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Retirement review leaves door open to pension tweaks

Treasury’s Retirement Income Review consultation paper has laid the groundwork for a potential redesign of the age pension, revealing a range of statistics around Australia’s public expenditure on welfare support for retirees.

Business Sarah Kendell 29 November 2019
— 1 minute read

The recently released consultation paper pointed out Australia’s extremely high rate of age pension reliance, with 68 per cent of retirees receiving the pension compared to around 30 per cent in other OECD countries. 

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While this had declined from 80 per cent age pension reliance across the Australian retiree population in 1999, the decline was mainly coming from those entitled to the full age pension, with part age pension recipients remaining steady over time.

The paper pointed to intergenerational inequity as a potential issue in the retirement income system, stating that “when one generation is required to fund their own retirement as well as the retirement of a previous or future generation, they may view this as inequitable”.

“Age pension expenditure is funded from government revenue, affecting the tax impost on working Australians. Australia’s ageing population means there will be a declining number of workers for every retiree. It is therefore important the retirement income system does not place an undue fiscal burden on future generations,” the paper said.

However, the paper also revealed that Australia’s system was fairly unique among developed nations in having a flat pension rate that was not linked to an individual’s previous salary, unlike those of markets including the US, Switzerland and Norway.

As such, despite a high rate of take-up, Australia’s rate of expenditure on old age pensions compared to GDP was actually below the OECD average, the paper stated.

While the data would seem to suggest a pension rate linked to a person’s salary in their working life may be a preferable idea to reform the pension system, the paper noted the complications of adopting such a system in Australia.

“A benchmark replacement rate in retirement could be set to allow an individual to maintain a similar lifestyle in retirement to that enjoyed pre-retirement. Given replacement rates are usually framed as a percentage of pre-retirement income or expenditure, they may allow individuals to calculate a retirement income goal for their own circumstances,” the paper said.

“A key weakness of system-wide measures of replacement rates is they need to be higher for individuals on low incomes to avoid the risk the replacement rate results in incomes associated with poverty. To avoid this outcome, a different replacement rate could be set for those on higher incomes to those on lower incomes.”

The review is open for industry submissions until 3 February 2020.

Retirement review leaves door open to pension tweaks
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