How would you feel about having to retire later than you planned? If you’re like most Aussies, the prospect of working longer doesn’t sound appealing.
Yet whether we like it or not, that’s the road we’re heading down. By 2025, the preservation age is set to rise from 55 to 60. That’s the point at which you’ll be able to access your superannuation funds.
The reason why this threshold is rising is because life expectancies are too. Not only that, but the government is always on the lookout for new ways to cut corners and save on expenses. The easiest way for them to do this is by cutting back on pensions and super.
But the government takes its policy cues from think tanks. That’s why we should pay attention whenever a new report into superannuation reform is released.
On Tuesday, the Productivity Commission became the latest body to take aim at modelling what such reforms could look like. The report, Superannuation Policy for Post-Retirement, studied the effects of the preservation age rising from 60 to 65 years between 2035 and 2043.
Not surprisingly, the report found that the government would save a lot of money. They forecast savings amounting to a substantial $7 billion a year by 2055.
While you probably don’t need independent research to come to that conclusion, the $7 billion figure is nonetheless striking. Considering the current budget deficit sits at $40 billion, this would represent a significant saving in real terms.
Where would the savings come from?
As you might expect, most of the savings would come in the form of taxes and cutbacks on age pension entitlement.
The Commission forecasts that income tax revenues would rise by $5 billion annually. On top of this, a reduction in age pensions would add another $3 billion a year in savings.
How would this work?
By 2043, retirees will need to be 67 years of age to qualify for an age pension. Now let’s say that the preservation age rose to 65 are projected in the model. That would leave a two year gap between the age pensions and the preservation age.
As a result, the Commission believes this would encourage people to work longer. There is some logic to this.
People that can afford to keep working are likely to do so if they can’t access their super at 65. So in theory this two year gap could provide an incentive for people to put off retirement.
With fewer people retiring before 65, it would reduce some of the pressures on the budget arising from age pension entitlements.
The report concludes that wealthier households would be most affected by this. The idea is that they’d be less reliant on drawing down from their super. As a result, super balances would rise by 10% once these households reached the preservation age.
The effects of involuntary retirement
Not everyone chooses to retire out of their own free will. The truth is that many Aussies are forced into an early retirement far sooner than they planned. With the qualification age for both pensions and super going up, what would these changes mean for victims of involuntary retirement?
The Commission’s model takes this into account. It projects that the $8 billion in savings would be slightly offset by a $1 billion rise in welfare payments. But it’s hard to know the full extent of these welfare payments.
We don’t really know how it will affect household standards of living. And these welfare payments would have to accommodate a lot of people. Roughly 50% of men, and 30% of women, are forced into involuntary retirement on average.
Will these welfare payments match what they would have received under the pension scheme? It’s hard to say. There are still too many unknowns. But it wouldn’t be the first time that struggling Aussie households have been thrown under the bus for the benefit of the government.
The Commission wants a reduction in superannuation lump sum payments
The Commission has concerns that the current flexibility in accessing super money is leading to a rise in lump sum payouts. Currently, fewer than 30% of super payouts are taken out as lump sums. But it still worries that households are depleting their funds too quickly, leading to an overreliance on age pensions.
This practice is most common among the poorest households, the report finds. Most lump sum payouts are taken from funds with fewer than $10,000 in savings. Naturally, that makes the worse off even more reliant on age pensions.
Nonetheless, it seems clear that major reforms to superannuation are coming. It may not take the shape of the Commissions particular model. But it’s certain to raise the preservation age over time.
The message we’re getting is clear. Get ready to work a little longer to enjoy your retirement.
Contributor, Markets and Money
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