Top position within reach

Australia's three-pillar retirement system is one of the best in the world. If the government lifts the super guarantee to 12 per cent, as proposed, things will get even better. Barbara Drury reports.

Australia's three-pillar retirement system is one of the best in the world. If the government lifts the super guarantee to 12 per cent, as proposed, things will get even better. Barbara Drury reports.

It might not feel like it to retirees who are in the trenches battling the ravages of the global financial crisis but Australia's retirement income system is one of the best in the world. Second-best, in fact, according to a global survey released last night.

Australia clawed its way back from fourth place last year to finish behind the Netherlands thanks to a real increase in the age pension and higher household savings, says author of the Melbourne Mercer Global Pension Index, David Knox.

The present base rate of the age pension is $689 a fortnight for singles and $519 each for couples, after a one-off $30 boost and cost-of-living increases. At the same time, household savings increased to 9 per cent of net income from 4 per cent last year.

Our savings rate is now similar to France, Germany, Switzerland and even Singapore. India and China save the most, due in part to the lack of a comprehensive pension system. In Britain, household savings were down to 3 per cent.

"We are back to the level of savings we had in the 1970s - in the '90s and noughties we had negative savings while we were on a spending binge", says Knox, a senior partner at Mercer.

The Netherlands tops the international rankings because of its high base pension rate and government-funded savings.

Knox says Australia could take line honours if it increases the super guarantee to 12 per cent as proposed.


Although Australia's pension system stacks up well against other countries, the research director at the Association of Superannuation Funds, Ross Clare, says adequacy and coverage are still big issues.

"The super guarantee at [the present] 9 per cent is well up on a decade ago but many people may well not reach the standard of living they need or desire in retirement," he says.

Moreover, although coverage is good by international standards, there are still gaps, especially among the self-employed and women on parental leave.

Clare says some 35 per cent of working-age Australians have no super and the trend towards more casual, contract and part-time labour will be challenges.

Most developed countries adopt a multi-pillar approach to spread the risk of increasing longevity among governments, employers and individuals. Australia has a three-pillar retirement income system based on a means-tested, government-funded age pension, compulsory employer-funded super and private savings. There is also a default fourth pillar, according to the chief executive of the Council of the Ageing NSW, Ian Day: "The family home".

He argues that the thinking about super in this country is still biblical, based on an assumption we are destined to live "three score years and 10".

"The reality is that many men are living into their mid-80s and women are living to their late 80s, if not 90s," Day says. "The idea that people who retire at 65 will live for 25 years on super is not going to work.

"The bulk of retirees will have a home, some super and perhaps some investments. By age 75, most will have used their super and investments, not necessarily frivolously, and be left with their home and the age pension."

For people unlucky enough early in retirement to stare down a global financial crisis or a personal financial crisis such as failing health, their capital base might erode even faster.

"That leaves the house to fund aged care," Day says.


This was tacitly acknowledged by the recent Productivity Commission inquiry into aged care, which recommended a user-pays system funded in part by the equity in a person's home through a government-operated reverse mortgage scheme.

However, there is a gaping hole in this plan. The average age of entry into aged care is 84 for women and 81 for men. Any super they had would, in all likelihood, have run out a decade earlier, forcing many to downsize or tap into the equity in their home.

"That's fine for the average Joe what's really scary is the person who starts out [their retirement] with low or no super and renting," Day says. "They will have to try and stay in the workforce because it is almost impossible to pay for rental accommodation from the age pension.

"People in public housing are slightly better off. If the house is to be the funding mechanism by default for aged care, it can't also be the default position for the funding of retirement."

Knox agrees that owning your own home provides security in retirement and says the pension index takes rates of home ownership into account. Not surprisingly, Australia scores highly, with about 68 per cent of households owning or buying their own home. This is similar to Britain and US, with 67 per cent and 69 per cent respectively.

Home ownership rates in Europe, however, are much lower, just 48 per cent in the Netherlands and 43 per cent in Germany.

Since the onset of the global financial crisis, many European countries, as well as the US, Canada and Japan, have slipped in the rankings due to high government debt and rising unemployment that leaves more people without employer-funded pension contributions.

"The risk of governments not being able to financially support their ageing population is becoming more of a reality unless some significant pension reform is made now," Knox says.


Although Australia's report card is good, it could do better. Knox says Australia could improve its overall rating by increasing the super guarantee, requiring people to take part of their retirement benefit as an income stream, increasing the workforce participation of older workers, increasing the pension age as life expectancy increases and by reducing the costs of the system by encouraging greater efficiency.

Some of these measures are already in train. As well as the proposed increase in the superannuation guarantee, there are plans to gradually lift the retirement age from 65 to 67 by 2013 and low-income earners will receive a tax rebate (capped at $500) on voluntary super contributions.

For the moment, encouraging people to take more of their super as an income stream is in the too-hard basket. "Compulsory income streams don't resonate with the public," Clare says. However, he says it is generally agreed that improvements are needed in the post-retirement product area.

Clare argues that more could be done to make annuities and other lifetime income streams more attractive without compelling people to buy. For example, the government issue of more long-term bonds would help provide suitable investments to underpin annuity-style products and concessional asset test treatment might encourage more people to take an annuity.

Although the the Australian system rates highly, Knox says two areas are lagging. One is projected benefits. "When you get a statement from your super fund, the most helpful information is not what you have now but what you will get when you are 65," he says. "Some countries have that, we don't.

"Another area that hurts us is costs. Large funds tend to be cheaper to run per person than small funds but one-third of our super assets are in self-managed funds. In terms of costs, that's not a very efficient way to run the industry."

Australia's biggest industry fund, AustralianSuper, has $40 billion in assets but this represents just 3 per cent of the total industry. Based on overseas trends, Knox says further industry consolidation is likely and would improve costs.

"If people see value in the system then they trust the system," he says. "If they see huge costs, they don't trust it."

Rating retirement

- The Melbourne Mercer Global Pension Index is compiled each year to compare and rate retirement incomes around the world. This year the survey included 16 countries across Europe, Asia and the Americas covering more than 50 per cent of the world's population.

- Australia was one of only three countries to receive a B-plus rating. No country scores an A, which is an indication there is a way to go before government, business and individuals come to terms with the shortfall in retirement funding that lies ahead if action is not taken.

- The index is broken down into three sub-indices measuring what retirees get (adequacy), if it will last (sustainability) and whether you can trust the retirement system and its regulators (integrity).

- Australia ranks third for adequacy behind the Netherlands and Sweden, second for sustainability behind Sweden and fourth for integrity behind the Netherlands, Switzerland and Britain.

Careful approach rewarded

Judith Daley retired about two years ago at age 65 and, after initially being fully self-funded, she recently qualified for a part-age pension.

Daley worked full-time from age 15, beginning in general office administration. She went to university at age 49 to do a masters degree in employment relations and spent the last 15 years of her working life as a child protection investigator for the NSW Education Department.

"I had public-service super but because my partner was unwell, I supported him for many years, so I couldn't put any extra into super," she says.

On retirement Daley, who is now widowed, sold her home and moved into a retirement village.

"I live in a small villa, which is close to the city and good public transport," she says. "I have a comfortable retirement but I don't have extravagant tastes and I don't travel. I haven't taken a holiday since retirement.

"My most extravagant thing is to subscribe to the opera, which is more do-able now I get a pensioner discount."

Unlike many self-funded retirees, Daley says she wasn't badly affected by the financial crisis. Her super fund gives her access to an annual consultation with a financial planner and more regular phone contact if needed.

"I asked for very conservative management [of my super investments] and I pay no commissions. I have faith in the organisation and the person who is my fund manager, so I'm not anxious about it," she says.

"You do have to cut your cloth [to fit your circumstances] but you get used to it. I'm hoping by the time my super runs out my desires will as well."

Healthy lifestyle key to enjoying life after work

At age 80, Malcolm McKenzie (pictured) is fit and active. The retired accountant still works part-time, is the secretary of the Retirement Village Residents Association, founder of his local Probus club and a regular at the local gym and swimming pool.

But a series of events towards the end of his working life mean retirement is not as comfortable as it might have been. "I only had about $3000 super when I retired," he says. "I was a victim of the lack of portability in super [before 2003]. I had to cash out my super when I left a job to move to Tasmania and again when I was made redundant."

At 60, McKenzie lost his job in Tasmania so he and his wife, a midwife, sold up and moved north, using his payout to get into the more expensive Sydney housing market. He found a new job until five years later they retired and moved into a retirement village for a little less than they received for their home.

"We have survived on the age pension but we have nothing to spare," McKenzie says. "I've got to be careful. My wife is in a low-care hostel now and because she had few assets she paid a small bond for that. I live in a single unit in the retirement village and pay recurrent fees of about $1100 a quarter. I also pay for electricity, gas and water separately.

"I've kept my computer skills up to scratch and I've still got a few accounting clients so I lose a little bit [of age pension].

"People ask me all the time, 'When are you going to settle down and retire?'. I try and keep fit and busy," he says cheerfully.

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