.

The whole pension and associated handouts are directed to people who don’t need them. I am a self funded retiree and tongue in cheek I applied for the seniors heath card….they gave it to me along with $78 QTLY payment. I don’t need it, I am lucky I take no pills and healthy….I get rego reduction and state power supplement . It’s there I take it but the governments should tighten the handouts so people like me, (I am sure there are thousands who really don’t need any assistance,) don’t get access to funds we don’t need. My yearly income through my SMSF is six figures tax free yet the government uses a deeming rate to determine mine and others income that is so far from actual income it’s laughable…….but we are all a gready lot……..all want hand outs …..all expect it……while those who really need it suffer…….

Paul, would you be happy to pay say a 2.5% tax on withdrawals from your SMSF? I'm in a similar position, and thankful that I have adequate retirement income due to going without, and working for 38 years in a Bank -the last few were miserable with unachievable KPI's and ultimate reward - retrenchment.

Interesting article, but one point, home owner v renter, and I acknowledge different circumstances, different outcomes. My sister and her husband are on the full pension and rent, I am a self funded retiree living in my own home. However, my sister pays less in rent per annum after government rebates than I do in rates, water and insurance, additionally I have maintain my home where the landlord is responsible for all maintence on the house my sister rents. So retired home owners are not always better off then retired renters.

Mick, this will depend on where you are in Australia. Rents in capital cities at the moment are soaring well above inflation. The last 12 months have been extraordinary - SQM research reports combined Capital City Average Rent up 23.8%! As a home owner you have guaranteed tenancy for life and the costs you mention are going to rise modestly. Renting is fraught with unknown future cost and uncertainty of location.

An excellent analysis. However, we need much more than financial solutions to respond to the challenge (and opportunity) of increasing longevity. About half those alive today at 67 are likely to live beyond 90, whereas when they were born (1955) that number was about 70. Over that time the ‘entitlement’ to the age pension was raised just two years.
The situation won’t be resolved overnight or with a bit of tweaking. We need a National Longevity Strategy based on much better co-ordination of government responses, and a much greater awareness in the community of its own role.
The federal government should sponsor this strategy to enable the states to establish matching strategies and support. It should also sponsor a national longevity education program beginning from midlife to ensure next generations are not anchored in a hopelessly outdated expectation of financial support while they remain in reasonable health. Having a coherent personal longevity plan frames personal health, career, financial and estate planning decisions.
We already know much of what can be done. It’s time to get on with it and ensure the growing longevity bonus of increasing healthy lifespans is properly understood and shared and becomes a positive expectation for future generations.

It's not just the retirement income system that is distorted and subject to misallocation and rorting. The Medicare system, public school "fees", childcare subsidies - all the "universal access" government payments are great in theory but have to be paid for out of a small tax paying population. Heaven forbid that co-payment would be expected for all but welfare recipients.
Although we might think we have moved on from our colonial past, Australia is still very much tied to the notion that the "government must provide". The COVID support largess has entrenched this belief even further into the collective psyche.

Each respective government tinkers with the system ,based on their respective social ideology. So over say 15 years you have a collection of “ adjustments “ which can be counter intuitive/ productive to each other ,resulting in the current complex and distorted outcome we have today.along with its massively expensively administered costs.
I do not pretend to have all the answers , however some how we need to take the administration and over site away from each Federal administration where each cannot continue to tweak with a already unbalanced system often to the detriment of current and future retirees.

Kate, the federal government, as a currency sovereign of a wealthy country, does NOT have to raise taxes to afford it's spending. In fact, it happens the other way around. Read The Deficit Myth by Prof Stephanie Kelton, its an eye opener.

A good explanation Jon

Jon, a great summary of our retirement system as it is today. These are the facts and circumstances we have to deal with. Tomorrow they are likely to change but we will still have a retirement system, different, and distortion will remain though it too may be different. At the same time, those of us who engage with it will approach it from different needs and perspectives and evaluate it from how it meets those needs and perspectives. And our personal needs and perspectives are less likely to change than the retirement system. End result of this is that regardless of how the retirement system changes, it will always meet the needs and perspectives of some but not all who engage with it. A Better system is more likely gauged by how many are satisfied with a new system versus satisfaction with the old system. Despite this, Govts and their legislation will never get full approval because they will never satisfy all.
So, we all need to deal with what we have not what we wish we could have. We know the system will change routinely so take a conservative view to minimise disappointments and hope that better opportunities evolve because you have no control beyond that.

"Access to super before it is assessed for the age pension, means that not all super savings are used to fund retirement income."

If you're suggesting in any way that access to super should be deferred until pension age (67) please don't put this out there!

It's our money, that in part we've been forced to forgo present consumption for! The less government interferes or has it's hand in our pockets the better. To quote a former US president (Reagan): "Government is not the solution to our problem, government is the problem."

I have no problem with you using your concessionally taxed savings to buy the Landcruiser and caravan. Similarly, it is quite acceptable for your neighbour to use their super savings to live rent-free on the full age pension in retirement. It must be legitimate because no government has sought to plug this leakage from super.

My objection is that many “experts” look at these super tax concessions and are surprised that this taxpayer generosity does not reduce the cost of the age pension. They then claim that taxes on super should increase on those living on their super in retirement.

And it is those people who are using super as intended in retirement by reducing or eliminating their dependence on the age pension.

Having paid full UK NI contributions my wife and I receive a non-indexed payment which is not considered a pension in Australia so, as I understand it is deemed as an asset. My 15 years of service NHS pension is treated in the same way in contrast to my wife’s Comcare pension which is treated in the like our SMSF income meaning we are likely to forever be ineligible for an Australian age pension. There must be many UK migrants coming at a later age in similar circumstances. Thank goodness for our eligibility for Commonwealth aged care health card. These complications are not made clear at the time of migration.

I am confused as to why Robert says his UK national pension is not considered a pension in Australia. I have also never heard of it being assessed as an asset. How do you value that? The link below to ATO website quite clearly recognises this as a pension and I and my late husband have included our UK pensions as foreign income (less Undeducted Pension Price at 8% - easier than establishing cost of NI stamps over working life!) in our ITR's. Perhaps Robert can give website link to clarify my bewilderment as I am about to claim CSHCC under increased income limits - having lost access to that when my husband died 2.5 years ago.
https://www.ato.gov.au/Individuals/myTax/2021/In-detail/Foreign-pensions-and-annuities/

Robert the British Pensions in Australia organisation has been advocating for UK pensions to be indexed in the various countries which do not receive increased payments from the UK government, it might be worth joining the group?

You are entitled to reduce the amount of the UK and Commcare pension by the amount you contributed over the years to them. It is a UPP or undeducted purchase price of an annuity. Generally re the U K pension it's a fixed percentage.

The Liberals under Abbott had in their first budget that the family home over $4m from memory would be included as an asset for the age pension. I recall Amanda Vanstone discussing this. That Budget made the mistake of having a massive amount of proposals to deal with the debt, which saw it fall over.
My cynical side can see the family home protection being grandfathered around 2032, when all Boomers are in the system and Gen X yet again misses out.

Thank you to Gen X for being the 'baby busters' as population growth is the root cause of high housing prices.
Instead of being the victim, get politically active to improve our country.

I'm not sure Labor are super keen to allow retirees to pay nil tax on a super pension...IMO this is their next focus. Has franking credits actually the table. With inflation at 8%, without the impending wage spiral, retirees have reason to be worried.

A large part of the problem is that the current assets test is extremely generous. A couple who own their own home, have a new small/mid size SUV and contents worth about $50k, plus $750k in their super would get over $10,000 in age pension plus all the benefits of the healthcare card. If they don't mind drawing down on their super a bit (which is what they're supposed to do) they could lead a very comfortable life for most of their retirement, and as they age and spend less money easily cover their living costs in their later years as well.

A couple with their own home, a used car and contents plus 400k in super would get $40k in age pension plus could sustainably draw down another $16k from their super giving them $56k a year to live on with no tax to be paid, no kids etc. That should be enough to lead a pretty good life, and if they've done some good planning they can then hand on all of those assets tax free to their children.

I would like to see the age pension treated as the welfare system that it is supposed to be, as opposed to the entitlement system that it is. Cutting the assets test threshold dramatically would be a good start in doing so.

"Cutting the assets test threshold dramatically would be a good start":

... to increase the Asset Test Taper rate and increase 'perverse' incentive to reduce Assessable Assets.

Threshold $0: get $40,000 / y if $0 assets; and get $0 / year with $1 assets?
That's a return of 40,000 / 1 = 4,000,000.00% / y.

With 4% on money-in-the-bank any potential Age Pensioner with $1,000,000 Assessable Assets will hasten to 'waste' it, including their last $1 - to get a full Age Pension indexed for life worth $40,000 / y.

"hasten to 'waste'":

With Age Pension as a Taxable Entitlement there would be no 'perverse' incentive; the elderly could pursue Mammon to the grave, making Superannuation obsolete, and taxes on the wealthiers earnings paying for low incomers.

It would be nice to think that pension recipients aren't out to get every last dollar that they can from the government and are happy to use some of their retirement savings to provide for themselves. Or at the very least to give themselves a safety net, and have money available to pay for house repairs, replacement cars, holidays etc.

And cutting the threshold dramatically does not mean that it starts or finishes at a threshold of $0. As much as I might think that paying ten grand a year to a homeowning couple with three quarters of a million in super paying no tax is excessive, that's not the same as wanting someone with $75k in the bank to get nothing. Somewhere in the middle would make a lot of sense.

"It would be nice to think that pension recipients aren't out to get every last dollar that they can from the government":

It would be nice if government could think and understand and explain numbers. Simply tallying the votes of the un-enlightened leads to 'perverse' outcomes noted afore.

"cutting the threshold dramatically does not mean that it starts or finishes at a threshold of $0":
The extreme example to show how tapering works as simply as possible. Black, white.
Any taper results in 'perverse' incentives.

"Somewhere in the middle would make a lot of sense.":
... by increasing the taper rate and hence 'preserve' incentive?

I would think that most people aren't out to get every last cent possible from Centrelink, especially if it means having to spend down all of their money or put it into their house thus making it inaccessible except through a reverse mortgage.

They will potentially take some action to keep some of their pension, but to use my example above it seems unlikely that most couple who currently have $750,000 in assets and are getting $10k a year are going to spend $300,000 on renovations or a very lavish holiday etc simply to keep receiving that $10k if the assets test threshold drops by $300,000 or so. To be sure there are some that will, but in many ways they would be putting themselves in a worse financial position by doing so.

And over time those that reach age pension age aren't going to have that memory of previously being able to get more age pension, and will simply accept that they are going to have to spend some of their own money to fund their retirement.

"couple who currently have $750,000 in assets and are getting $10k a year":

Age Pension:
= (26 * 1547.6) * (1 - ((750000 - 419000) / (935000 - 419000)))
= $14,426.27 / y

Investment 4% yield, 5% inflation; real yield:
= ((1 + 4%) / (1 + 5%) - 1) * 750000
= $-7,142.86 / y

Total real income:
= $14,426.27 + -7,142.86
= $7,283.41 / y

Government 'aving a lend of middle wealthers.

"keep receiving that $10k if the assets test threshold drops by $300,000 or so. To be sure there are some that will, but in many ways they would be putting themselves in a worse financial position by doing so.":

Age Pension:
= (26 * 1547.6) * (1 - ((750000 - (419000 - 300000)) / (935000 - (419000 - 300000))))
= $9,122.50 / y

Investment 4% yield, 5% inflation; real yield:
= ((1 + 4%) / (1 + 5%) - 1) * 750000
= $-7,142.86 / y

Total real income:
= $9,122.50 + -7,142.86
= $1,979.64 / y

Each $1 reduction in Assessable Assets results in extra Age Pension:
= 40000 / (935000 - (419000 - 300000))
= $0.049019608
Indexed. Better than banked.

Jon - absolutely spot on with the problems ! It's interesting to compare the Age pension system to, say, the UK National Insurance system where the 'user pays and benefits' process means that everyone who pays NI during their working years gets these payments as credits towards the UK Government pension. The Aussie Super system does have some benefits compared to the UK (e.g. $1.7m TBC payments tax free for the over 60s) but I do wonder if countries like the UK / NZ have a pension system that better avoids the law of unintended consequences as you point out !