A Christmas Present from Treasury

In September 2019, the federal government announced a review into Australia’s Retirement Income System.

In the shadow of this announcement, commentators began stressing the financial predicament Australia faces with an ageing population. In fact, for 2019/20 the cost to the Government for funding the age pension, aged care, and other aged care costs is estimated to be just over $70 billion[1]. This is projected to increase to just over $80bn by 2022-23. To put this in context, Australia’s total expenditure on health care for 2019-20 is estimated to be in the vicinity of $82bn[2].

On 22 November 2019, Treasury released its Consultation Paper and called for submissions to be made by 3 February 2020.

The purpose of the Review is to “establish a fact base of the current retirement income system that will improve understanding of its operation and the outcomes it is delivering for Australians”.

Importantly, the purpose of the review is to examine how well the current retirement income system is working, not so much to make recommendations on how the system should be changed.

The three pillars of retirement income

Australia’s retirement income system is based on three “pillars”:

  1. a means tested Age Pension;
  2. compulsory superannuation; and
  3. voluntary savings, including home ownership.

The Age Pension was first introduced in Australia in 1909 – 110 years ago. When first introduced the pension was payable to eligible men and women once they reached age 65. The qualifying age for women was reduced to 60 in December 1910, but was then increased progressively to 65 once again from 1995.

When first introduced, the age pension was means tested with the family home being included as an asset. However, the family home was removed from means testing in 1912.

Even though superannuation first appeared in Australia back in the mid 1800’s, in those early days it was usually only available to employees of large companies and the government. While there had been attempts to introduce a compulsory form of award-based superannuation since the 1980’s, modern superannuation only gained traction from 1992 when the compulsory Superannuation Guarantee system was introduced.

In the Consultation Paper, home equity is specifically included as a component of voluntary savings. This is consistent with an increasing emphasis over recent years that home equity should be included as a component of retirement savings.  

What is the ageing population dilemma?

In 1974 the ratio of people of working age to people over 65 was an estimated 7.4 to 1. By 2014-15 this ratio had reduced to 4.5 to 1. It is expected that this will continue to reduce to approximately 2.7 to 1 over the next 40 years[3]

Less people in the workforce will place more pressure on the taxation system to provide incomes and services for those in retirement. This creates the dilemma of how to ensure a system that will help support the aging population without undue pressure on those that are currently working.

Where to from here?

Over the course of the coming months, and particularly as we head into the Christmas “slow news” season, we expect to see commentators use main stream media as a platform to promote their own views on what Australians retirement income system should look like.

Some of the ideas that are likely to appear in the media over the coming months (if they aren’t already) include:

  • Increasing the age pension age – this is currently between 65.5 and 67 depending on when you were born. While an increase to 70 has previously been proposed, the Prime Minister has dismissed this plan.
  • Increasing the age at which superannuation can be accessed – super can generally be accessed from age 60, as long as you have retired. There are some commentators who believe this should be increased to match the age pension age.
  • Means testing the family home for pension purposes. While this has been proposed at various times in the past, it remains a very sensitive issue. Even including a portion of the value of the family home for means testing will take a brave Government.
  • Reintroducing tax on superannuation benefits. The exemption of superannuation benefits from tax for people aged over 60 came into effect on 1 July 2007. Expect to see a conversation around the reintroduction of this tax.
  • Reducing the amount that can be contributed to superannuation. It has long been argued that the people who benefit most from the favourably taxed superannuation system are the wealthy. With that in mind, I wouldn’t be at all surprised to see commentary around reducing the tax concessions available to superannuation contributions.

While we can expect to see a plethora of opinions being proffered, remember that the Retirement Income Review is about gathering information to understand how well the current three pillars system is delivering – it is not about promoting a new or replacement system.

Having said that, the findings of the Review may well lead to the Government to make changes in the future to ensure the sustainability of Australia’s retirement income system. 


[1] Actuaries Institute 2019, “Options for an Improved and Integrated System of Retirement”. P.15         

[2] Parliament of Australia 2019, Health Budget Review 2019-20 Index viewed 2 December 2019

[3] Frydenberg, J 2019, “Australia must prepare for an ageing population”, Australian Financial Review, 19 November.