Securing the retirement incomes of all Australians: It’s an oldie but a goodie. As the saying goes, we work to live not live to work.
It reminds us that there is more to life than just our day job and that we should all aspire to enjoy life in retirement with those closest to us.
We are fortunate that in Australia we have a system that combines voluntary and compulsory savings for one’s own retirement with government support for those who need it.
This system has served us well, but given its significance we must ensure it continues to do so – particularly as our population ages, life expectancy increases and our superannuation savings exponentially grow.
This is why the government has accepted the Productivity Commission’s recommendation to conduct an independent inquiry into the retirement income system. An independent panel of three will review the existing system, chaired by former Treasury official and executive director of the International Monetary Fund, Mike Callaghan, businesswoman and member of the Future Fund Board of Guardians, Carolyn Kay, and respected academic and member of the RBA’s Payments System Board, Professor Deborah Ralston.
They will look at how it supports Australians in retirement, the role played by each of the three pillars – the Age Pension, compulsory super and voluntary savings – and their distributional impacts across the population and over time. To be concluded by June next year, the review will provide a fact base to inform policy development and represents the first holistic examination of our retirement income system since the introduction of compulsory super over 25 years ago.
There are three reasons why this review is important.
First, it will help inform Australians about the operation of the retirement system, empowering them to make better choices.
With more than 15 million Australians having a super account and two-thirds of those aged over 65 receiving the full or part Age or Service Pension, we all have an interest.
The review provides an opportunity to improve the information and the tools available to Australians so they can better determine how much they will need in retirement and how to make the most of their savings over their retirement.
For example, it’s not widely understood that a typical retiree aged 65-69 will spend nearly twice as much a year as they will when over 85 years of age.
Second, the review will help us better understand the impacts on the system of a complex and changing landscape. There are some profound demographic shifts under way.
People are living longer, with life expectancy increasing by seven years for males and five for females between 2020 and 2060.
The number of people eligible for the Age Pension will rise from 3.7 million to 8.7 million by 2060.
The median super balance is projected to increase from $188,000 in 2016-17 to $475,000 by 2050 in real terms, as today’s super pool of $2.8 trillion is estimated to increase more than three-fold over the next two decades.
These changes will occur against a backdrop of declining home ownership, which is estimated to see the share of over 65s owning their own home go from around three-quarters today to fewer than 60 per cent by 2056.
These changing demographics will have a significant impact on the system.
Third, the review will help us ensure the fiscal sustainability of our retirement income system.
On the current trajectory, in 25 years there will be 2.7 people of working age for every person aged 65 or over. This compares to 4.5 people in 2014-15 and 7.3 people four decades prior. Together with the increasing contribution from super to retirement savings, the review will provide a fact base to assess the impact of existing policy settings on public finances into the future. There are few more important areas of public policy than our retirement system.
It is relevant to the quality of life of every Australian as well as the state of the nation’s balance sheet.
This review will ensure the system delivers the outcomes we all expect of it.
Josh Frydenberg is the federal Treasurer.