Ageing Population Makes Superannuation Reform Essential

Editorial Friday 18.09.09.
With the launch today of the new Australian Institute for Population Ageing Research we have heard that the most recent projections indicate that our population will reach 35 million by 2049. This is more than was previously expected, highlighting once again the challenge of our ageing population. While the proportion of people over the age of 65 is now expected to be less than previously thought, it will still reach 22%, almost doubling from today’s 13%. The reason for the more rapid rate of population growth is a combination of growing immigration and a rising birthrate.

While there will no doubt be much debate about just what a sustainable level of population might be on a continent with water supply issues, housing shortages, and the eternal argument about whether migrants are taking jobs or creating jobs, the big question is still the question of retirement incomes. With the percentage of people over 65 almost doubling in the next 40 years, it has been clear for quite some time that sustaining the age pension arrangements will be difficult, if not impossible. Now, the growing concern is that other forms of retirement income may also not be sufficient.

The recent decision by the government to gradually increase the pension age from 65 to 67 is obviously a response to the problem of sustainability, and I suspect the day will come when perhaps that age is revised upwards again. But by far the most important decisions to be made about retirement incomes will relate to the compulsory superannuation system. One of the problems which confronts the superannuation system at present is the so-called “longevity risk”. That’s the risk of an individual living longer than expected and running out of money, and it happens partly because of the way the retirement income industry is structured.

What usually happens when a person retires is the bulk of the superannuation money winds up in some sort of annuity, generally an account based pension. While the fund earns money, the retiree is usually drawing down a pension payment which exceeds the income, so that eventually the fund will run out. Normally it is supposed to run out after you die, but with life expectancies increasing, and some people just too damned stubborn to die, sometimes the money runs out before the person dies. Then, at a time of life when they are at their most vulnerable, and may well have increasing medical needs, they are thrown back onto the government pension system. With the combination of both population growth and population ageing it is only going to become worse.

One of the things that the new Institute will be doing is calculating a new Australian Longevity Index, which is supposed to provide the sort of data needed to create a different kind of pension fund. With such data it should be possible for financial institutions to create a lifetime pension product, based on the aggregated community risk in much the same way as insurance products are designed. In fact, it could be described as a kind of reverse life insurance where the fund keeps on paying you so long as you don’t die. Such a fund would provide much more certainty for self funded retirees.

The other part of the equation is the superannuation system itself, which continues to be the subject of a raft of government regulations and taxes along with excessive fees and outright rorts in the financial services industry. The accumulation of the retirement nest egg itself needs to be free from those barriers which prevent it from delivering the maximum possible benefit. There are many aspects of superannuation which would benefit from reform, but here’s just one. While it remains to be seen just what recommendations might be made by the Henry review of taxation, in an ideal world superannuation contributions should not be taxed at all, and neither should the earnings of the fund, effectively quarantining it form tax while the nest egg grows. The benefit is a bigger retirement nest egg at the other end, providing for wealthier self funded retirees, who will pay more tax in GST while spending more money into the economy.