If I were to design a retirement income system from scratch, it wouldn’t look much like Australia’s current regime, which is a rather ad hoc mix of a low public age pension combined with tax-subsidised private superannuation. The superannuation tax concessions are costly – more so even than the age pension itself – and extremely regressive. In practice the regime also allows Australia’s bloated financial sector to skim far too much profit off ordinary people’s life savings. In addition, it exposes individuals to excess financial risk, which could be better managed through societal-level pooling.
The system I would design from scratch is an entirely public pension system. It would not have the above problems – simple.
Nevertheless, in real world political economy, things tend not to be so simple. The welfare institutions that emerge in a particular country tend to be path dependent; that is to say, in practice we are prisoners of our history, at least to some degree. People get used to existing models – social norms, expectations, affinities and interests form around them – and this usually influences the contour of future reform.
In recognition of this, I’ve tried to come up with a half way house that would help move Australia in a social democratic direction in the context of the existing retirement income structure.
My proposals:
- Abolish tax concessions on voluntary superannuation contributions.
- Abolish tax concessions on compulsory superannuation. (Fall back: five percentage point reduction in individual’s marginal tax rate on contributions.)
- Put the resulting additional revenue in a national wealth fund that will contribute to eliminate the assets test and increase the payment rate on the public age pension. These changes would phase in gradually over decades. It would reach full effect for those who have never received superannuation tax concessions.
- Give people the option to choose a superannuation fund administered by government. This should cut down on profiteering and give people choice. Those who wish to have a fully public retirement income system can have one.
- Upon retirement allow people to use their superannuation to purchase an annuity from government, at an actuarially fair rate for an average person of that age. The annuity will then be paid as a supplement to their regular government age pension. Thus regardless of whether the person elected a private or public fund during the accumulation phase, it can integrate seamlessly into a government pension if they choose.
A problem with the existing model is a systematic underpayment for Indigenous Australians, due to their lower life expediency. Given the connection of this situation to historical and ongoing injustice, I would argue strongly that it warrants special rules.
Hence, Indigenous Australians may (1) access age pension eight years earlier, (2) access superannuation eight years earlier and (3) purchase an annuity at rate that is actuarially fair based on life expectancy for the average Indigenous Australian.
The proposed system would still be imperfect, but it moves in the right direction. In effect, it gives citizens a public option, in which their retirement income scheme is entirely administered by the government. If it works better than the private sector – which I believe it would – it just might grow on them.
*UPDATED: Added reference to eliminating the age pension assets test. This is a core part of my approach, but I forgot to include it in the write up.
Western Sydney Wonk 