Wednesday, 10 February 2021

How the Organisation for Economic Co-operation and Development (OECD) sees Australia's national pension scheme


It would appear that the Australian Government national old age pension scheme is managing to tread water when in comes to international comparison - predominately because its cash transfers are set roughly on par with the official poverty line adopted by this country and therefore on paper no-one is falling post-retirement into abject poverty.

However, with an ongoing acute shortage of affordable housing/ social housing stock, a large cohort of women bringing little or no superannuation into their retirement and successive federal governments which have failed to introduce and fully fund health and wellbeing support systems for Australian as they enter old age, the national age pension scheme appears to be failing a great many people.

OECD Pensions at a glance 2019, 27 November 2019:

OECD’s biennial report on the pension systems across OECD and G20 countries. Each edition opens with an overview comparing pension policies of OECD countries and recent reforms. This is followed by at least one thematic chapter and a range of indicators including pension projections for today’s workers.

The 2019 edition; reviews and analyses the pension measures legislated in OECD countries between September 2017 and September 2019. As in past editions, a comprehensive selection of pension policy indicators is included for all OECD and G20 countries. Moreover, this edition provides an in depth review of different approaches to organising pensions for non-standard workers…..

How does AUSTRALIA compare?

Key findings

While contributing to superannuation funds is nearly universal among employees, only 27% of the self-employed made contributions in 2016-17.

Full career self-employed workers will have a pension equivalent to 90% of that of full career employees despite not having made any pension contributions.

Relative incomes of those aged over 65 to the total population are low at 72% compared to the average of 87%, while poverty rates for the elderly are very high in Australia at 23%, ten percentage points above the average. As Superannuation funds can be taken as a lump sum, this might skew these figures.

Replacement rates in Australia are lower than the OECD average. The future net replacement rate for a full-career male (female) average-wage earner is 41% (37%) compared to 59% (58%) for the OECD. With the relatively high value of the Age Pension this improves to 76% (72%) or low earners compared to the average of 68% (68%).

Five-year breaks in the career for childcare or unemployment lower future replacement rates by 12%, much higher than the OECD average of 4% and 6%, respectively…..

Excerpts from the 2019 document:

Employees are automatically enrolled in theSuperannuation system, although they are not compelled to make any contributions as the base scheme is entirely financed from employer contributions, whilst additional voluntary contributions can be made by employees. The self-employed are thus only covered by voluntary contributions and there is no requirement for them to contribute to the Superannuation scheme.

With near universal coverage of employees the Superannuation scheme has shown its effectiveness in providing a savings mechanism but with no compulsion for the self-employed to enrol their participation rate is much lower, at only 27% in 2016-17.

As a result, the self-employed tend to be solely reliant on the Age Pension, giving them a lower replacement rate at retirement compared to employees……

The average income of current retirees is only 72% of the population figure for the over 65s. There is also considerable variation by age with the 66-75 years age group at 78% compared to only 64% for those aged 76 and over. This age profile partly reflects the building-up of the impact of the Superannuation system, which was only introduced in 1992: those aged over 75 today would have had only limited opportunities to contribute….

Australia is ageing more slowly than the OECD average. Given the relatively limited involvement of the government in pensions and the slower ageing process, there is less of an issue of public finance pressure than in many other OECD countries. Public expenditure on pensions is projected to remain well below half of that of the OECD average. The Superannuation system being defined contribution is not subject to financial sustainability issues and as it will reach full maturity fewer individuals will be reliant on the Age Pension safety-net.

Future net replacement rates for average-wage earners in Australia are low at 41% compared to 59% for the OECD on average. The situation is however much better for lower earners with a net replacement rate of 76%, compared to 68% on average for the OECD, as the Age Pension provides an effective safety net for this group. However, individuals who are taking the  Superannuation component as a lump sum are then able to spend it as they wish. Once the funds start to deplete they can also then become eligible for at least a partial payment from the Age Pension….

In Australia, the impact on pension entitlement of interrupted careers is mixed depending on the absence period. There are no credits for either unemployment or childcare absence within the Superannuation system, unlike most other OECD countries, where in addition childcare absences usually have a lower impact on future pension entitlements than unemployment. For five years out of the labour market the pension entitlement in Australia for an average-wage earner is reduced by 12% compared to 6% on average in the OECD for unemployment and only 4% for childcare.….

The projected working-age population (20-64) will decrease by 10% in the OECD on average by 2060, i.e. by 0.26% per year. It will fall by….. more than 20% in Australia….

Mandatory pension contribution rates differ widely among OECD countries….Contribution rates are the lowest, below 10%, in Australia, Canada, Korea, Lithuania and Mexico.

Recent Pension Reforms

JULY 2018

From July 2018, members with total superannuation balances below AUD 500,000 are allowed to carry forward unused concessional (before tax) contribution-limit amounts for up to 5 years. From July 2019, members can access the unused contribution.

JULY 2019

Superannuation funds have to cancel supplemental life and disability insurance coverage for accounts with 16 consecutive months of inactivity unless participants actively choose to maintain the coverage.

The law caps the total annual administrative fees superannuation funds can charge accounts with balances below AUD 6,000 at 3% of the year-end balance. (Previously, there was no fee cap.) The law also prohibits superannuation funds from charging exit fees when accounts with any balance amount are transferred to other providers.

From July 2019, the Pension Loans Scheme (a voluntary, reverse mortgage type loan providing a fortnightly income stream) was expanded to all Australians who reached the normal retirement age with securable real estate/assets owned in Australia. The maximum fortnightly payment (pension plus loan) also increased from 100% to 150% of the fortnightly maximum rate of pension.

Superannuation funds have to transfer accounts with balances below AUD 6,000 to the Australian Taxation Office (ATO) after 16 consecutive months of inactivity. Within 28 days of receiving an inactive account, ATO will combine it with an active account belonging to the same participant if such an account exists and the combined balance would be at least AUD 6,000. If the account cannot be combined, ATO will continue to hold it until it can be combined or issue a lump-sum payment to the participant if he or she is aged 65 or older or the account balance is less than AUD 200.

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