Pitfalls in the retirement system and some thoughts about risk, reward and remediation
- Roger Cohen
- Ummul Ruthbah
Project background and aims
The Australian retirement system is highly regarded by world standards. Despite this, there are anomalies in the system, which can be removed or improved to produce better outcomes for both retirees and the government.
This paper illustrates how the three pillars of the Australian retirement system – the pension, superannuation, and savings – interact. It is well known that the unintended consequences of this interaction can encourage savings and investment behaviour, which is both counterintuitive and contrary to the intended outcomes of the system. Ultimately, this is detrimental to retirees and will increase the fiscal burden on the government.
We introduce a framework for potential alternatives that address some of these anomalies. Our framework is simpler and leads to better outcomes for retirees and the government than the current system. The main proposal is to use superannuation to fund a compulsory defined benefit scheme, which, coupled with government assistance, will fund a universal pension. This alternative framework will continue to provide a lifetime safety net for all Australians while retaining a defined contribution system to provide additional income.