The Australian Government has completed a review of the retirement income system to assess how it will perform in the future as Australians live longer and the population ages.
The review, which was commissioned following a recommendation by the Productivity Commission, was not asked to make recommendations or propose changes to policy settings. However, it did uncover evidence that many aspects of the system need improved understanding.
Key observations and overview
The need to improve understanding of the system
- Dealing with complexity. Complexity and uncertainty, a lack of financial advice and guidance, and low levels of financial literacy are impeding people from understanding the system. As a result, some people fail to adequately plan for retirement and make poor decisions about how to use their savings in retirement.
- The nature of retirement income. Most people die with the bulk of the wealth they had at retirement intact. It appears they see superannuation as mainly about accumulating capital and living off the return on this capital, rather than as an asset they can draw down to support their standard of living in retirement. The family home is an underutilised source to support living standards in retirement.
- The nature of retirement. The nature of retirement has changed. For many, the transition from full time work to permanent retirement is gradual rather than abrupt. Some people retire more than once, others are involuntarily retired. There is no mandatory retirement age for most workers.
- The objective of the system. The retirement income system lacks an agreed objective. Differing views on the appropriate level of the Superannuation Guarantee (SG) rate stem from different views about the system's objective.
- Role of the pillars. The ‘pillars’ of the retirement income system are commonly seen as being the Age Pension, compulsory superannuation, and voluntary saving (including housing). Some see housing as a separate pillar.
- Dealing with diversity. The retirement income system covers people in very different circumstances: different incomes, time in the workforce, employment situation, capacity to save, home ownership status, risk preferences, financial literacy, partnership status and life events. While the system may provide adequate retirement incomes for many Australians, there is uncertainty about if and how it can compensate for those who may fall short, such as women, lower income renters, individuals not covered by the SG, involuntary retirees, Aboriginal and Torres Strait Islander people and those with disability.
Source: The Australian Government – The Treasury.
What does this mean for you?
This review has identified the need for greater financial advice for consumers, particularly when it comes to retirement planning, to help people understand the complex laws and regulations that are already in place.
Without this financial advice from qualified financial planners, you might be missing out on maximising your retirement potential.
Speak to one of our qualified Morgans advisers today to define your own retirement journey.
