Pitfalls in the retirement system and some thoughts about risk, reward and remediation

Australia is recognised globally as having a world-class pension system. As a country, it has the fourth largest (Thinking Ahead Institute, 2019) pool of retirement savings globally. In the latest Melbourne Mercer Global Pension Index, Australia ranked number three behind the Netherlands and Denmark (MMGPI, 2019). Yet despite these plaudits, it is recognised that the system can still be improved, and there are gaps and anomalies in the system. These are especially evident to retirees within certain levels of assets and income.

The Government is well aware of and is trying to address some of these shortfalls. The development of a framework for Comprehensive Income Products in Retirement or CIPR, aimed at increasing standards of living in retirement with products specifically to solve for stable income and mitigate longevity risk, was initially concluded in July 2017. A Retirement Income Covenant position paper and subsequent consultation process closed in June 2018. Recognising how complex the issues are, the commencement of the Covenant has been delayed until July 2020 to allow for the development of suitable investment products. In September 2019, the Productivity Commission recommended a Retirement Income Review. The terms of reference of this review will focus on the three pillars of the system, namely:

  • a means-tested age pension;
  • compulsory superannuation; and
  • voluntary savings, including home-ownership

This paper will address some of the well-known anomalies and shortfalls with the current system and explore strategies to address them.

Research questions

  • Are there any undesirable consequences resulting from the interaction between the pillars above?
  • What are the behavioural aspects of the anomalies if there are any, and the impact on risk and risk-taking for the retirees?
  • How can we restructure the system that removes the existing anomalies and improves the outcomes for retirees; ensure that the existing safety net provided by the current pension is retained, and to decrease (or as a worst-case not increase) the financial burden on the Government?