In brief
Written by Senior Regulatory Counsel Michael Mathieson
A close reading of the retirement incomes chapter in the interim report of the Financial System Inquiry reveals a series of paradoxes.
The report identifies policy options for the retirement phase of superannuation which focus heavily on longevity-protected income streams, such as lifetime annuities.
The options include creating incentives to support these products and making them the default product or perhaps even compulsory at retirement.
Any of these options, if adopted, would constitute a major change to the retirement income system.
The first paradox is that the report says major changes to that system require consideration of the policy settings in the tax and transfer system – and that those settings are outside the Inquiry's terms of reference.
To say this, while canvassing the policy options it does, suggests an Inquiry that does not mind being half-pregnant.
The second paradox involves the Inquiry's decision not to consider the elephant in the room – the preservation age at which benefits can be accessed.
If you are prepared to canvas making lifetime annuities compulsory, thereby restricting access to retirement benefits, it seems a little cute to exclude the preservation age from your review.
The third paradox lies in the Inquiry's attitude to longevity risk – the risk of outliving your retirement savings.
On the one hand, the Inquiry recognises that longevity risk cannot be eliminated, it can only be transferred. It says the burden of managing longevity risk must fall on individuals, retirement funds, insurers or government.
On the other hand, it says the lack of longevity risk management is a major weakness of the system and goes on to outline policy options focused on longevity-protected products.
There is a largely untested assumption here that retirement funds and insurers are better able to manage longevity risk than are individuals or government. There is also no real discussion of what the optimal sharing of that risk, as between the various candidates for bearing it, might look like.
The fourth paradox is that the Inquiry is focusing almost exclusively on retirement products, specifically those providing longevity protection, yet it recognises that 'if people have not saved sufficiently during their working lives, they are unlikely to achieve their objectives in retirement with any combination of products'.
In other words, the Inquiry's main focus is likely to be relevant for only a small minority of those approaching retirement. While this will change with the aging population, it will not change overnight.
The final paradox is that the Inquiry specifically addresses the need for stability in superannuation policy settings. Given the narrow, and arguably shallow, approach taken in the interim report, there is little reason to be confident that any systemic changes flowing from the Inquiry's work are likely to stand the test of time.
In 1993, the Fitzgerald report on national savings said that if change to the superannuation system is highly desirable, it is better done sooner than later. It said the aim is to move quickly to a system that has the essentials right and can justify community trust in its long-term durability. The question is whether the Inquiry will make out a convincing case that change of any particular kind is highly desirable.
The Inquiry might do well to consider a thoughtful report provided to the government last year entitled A Super Charter: Fewer Changes, Better Outcomes. The Inquiry's interim report makes no mention of it.
Retirement incomes were specifically excluded from the 1997 Wallis Inquiry's terms of reference. Unless the current Inquiry is prepared to do a lot more work on the retirement phase of superannuation between now and November, it might consider whether a similar restriction should be self-imposed this time around.