Superannuation is complicated. A guaranteed government income in retirement would be simpler
- Written by: Brendan Coates, Program Director, Housing and Economic Security, Grattan Institute
Having compulsory super should help create a comfortable and stress-free retirement. But Australia’s super system is too complex for retirees to navigate.
This can leave them stressed and lacking the confidence to spend their super savings.
Our latest report, Simpler super: taking the stress out of retirement, recommends the federal government offer all Australians a lifetime annuity - a financial product that pays a guaranteed income for the rest of their lives.
This would help retirees stress less, spend more, and enjoy their retirement years.
Stress prompts many to underspend super
For the first time, many Australians are entering retirement with significant super balances: Australians are retiring with an average super balance of more than A$200,000, and couples with about $300,000.
Despite having saved enough to be comfortable, four in five people say planning for retirement is complicated, and 60% don’t think their retirements will be financially stress-free.
Few retirees draw down on their retirement savings as intended. In fact, many are actually net savers – their savings continue to grow for decades after they retire.
Our analysis of the ABS Survey of Income and Housing shows for those aged 60-64 in 2003-04, average super balances had grown by 37% in real terms by the time they were aged 76-80 in 2019-20.
And their average net wealth, which excludes the equity in their home, grew by 14% over the same period.
Australia’s $4 trillion compulsory superannuation system is turning into a massive inheritance scheme. That’s not how super was supposed to work.
Retirees are given too little guidance
The super system makes most big decisions for working Australians, such as how much to contribute or how it’s invested. But once we retire there is little guidance about how to use our funds.
More than four in five retirees are steered into account-based pensions. But partly because they’re anxious not to outlive their savings, this group manages their spending very cautiously.
While on average, an Australian woman aged 65 today can expect to live until 88, they also have a one-in-five chance of either dying before age 81 or of making it to 94.
Half of those retirees who use an account-based pension draw their super at legislated minimum rates, which if followed, leave 65% of super balances unspent by average life expectancy.
This widespread use of account-based pensions makes Australia a global outlier. Retirees in most rich countries are automatically given – or otherwise strongly encouraged to choose – an income guaranteed to last their entire lives.
Research suggests having an income that is guaranteed to last until death can reduce stress and boost retirees’ spending.
Government could steer retirees into annuities
Our report argues retirees should be encouraged to use 80% of their super balance above $250,000 to purchase an annuity.
The government could embed this pre-set guidance throughout the retirement income system. It could be included in all relevant communications with retirees from super funds, and especially at the point of retirement.
Research shows that retirees tend to choose the option put in front of them.
The remaining super balance – $250,000, plus the remaining 20% of any savings above that level – would continue to be drawn down via an account-based pension. Retirees would still have to access their super for large purchases if needed.
Using some super to buy an annuity could boost expected retirement incomes by up to 25%, compared to solely drawing on an account-based pension at legislated minimum rates.
And it would ensure that the bulk of retirees’ incomes, irrespective of their super balances, would be guaranteed to last the rest of their lives.
Annuities should be provided by government, not super funds
But steering retirees into annuities offered via super funds is unlikely to work.
Super funds have resisted previous attempts by government to require them to offer annuities to retirees.
Many people also struggle to understand and compare annuities. They often find it difficult to switch to a better deal later even if they can spot one.
Recent experience in the UK showed when required to purchase an annuity, most people simply took what their fund was offering and often got a poor deal.
Designing a regulatory regime that overcomes these issues is a huge challenge. The best option, therefore, is for the government to directly offer annuities. It should offer all retirees a simple lifetime annuity as the baseline option.
The government could also offer alternatives including investment-linked annuities, where payments are guaranteed for life, but payments could vary based on investment returns.
Priced fairly, and managed by an independent agency, a government annuity would encourage there take-up. Retirees would be more confident that they’re getting a good deal.
Annuity payments would be made from the pool of capital created by annuity purchases, with these investments managed by the Future Fund.
Under reasonable assumptions we project the government annuity provider could be managing assets totalling 2.5% of GDP by 2040.
Superannuation offers Australians the promise of a more comfortable and stress-free retirement. Government-offered annuities can help turn that dream into reality.
Esther Suckling made substantial contributions to the research underpinning this article.
Authors: Brendan Coates, Program Director, Housing and Economic Security, Grattan Institute
