Australia needs an increase to the preservation age to boost retirement savings: FSC.

The Financial Services Council will be calling on the Commission of Audit to recommend raising the preservation age for superannuation to relieve the increasing strain on the economy as the Australian population ages.

“The Commission of Audit is the right vehicle for considering changes to the preservation age and the Productivity Commission’s recommendations on dealing with the pressures of an ageing population,” Martin Codina, FSC Director of Policy and International Markets said.

“It would be appropriate for the new Government to commission and publish a new Intergenerational Report as a priority to inform policy decisions in relation to Australia’s ageing population.” Mr Codina said.

“The superannuation system’s ability to generate adequate retirement incomes for Australians can be significantly bolstered by increasing the preservation age.”

Research conducted by Rice Warner Actuaries for the FSC shows that increasing the time spent in the workforce for every Australian by just one year reduces the superannuation savings gap by $200 billion.

“Australia currently has a superannuation savings gap of $1,063 billion. That is, the difference between what is actually being saved through superannuation and what is needed to sustain a comfortable lifestyle after retirement,” Mr Codina said.

“This significant retirement savings gap makes increasing the labour force participation of older workers in Australia a policy imperative.”

Australia has a lower proportion of 55 to 64-year-olds in the workplace than the United States, the United Kingdom, Canada and New Zealand. In fact, New Zealand is 15 percentage points higher than Australia for the employment of this age group.

The FSC has advocated for a phased increase to the preservation age from 60 to 62 years of age to boost retirement savings and reduce pension outlays. In 2009, the age pension eligibility was increased to 67.

“It’s now time to start closing the seven year gap between the preservation age for superannuation and the age pension. The gap will accelerate consumption of superannuation before retirees become eligible for the age pension,” Mr Codina said.

“To achieve the dual aim of reducing longevity risk in superannuation and increasing labour force participation of older workers to drive economic growth Australia needs to debate the appropriate preservation age for superannuation,” he said.

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Few boomers have confidence recent changes will have positive outcomes for super.

Only 19% of Baby Boomers say recent moves to increase super contributions will give them more confidence in their ability to fund their retirement dreams according to the 2013 RaboDirect National Savings and Debt Barometer (NSDB), launched yesterday.

The survey of 2,322 Australians aged 18 to 65 also revealed the extent of the gap between average current superannuation pot ($180,467) for Baby Boomers and what they anticipate they will have at retirement ($316,666). And this latter figure falls worryingly short of the amount people feel that they would need to live 20 years in retirement ($749,824).

RaboDirect’s General Manager Greg McAweeney commented, “The retirement shortfall is worsened by the fact that, generally, people aren’t planning for the improvement in life expectancy. For instance people who are now 65 are expected to live until 85 for a man and 87 years for a woman and this equates to 20 years in retirement. And if you are younger than 65 you will live even longer than 20 years in retirement.”

The NSDB also found that almost one third (29%) of the Baby Boomer generation expect to have a mortgage when they retire. A large proportion are banking on super to repay this debt (25%) and for a further 33%, downsizing will hold the key to clearing their current mortgage and allowing them to enjoy their retirement mortgage free.

Levels of concern around mortgage debt post retirement are also high according to the study – more than half of Baby Boomers (54%) report that they are ‘quite’ or ‘very’ concerned about the prospect of retiring with a home loan.

While these findings may paint a seemingly bleak picture for retirees, Mr McAweeney says that awareness is necessary to encourage action and for people to think about how best to address the problems they are facing.

“It’s only with planning ahead, and having a clear understanding of their financial position heading into pre-retirement and retirement, that people can then start to think about solutions. Those who are a number of years away from retirement still have time to consider alternative savings strategies so they can avoid selling their homes or dipping into their super unnecessarily,” he said.

In other findings from the study released today, close to half of Baby Boomers (48%) expect to run out of money during retirement and say they will need the Aged Pension.

“For those who are facing the probability of drawing an Aged Pension later in life it is particularly important to look at ways of making their savings work as hard as possible now and really preparing for their retirement date,” Mr McAweeney commented.

Key findings:

The study found that many Baby Boomers are already living on a tight budget. More than seven in 10 (72%) Baby Boomers are reducing their power usage to save money and 68% are doing their own odd jobs rather than employing a tradesman.
Despite high levels of concern amongst Baby Boomer mortgagees, a significant proportion does not know what the rate is on their mortgage (16%).

In the current study 48% of Baby Boomers said they expected to run out of money during retirement. This is down from 57% last year, indicating an increase in confidence for this group.

Mr McAweeney concluded, “We conduct the National Savings and Debt Barometer to encourage people to become more engaged with their money so they can plan ahead and make the most of what they’ve got. For example, we know that Aussies are losing out on billions of lost interest by leaving their money in low interest accounts – the survey this year found that the average balance sitting in Australians’ transaction accounts has increased by 42.9% (from $1,396 to $1,995). By moving some of this excess money from a transaction account into a true-to-label savings account, Australians can make their money work harder for them and can truly experience the benefits of compound interest. This will give people greater financial freedom and more options in retirement.”

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Last night’s Federal Budget announcement allowing excess superannuation contributions to be refunded back to the individuals reflects the ongoing advocacy efforts of the Financial Planning Association (FPA) but represents a lost opportunity to fix a problem facing many Australians.
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“While this reform is expected to reduce the number of occasions where the concessional contribution caps are exceeded and individuals penalised, the measure falls well short of delivering a solution for a very serious problem,” FPA CEO Mark Rantall said.
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“We believe the government could have taken advantage of the strong economic position to embark on a more ambitious tax reform program and whilst the concessional contributions amendments are welcome, there needs to be a substantial rethink of how we engage Australians in contributing to a stronger, long term retirement income position.”
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The FPA has called on the Federal Government to remove the 46.5 per cent excess contributions tax penalty for non-concessional contribution and:
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• Refund excess non-concessional contributions back to the taxpayer
• Provide taxpayer with warning and impose no monetary penalty if it is taxpayers first break of the non-concessional cap
• Impose a monetary penalty (admin fee) on the taxpayer if this is the second/third break of the non-concessional cap

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Nor does the FPA support the introduction of a $500,000 account balance eligibility threshold for concessional contributions. Rather, the FPA has called for:
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• The concessional contributions cap for people aged 50 and over to at least remain at $50,000 but indexed with inflation
• Removal of the Superannuation Guarantee (SG) from the concessional contribution limit

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From 1 July 2011, individuals who breach the concessional contributions cap by up to $10,000 can request that these excess contributions be refunded to them. This refund will only apply for first time breaches of the concessional caps. In effect, individuals will be able to take excess concessional contributions out of their superannuation fund and have it assessed at their marginal rate of tax, rather than incurring a potentially higher rate of excess contributions tax. However, what is not clear is whether individuals who have breached the cap before this measure commences will be eligible.
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The Government plans to complement the other reforms including the increase in the concessional caps for those over 50 (with superannuation balances under $500,000) from 1 July 2012; the gradual increase in the SG rate to 12 per cent; and a new super contribution of up to $500 for low income earners.
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“The FPA looks forward to continuing to work with the Federal Government and Treasury to ensure we achieve the most equitable outcome for both the financial planning profession and the retirement savings of all Australians,” Mr Rantall said.

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