Retirement
Retirement income test draws OECD’s ire
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.
Retirement income test draws OECD’s ire
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“With TRIS one must have reached the preservation age and superannuation funds cannot be withdrawn in a lump sum.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 Planning
How to adjust your wealth strategy during COVID
Investors are being urged to be conservative about spending, reduce debt and be careful of assets that are supported by government spending, as they look to adjust their wealth strategies during the f...Read more
Retirement Planning
Should older Australians downsize their property?
Older Australians face the dilemma of not being confident about their retirement outcomes, but are among the wealthiest retirees in the world due to a large proportion of their wealth being tied up i...Read more
Retirement Planning
Self-funded retirees ‘hung out to dry’ by 2020 budget
The Association of Independent Retirees has slammed last night’s federal budget release, accusing the government of overlooking older Australians in its post-COVID-19 recovery plans. ...Read more
Retirement Planning
Work backwards and buffer: How to set (and stick to) financial goals
Working backwards is one of the most effective ways for individuals to set financial goals that actually work, according to a finance director. ...Read more
Retirement Planning
What are self-funded retirees most worried about in 2020?
The national economy, the value of investments and the ability to manage long-term finances are top of mind of self-funded retirees reeling from the effects of a worldwide economic slump. ...Read more
Retirement Planning
Boost your super in the comfort of your own home
There’s a new way for retirees to top up their super through the downsizer contribution without having to move out of their home – and it’s got the approval of the ATO. ...Read more
Retirement Planning
How you’ll retire depends on personal values as much as dollars
Ever wondered why some people accumulate more wealth than others, even when their incomes are on par? It probably stems from their personal values, writes Helen Baker. ...Read more
Retirement Planning
Intergenerational wealth gap grows to 2-decade high
Falling rates of home ownership, government spending skewed to older Australians and deteriorating environmental factors are causing intergenerational wealth to grow, new research has shown. ...Read more
Retirement Planning
How to adjust your wealth strategy during COVID
Investors are being urged to be conservative about spending, reduce debt and be careful of assets that are supported by government spending, as they look to adjust their wealth strategies during the f...Read more
Retirement Planning
Should older Australians downsize their property?
Older Australians face the dilemma of not being confident about their retirement outcomes, but are among the wealthiest retirees in the world due to a large proportion of their wealth being tied up i...Read more
Retirement Planning
Self-funded retirees ‘hung out to dry’ by 2020 budget
The Association of Independent Retirees has slammed last night’s federal budget release, accusing the government of overlooking older Australians in its post-COVID-19 recovery plans. ...Read more
Retirement Planning
Work backwards and buffer: How to set (and stick to) financial goals
Working backwards is one of the most effective ways for individuals to set financial goals that actually work, according to a finance director. ...Read more
Retirement Planning
What are self-funded retirees most worried about in 2020?
The national economy, the value of investments and the ability to manage long-term finances are top of mind of self-funded retirees reeling from the effects of a worldwide economic slump. ...Read more
Retirement Planning
Boost your super in the comfort of your own home
There’s a new way for retirees to top up their super through the downsizer contribution without having to move out of their home – and it’s got the approval of the ATO. ...Read more
Retirement Planning
How you’ll retire depends on personal values as much as dollars
Ever wondered why some people accumulate more wealth than others, even when their incomes are on par? It probably stems from their personal values, writes Helen Baker. ...Read more
Retirement Planning
Intergenerational wealth gap grows to 2-decade high
Falling rates of home ownership, government spending skewed to older Australians and deteriorating environmental factors are causing intergenerational wealth to grow, new research has shown. ...Read more
More articles
Website Notifications
Get notifications in real-time for staying up to date with content that matters to you.
