The Age Pension and Superannuation

The age pension and super annuation should interact in such a way that the age pension is affordable, such that superannuation tax concessions are affordable and such that that the elderly are properly provided for.

I think it is an obvious reality is that as life expectancy increases, the pension age must also increase. I believe it is a good idea to take the politics out of it and let statisticians set the pension age. We take a base year, say 2015, and a nominal pension age of 67. From 2016 onwards, we adjust the nominal pension age so that the remaining life expectancy at pension age as a proportion of the pension age remains constant. The Australian Bureau of Statistics would perform the calculations and set the exact age.

I say nominal pension age because the already legislated pension age of 67 is not yet phased in. Therefore the new system for determining pension age would also have to be phased in.

We should also set some sort of maximum target age, I am thinking around 90 to 92 (to be adjusted as life expectancy increases), where we don't expect, even for people with a lot of super, that their super needs to last them beyond that age. Obviously, many people don't have enough super to last them anywhere near that long. I think the arrangements for single retirees should be as follows:

• We set the individual target age (how long the super needs to last) when retirees start using their super. Retirees would be self-funded until the target age and qualify for the pension thereafter. There would be no part pension.
• The individual target age would be set on the assumption that self-funded retirees withdraw money at a somewhat greater rate than the age pension. Otherwise self-funded retirees would not have any advantage from being self-funded. I am thinking something along the lines of 1.5 times age pension for retirees with minimal balances to 2 or 2.25 times age pension for people with enough to last them to just under the maximum target age. On top of that, retirees who rent should be able to withdraw the equivalent of rent assistance.
• If someone wishes to retire before pension age, the individual target date would be set based on their projected income until retirement age. In other words, it would be same as we estimate it would end up if the prospective retiree kept working until retirement age. Then, if the prospective retiree has enough superannuation to last him/her until the individual target data, he/she could retire early.
• Retirees can withdraw lumpsums if they want. But there is one constraint: They must leave enough behind to last them at age pension rate until their individual target age.
• To protect retirees from low returns, there would be an optional system where retirees can invest with the government an amount equivalent to the age pension until their individual target date. The government would then guarantee that that investment increases at the same rate as the age pension.
• If retirees reach their individual target age and still have super left over they would be able to use it to supplement the age pension.
• Withdrawals from super would be taxable. But retirees would get credit for the tax already paid when they contributed and on returns that the super account earned. I am not going to talk about every case here, but in the standard case, that tax is 15%. That's equivalent to 17.65% in terms of the money left behind (15% of 85%). At current tax rates, for a retiree who is single, there would be no tax on withdrawals of up to $50157 per year. That's the point at which tax plus medicare reaches 17.65% ($3572 + 32.5% of income over $37000 + 2% medicare levy = $8851 which is 17.65% of 50157). Then normal tax and medicare levy would apply less 17.65%. So just after $50157, instead of 34.5% (32.5% plus medicare), the rate would be 16.85%.
• Except for special cases, when a retiree dies with super left over, the heirs would have two options. They could transfer the left-over super into their own superannuation accounts. Or they could withdraw it, in which case it would be taxed as though the deceased retiree had withdrawn it on the day he/she died. The rationale is this: The super money was accumulated with concessional tax treatment. It should not be treated as regular after-tax money when it is goes to the heirs.

Where retirees are a couple, and both retirees have enough superannuation until their maximum target age, their treatment in terms of accessing superannuation should be the same as singles.

Where retirees are a couple and neither retiree has enough superannuation to last until their retirement age, each retiree would have their individual target age calculated as for single retirees. When one retiree has reached his/her individual target age, he/she would then be paid an age pension as the difference between the single rate and the rate for a couple until the partner reaches his/her individual target date. From then on, the couple would just be regular age pensioners.

Where retirees are a couple and one of them has more superannuation than is required to get to the maximum target age and the other has not enough, then the arrangements should be something like the following:

• The retiree with more superannuation should be able to reserve enough superannutation to get to his/her own maximum target age (at the withdrawal rate that applies to single retirees), plus some additional percentage, something like 10 to 20%. He/she would be expected to support his/her partner only from the surplus.
• The surplus would be divided by the same withdrawal rate applicable to a single retiree with just enough money to reach the maximum target age. The outcome of that division is the number of years that the retiree with more superannuation needs to support his/her partner.