Michael Price

Prominent actuaries and superannuation experts have tackled the decades-old issue of women retiring with less money than men, pinpointing three areas for reform including a government-funded carer’s credit.

Mercer’s David Knox, and Michael Rice and Richard Dunn from Rice Warner, said the gender super gap begins at the very start of a woman’s working life, peaking when she is in her 50s.

“Women are the fastest growing cohort of retirees living in poverty in retirement,” said Mr Rice, the Executive Director at Rice Warner. “It is the final outcome of a flawed system,” he said.

“Australia’s performance has been less than stellar,” said Dr Knox, senior partner, and senior actuary at Mercer. “Average super balances for women are significantly less than those for men, and one in three women are retiring with no super at all,” he said. “Part of the solution needs policymakers and community commitment to change.”

In the paper, Gender Inequality in Retirement Savings^[1], the authors argue for measures that include a ‘carer’s credit’; fundamental changes to annuities; and recognition and drive for change in the way the superannuation industry addresses women’s finances. The paper, which represents the views and work of the three authors, which was presented at the Actuaries Institute’s Virtual Summit on April 29.

The paper states three broad areas, that combined, result in women retiring with less money in superannuation than their male peers. The first is employment differences: women tend to have shorter working lives than men because they take time out to care for children and sometimes aged parents; they are paid less with more part-time work, and women, on average, live longer than men.

The second is differences in superannuation and pension design. “In Australia, a feature of the super system is that workers must earn more than $450 a month before super contributions are paid by the employer,” Dr Knox said. “We know that more women than men have casual or part-time jobs. Hence more women than men miss out on super. The removal of the $450 threshold is a fairness argument.”

The third factor affecting women relates broadly to cultural issues and attitudes, from the lack of affordable and appropriate childcare, to the fact that women, not just in Australia but globally, tend to be conservative investors in retirement, which reduces their investment returns over the long-term. The OECD (2021) also found that lower levels of financial literacy among women affects their financial decisions.

Richard Dunn, Consultant, at Rice Warner, said a carer’s credit, which provides paid superannuation for those out of the workforce looking after small children, would help build super savings for women.

The concept is not new: care-giver credits are paid by governments in France, Sweden and Germany. The payment, which could be set at the current superannuation guarantee levy rate of 9.5%, would be paid by the government, and would also result in lower Age Pension costs over time.

While the paper noted that the rate could be based on a median or minimum wage, it also said the period for which it is provided varies around the world and is open to debate.

“We want to get the discussion started,” Mr Dunn said, adding, the authors also recommend compulsory superannuation contributions be mandatory during paid parental leave. Currently, there is no obligation for employers to pay the levy.

“A carer’s credit is something that requires community agreement,” Dr Knox said.

“It’s a government expenditure. As a society, we must encourage and help people who take time out of paid employment to look after small children. We have an ageing population. Peter Costello [the former Treasurer under John Howard] introduced the Baby Bonus; it’s time to think about a carer’s credit.”

The paper also examines the way annuities are priced and structured. In Australia, annuities provide smaller pensions for women than men because women tend to live longer. The use of gender specific mortality tables leads to smaller annuities or pensions for women due to their lower mortality rates. The authors say lifetime annuities should be based on unisex rates, as required in Europe.

“We know that women live longer than men,” Mr Dunn said. “It’s not that annuities are incorrectly priced; they are priced based on the data. However, we should look at what’s fair based on society’s expectations. Women over 55 who are single, whether they are widowed or have remained single, struggle more through retirement than any other cohort,” he said. “But a woman buying an annuity today gets a smaller pension than a man, for the same age.”

Dr Knox and Mr Rice have a long history working for better outcomes in superannuation. Mr Rice championed women in his own firm, Rice Warner, which took the battle for better retirement outcomes for women to the Human Rights Commission.

In 2013, Rice Warner’s female employees were offered a package of benefits, including flexible work conditions, paid parental leave, and crucially, an additional 2% payment of their salary into their super fund to partially close the gap with men.

Dr Knox said Mercer included in its 2020 Mercer CFA Institute Global Pension Index a question about carer’s credits. “We believe that carers who sacrifice their current income to care should not also have to sacrifice their future retirement income. We need to recognise their service to the community,” he said.

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[1] https://www.actuaries.asn.au/Library/Miscellaneous/2021/GenderInequalityinRetirementSavingsActuariesInstitute270421.pdf

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Anthony Asher

Three of Australia’s leading superannuation and retirement experts have urged the Federal Government to give broad scope to its pending review of Australia’s retirement system, to better integrate the Age Pension, superannuation and aged care.

Dr David Knox, Dr Anthony Asher and Michael Rice, authors of the Actuaries Institute’s Green Paper, Options for an Improved and Integrated System of Retirement, state that Australia’s current system has obvious shortcomings: it is complex, intrusive, contains anomalies, produces perverse incentives, and is sometimes unfair.

“And, as an increasing proportion of the population move from the accumulation to the pension phase, problems that beset the system will become more apparent,” the paper states.

“The best system would take an integrated view across all sources of income and expenses for retirees,” said Actuaries Institute Chief Executive Elayne Grace. “This includes the Age Pension, superannuation, the family home, aged care and health costs.”

“The current system, though world-leading in some respects, falls well short of that.”

The Actuaries Institute believes the overarching objective of the retirement system should be to ensure that Australians can confidently live their retirement years in dignity. The system must be fair and efficient.

Right now, there is potential fiscal headroom to accommodate changes, especially when a holistic approach to retirement is taken.

The report states retirees need access to a regular income stream, savings to cover unexpected expenses, and protection against longevity, inflation and market risks, known as the ‘retirement income trilemma’.

But the system must be simple to understand so that retirees who don’t seek financial advice can still make smart choices.

Intergenerational fairness is crucial. The cost to government and taxpayers must be shared equitably. And there must be encouragement for those who can afford to defer consumption to do so to provide for their retirement.

Retirees should also be persuaded to spend to maintain a dignified standard of living, and not transfer wealth through large bequests to the next generation.

There should not be incentives to ‘game the system’ and disincentives in the form of penal means tests or taxes are undesirable.

Now is the time for review. “The Actuaries Institute encourages that debate to start now,” the paper states.

“If it does not, Australians may lose the opportunity presented by the fiscal headroom of the declining Age Pension costs, and the lead time we have to prepare for known longer-term changes, such as those to patterns of home ownership and work, longevity and growing health and aged care costs.”

Age Pension costs as a proportion of gross domestic product should fall, but long-term projections show aged care is the second fastest growing category of expenditure after the NDIS, and likely to rise as longevity rates increase.

The options for reform reviewed in the paper include:

• simplifying the Age Pension, better integrating it with superannuation and aged care;
• addressing anomalies created from exempting the family home from Age Pension means testing;
• embedding automatic adjustments in the superannuation preservation age and the Age Pension eligibility age to reflect changes in longevity (although not necessarily in a one-for-one manner);
• setting targets for government expenditure for support in retirement;
• addressing tax and aged care funding anomalies; and
• co-ordinating policies for support in retirement.

These could be achieved with a simpler Age Pension means test, an option that might allow retirees to ‘buy the Age Pension’, or a simpler, combined assets and income test. There could also be a universal Age Pension and/or a concession card that allows everyone over a set age to access cheaper medical care and Pharmaceuticals Benefits Scheme drugs.

The authors also point to the perceived unfairness of the current system. “There are individual accounts, worth tens of millions of dollars that are taxed at the concessional rates for all superannuation of 15% on investment income and 10% on capital gains.” The amount held in super could be capped, or those with large balances could pay more tax.

The Actuaries Institute encourages the initial discussion of reform be kept at a high level to identify the options that have enough support to be further developed.

In summing up, and urging the government to act, Actuaries Institute President Nicolette Rubinsztein said, “There are a number of known longer-term trends: an ageing population, a maturing superannuation system, changing patterns of home ownership and work, a growing dispersion of wealth and health, and growing private costs for health and aged care.

“All of these will aggravate the inconsistencies that stem from a lack of appropriate integration between the various components and undermine the potential for a dignified life for all retirees.”

Key points:

• Australian retirees will face greater diversity in wealth, health and longevity outcomes.
• More retirees will reach retirement age as renters, or not having paid off their family home.
• The Actuaries Institute believes structural reform will deliver a fairer retirement for all.
• Options for review should be bold and consider universal benefits, the means tests, the treatment of the family home, and an end to tax concessions for large super fund balances.

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