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Retirement income test draws OECD’s ire

Retirement income

The OECD has revealed that while Australia is ageing more slowly than the global average, the age pension’s earning test could be a problem.

In its annual Global Pensions at a Glance report released this month, the Organisation for Economic Co-operation and Development (OECD) said Australians on average retire on an income 43 per cent the size of their working wage.

Further, three-quarters of Australians ages 65 and over receive an age pension, compared to a quarter, on average, of OECD countries that have pension systems.

“However, almost 42 per cent of all recipients in Australia have their age pension benefits reduced by the means test,” the OECD said.

“Retirement income replacement rates in Australia can be a problem.”

The OECD said the fact that Australians enjoy longer lives, an “increasing diversity of work trajectories” and increasing appetites for autonomy in decisions around retirement means there are growing calls for more flexible rules.

However, they warned that Australia’s age pension stipulation, wherein earnings exceeding 14 per cent of the average wage lead to a pension reduction, is “likely to discourage those who are eligible for an age pension to work longer”.

“In Australia the effect of deferring pensions and continuing to work - for a full career worker - is close to 8 per cent [increase in replacement rate], which is similar for other countries with defined contribution schemes (funded or not), like Chile, Italy, Latvia and Mexico.

“The introduction of the Transition-To-Retirement Income Stream (TRIS) made it possible to gradually reduce working hours while withdrawing part of the superannuation funds before the normal retirement age,” the OECD continued, noting that previously, superannuation fund withdrawals could only occur from the normal retirement age or upon complete retirement.

“With TRIS one must have reached the preservation age and superannuation funds cannot be withdrawn in a lump sum. Initially, any earnings on assets financing someone’s TRIS were earning tax exempt.

“However, this exemption was removed from July 2017 onward, earnings from assets under the TRIS scheme are taxed at 15 per cent. This will reduce the attractiveness of taking this option.”

Looking wider

Worldwide, “the challenges of financial sustainability and pension adequacy mean that bold action from governments is still needed,” said OECD secretary-general Angel Gurría.

“The world of work is changing fast and policy makers must ensure that decisions made today take this into account and our pension and social protection systems do not leave anyone behind in retirement.”

The OECD revealed that while the average net replacement rate sits at 63 per cent, it ranges from 29 per cent in the UK to 102 per cent in Turkey.

However, replacement rates tend to be 10 per cent higher for low-income earners.

Time to raise the retirement age?

The OECD director for employment, labour and social affairs, Stefano Scarpetta and the director for financial and enterprise affairs, Greg Medcraft, together said that early retirement can pose risks that should be fully understood.

“Few reforms are as contested as raising the retirement age. It is a key market of when a society finds it normal to stop working and acceptable to draw a pension; it also signals when workers can expect to retire; and it is a threshold for many employers that indicates when their workers are expected to leave their company,” the directors noted.

“Population ageing and financial stability concerns have created pressures on policy makers to raise the retirement age, even if most people do not like this.”

They questioned why the proposition of a life of leisure is “so much more attractive” than work, even with a higher pension as a reward. Answering their question, they said flexibility is often what people actually desire.

“Older workers are a diverse group; people have different preferences on how and when to move from work to retirement. Some are able and motivated to work for longer, perhaps for the income, or the social interactions that work brings, or simply because they like their job.

“Others want to stop working earlier because of health issues, to pursue other interests or, as is increasingly the case, to care for elderly relatives or grandchildren,” they continued.

As such, the directors called for pension policies that complement wider labour market policies, explaining that people need “clear and honest information” about the benefits that come with different scenarios.

Further: “Employers should be encouraged to provide more flexible work solutions to workers wishing to prolong their career at older ages. In the context of population ageing and looming labour shortages in some countries this need is urgent.”

Concluding, the two directors argued that by implementing these strategies, pension policies will be able to meet the need for flexibility without risking people’s financial security in retirement.  

Retirement income test draws OECD’s ire
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