This report is a detailed analysis of two aspects of superannuation policy affecting the post-retirement phase:
- What might happen if the age that individuals can access their superannuation (the 'preservation age') were raised?
- Is the way people draw down their superannuation, and in particular, the use of lump sums, problematic?
As part of its research for this paper, the Commission has developed a model - referred to as the Productivity Commission Retirement Model (PCRM) - to assess the effects of increasing the preservation age. Modelling supplementary papers are also available.
Australia's ageing population will increase demands on the retirement income system. With this in mind, this report seeks to improve understanding of two elements of the retirement income puzzle - when and how individuals access their superannuation.
The preservation age - the age at which people can access their superannuation savings - is considered by some to be an important policy lever in managing the transition to an older Australia. The Commission has found that, consistent with expectations, raising the preservation age encourages some people to work longer and accumulate more superannuation.
Modelling undertaken by the Commission in order to better understand the response of individuals to a gradual increase in the preservation age to 65 suggests that:
- there will be a modest increase in the participation rate of older workers (of around 2 percentage points in 2055) - mainly among those with higher wealth at or near retirement
- households that delay their retirement are likely to do so by around two years and will have superannuation balances around 10 per cent larger in real terms when they retire
- there will be an indicative annual fiscal improvement of around $7 billion (in 2015 prices) in 2055 - mainly due to tax revenue increases from wealthier households
- changing the preservation age will have little, if any, impact on the workforce participation of individuals who retire involuntarily - almost one half of men and over one third of women who retire between the ages of 60 and 64.
Once they have access to their superannuation savings, individuals are afforded much flexibility in drawing them down. Some consider that this discretion is desirable given the diverse circumstances of retirees. Others are concerned that it encourages individuals to exhaust their superannuation too quickly by taking lump sums and leads to more reliance on the Age Pension.
The evidence suggests that most retirees are prudent in their drawdown behaviour. Less than 30 per cent of superannuation benefits are taken as lump sums. When retirees do take lump sums, they are most frequently used to pay down debt, invest in income stream products, and purchase durable goods that are used throughout retirement.
Lump sum use is not uniform, and is most prevalent among those with low superannuation balances (less than $10 000). These households tend to take between half and all of their superannuation assets as a lump sum. The evidence suggests that this behaviour has little impact on Age Pension reliance.
In undertaking its analysis, the Commission has identified a range of policy areas that warrant further and collective attention. These include:
- how involuntary retirement impacts policy outcomes
- the way in which incentives inherent in the retirement income system affect individuals' savings and retirement decisions
- how the retirement income system can better cater for the diverse circumstances and needs of retirees, particularly in the drawdown stage where 'one size' never fits all
- how to best manage longevity risk given the demographic transition underway.
The retirement income system has seen ongoing change to its components, albeit with less focus on the drawdown phase. But its overarching objectives remain poorly defined. Ideally, future changes to the system would be guided by a common set of objectives, informed by the principles of sustainability and efficacy, and considered as part of a holistic review involving considered and extensive community consultation.