Retirement
Does Australia need a universal pension system?
Older Australians are being discouraged to save additional funds due to asset thresholds, but according to new research, a universal pension system may be a way to solve it.
Does Australia need a universal pension system?
Older Australians are being discouraged to save additional funds due to asset thresholds, but according to new research, a universal pension system may be a way to solve it.
Under a proposed system by BetaShares and The Monash Centre for Financial Studies, superannuation would be streamed into defined-benefit schemes and defined contributions.
This streaming would be based on age, income, asset balances and other factors. Where a retiree has not fully funded their pension through their defined-benefit contributions, the shortfall would be funded by the government.
BetaShares senior investment specialist Dr Roger Cohen previously confirmed the “retirement trap” many Aussies are falling into when an increase in savings and investments results in less income due to pension entitlements.
The ETF providers said in a submission to the Australian Treasury that under their proposal, no individual is worse off than in the current one as well as much of the current burden on the government being reduced due to retirement funding falling mostly on the individual.
“With a universal pension in place, an Australian retiree can choose to spend or save additional income or assets based on their personal circumstances, without that choice being distorted by the structure of the system,” Dr Cohen said.
Under the current modelling, retirees are encouraged to spend their additional savings on their homes due to it being exempt from asset testing, instead of choosing to invest them to generate assets and capital growth, BetaShares said.
Dr Cohen believes that changing this policy would encourage Australians to save more, as opposed to the current design where, for certain balances, additional savings are discouraged due to the effect of losing pension entitlements.
Despite its limitations overseas, Dr Cohen said the Australian superannuation system could be used to reduce the fiscal costs of the current retirement system.
“Australia is well positioned to implement a best practice universal pension within its retirement income system. Where the universal pension has failed elsewhere, that failure has primarily been due to problems around ensuring that it is funded at sustainable levels.”
“Despite this, a full or partial universal pension is a successful part of the retirement system in many countries, including The Netherlands, New Zealand and some Nordic countries,” Dr Cohen concluded.
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