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Retirement incomes for vulnerable groups - an Australian perspective Paper presented to International Conference on Social Security, Singapore, 14th and 15th July 2005. Conference organised by Central Provident Fund, Singapore. David Kalisch Deputy Secretary (A/g) Department of Family and Community Services (FaCS) Australia Retirement Policy Section Seniors and Means Test Branch Department of Family and Community Services (FaCS) Australia Page 1 of 36 Table of Contents Page Executive Summary 3 1. Introduction 5 2. Australia’s Retirement Income System 6 3. Age Pension – an integral part of retirement income 7 4. Superannuation Guarantee – a framework for people to save 11 5. Voluntary savings – other savings and investments 15 6. Vulnerable groups – challenges 16 7. A flexible retirement benefits system 19 8. Extra support for certain groups 21 9. Emerging challenges for retirement income systems 23 10. The final element: responding to an ageing population 27 11. Conclusion 30 Attachment A - Age Pension – more information 31 Note: Dollar figures quoted are in Australian Dollars. Page 2 of 36 EXECUTIVE SUMMARY The Department of Family and Community Services was asked to discuss how defined contribution pension systems can support the retirement incomes of “vulnerable groups”. Australia’s three-pillar approach for retirement incomes provides an affordable basis for generating retirement incomes while providing a minimum standard of support for those unable to accumulate sufficient savings for themselves. • Age Pension provides a publicly funded minimum level of income in retirement, which is not based on past contributions or previous earnings and so provides a significant degree of protection for individuals at risk of not being able to accumulate significant savings for retirement. • Australia’s Superannuation Guarantee (SG), introduced in 1992, provides a framework through which people save, through employer contributions, for their retirement, based on their earnings from employment. • Retirement savings can be enhanced through voluntary superannuation saving and other forms of savings and investment, typically the most significant being the home. Australia’s retirement income system supports individuals in a range of employment circumstances which reduces the possibility of individuals being unable to access superannuation benefits. Employers are required to make SG contributions on behalf of all employees, whether full–time, part–time or casual, with very limited exceptions. While the self-employed are not required to make SG contributions, taxation incentives encourage them to make voluntary contributions and many do so. Australia’s retirement income system allows individuals to tailor their retirement income arrangements to suit their circumstances, which can be beneficial to individuals who have been unable to accumulate significant superannuation through working life. For example: • there is some flexibility around the age at which people may begin to draw down their superannuation savings; • people may choose to continue working while drawing down their superannuation; • people may choose to defer drawing on their superannuation while working (and so build further their superannuation savings); • people may claim an Age Pension while working; and/or • people may choose to defer claiming Age Pension (to receive a Pension Bonus lump sum when they claim). Page 3 of 36 The superannuation system provides specific support for groups at risk of not accumulating retirement savings through: • support for low paid people to make additional voluntary superannuation contributions on their own behalf through a government superannuation co-contribution scheme; • encouragement for higher income partners to make superannuation contributions on behalf of a lower paid spouse (which usually helps the female partner build up superannuation savings in her own right); and • allowing a spouse, after divorce, to access their former partner’s superannuation benefits. Much policy discussion in Australia has been about the steps needed to ensure the economy can best manage the consequences of an ageing population. There is growing recognition of the need to enhance workforce participation and to enhance the productivity of the economy through a mix of economic and social policy reforms. A key vehicle for enhancing the retirement income circumstances of vulnerable groups is maximising their workforce participation through their life course so as to enhance their capacity to accumulate assets and to save for their own retirement. Significant priority in recent years has been given to reforms to increase workforce participation among groups with low workforce attachment. Australia’s perspective is that protection of vulnerable groups can be achieved through a blend of social and economic policies that help people become financially stronger, a publicly funded Age Pension and a superannuation system that is flexible in the way it can be accessed, both in terms of the way people can contribute to their savings and in the way people can draw down their benefits. Page 4 of 36 1. INTRODUCTION The focus of the Conference is to consider the role of defined contribution systems in pension reform. The Conference aims to explore ways in which defined contribution retirement income systems could respond to the demographic and labour market challenges many countries are facing. In this context, the Australian Department of Family and Community Services was asked to share the Australian experience in addressing the issue of coverage for vulnerable groups, such as women, self-employed workers, and workers in the informal sector. Australia has a retirement income system comprising private superannuation (which is mainly in the form of defined contribution pension schemes) backed up by a comprehensive social support system (comprising income support and services) that is continuing to evolve in response to changing social and economic circumstances. Australia’s social support system provides means- tested benefits aimed at poverty alleviation for those in need, regardless of prior work history. Australian residents in need, have access to a full range of working age and retirement benefits under the social support system and are therefore protected against poverty. Certain people may be at risk of having low levels of private resources and savings for retirement including, for example, through disability, illness, caring responsibilities, long term unemployment or after marriage breakdown. In Australia this may be more likely for women, low-wage workers, and other workers with irregular employment histories (although for some, these periods may be transitory, rather than sustained, and others may be protected because of access to a partner’s resources). For individuals and families in these circumstances, Australia’s private superannuation arrangements can provide additional savings support, access to a partner’s benefits after marital separation or flexibility in the way superannuation savings can be accumulated or accessed so as to best suit their individual circumstances. This paper argues that policy solutions to enhance the retirement incomes of individuals lie outside of, as well as within, the design of retirement income systems. A broad mix of social and economic policy levers enhance individuals’ and families’ financial well-being over their life course so as to maximize their capacity to save for their retirement. The Australian Government’s approach is to build a comprehensive and fully integrated approach to the social policy needs of individuals, families and communities across the life course. There is a strong emphasis on building the capacity of people and communities to become more self-reliant across the life course where possible and thereby preventing social disadvantage. People who have are more self-reliant when they are of working age have a stronger capacity for workforce participation, and therefore the capacity for savings through superannuation and other means, leading to better incomes in retirement. Page 5 of 36 2. AUSTRALIA’S RETIREMENT INCOME SYSTEM Australia’s retirement income system is made up of three pillars that work together, to provide retirement incomes for older Australians. • The first pillar is Age Pension. Introduced in 1909, it is a publicly funded, means tested payment that provides a modest but adequate income for people in need in retirement. It provides a flat-rate maximum level of payment, indexed to the Consumer Price Index and set to at least 25 per cent of Male Total Average Weekly Earnings (MTAWE)1. The amount of pension payable to an individual is determined by the income they earn and assets they hold. Individuals with significant income and/or assets may receive a lower rate of pension than the maximum rate (or no pension). People in receipt of Age Pension have access to a range of non-cash benefits such as cheaper health care, medicines, car registration and utility charges. • The second pillar is compulsory employer superannuation contributions of 9 per cent of earnings, under the Superannuation Guarantee (SG). SG commenced in 1992. It is an earnings-related scheme to generate retirement savings. Employers are required to make contributions in respect of their employees, with very few exceptions (mainly employees earning under $A450 per month2). Contributions are supported by taxation concessions. In the main, savings are accumulated through defined contribution schemes. Some defined benefit schemes still exist (mostly for government employees) but are being phased out. • The third pillar is voluntary superannuation under which employees are able to contribute superannuation savings over and above the 9 per cent SG (such savings are also supported by taxation concessions). While the self-employed are not covered by the SG, they are encouraged to make voluntary contributions through significant taxation concessions and over one third do so. In addition to superannuation, many individuals will accumulate other private savings and investments and for most, this comprises the purchase of the home. These pillars work together to ensure a minimum level of protection for all Australians. The compulsory and voluntary superannuation pillars provide a retirement savings framework for those employed, while Age Pension particularly provides protection for those who have been unable to accumulate sufficient savings through superannuation. For many retired Australians, Age Pension substantially provides, or supplements their income in retirement. Australia’s retirement income system provides the choices, flexibility and support that older Australians need now, and into the future. 1 The maximum rate of pension paid to a single person is set to at least 25 per cent of MTAWE. For each member of a couple, the pension rate is around 83 per cent of the rate payable to a single person. 2 Earnings of $450 per month are equivalent to 12 per cent of Male Total Average Weekly Earnings. Page 6 of 36 Age Pension will continue to supplement retirement incomes Age Pension is expected to continue as a major source of income for many Australians in the future, even though as SG arrangements mature, higher superannuation balances will mean many will rely less on Age Pension (because Age Pension payments are means tested). Table 1 shows the projected impact of SG and other savings on the proportion of people in receipt of Age or Service Pension, and whether they receive a maximum rate of pension or a part rate of pension. Even with a mature superannuation system, there will be a continued role for Age Pension, particularly for those with lower levels of private savings. Table 1: The age pension age population – now and in 2050 2004 2050 Maximum rate Age Pension 54% 33% Part rate Age Pension 26% 42% No government pension 20% 25% Total 100% 100% Source: Treasury projections and FaCS data The Government spends about $21 billion annually providing Age Pension to over 1.8 million recipients (which equates to 2.9 per cent of Australia’s Gross Domestic Product (GDP)). Projected expenditure in 2041-42 is 4.6 per cent of GDP. The projected increase of 1.7 per cent of GDP over this period is relatively modest compared with most other OECD countries and the Australian Government considers that increase will be affordable to the budget (Intergenerational Report, 2002-03, p69). 3. AGE PENSION – AN INTEGRAL PART OF RETIREMENT INCOME Age Pension is funded from general government revenue. It is designed to alleviate poverty and to supplement retirement incomes in a way that is fiscally sustainable for Government now and into the future. It is targeted at those most in need in retirement through income and assets tests (collectively referred to as the means test). Age Pension provides a flat-rate maximum level of payment and may be paid at that level, or at a lesser, part-rate, depending on the level of a person’s other income and assets. It provides pensioners who rely on Age Pension with a modest but adequate income in retirement. Adequacy of Age Pension is of major importance to the community, especially for people relying on the payment as their sole source of income. A focus on Page 7 of 36 adequacy of Age Pension coupled with keeping the system affordable is of ongoing concern to the government and policy makers. Pension rates are not referenced to purchasing power but to a minimum acceptable standard of the community (Flanagan, 2000, p18). Pension indexation is the primary means of ensuring the adequacy of pensions. Supplementary payments in the form of rent assistance, ‘add-on’ allowances and pensioner concessions also contribute to adequacy of income for people who rely on the pension as their main source of income. Adequacy measures in place include indexation twice yearly to increases in the cost of living as measured by the Consumer Price Index and to increases in wages as measured by Male Total Average Weekly Earnings (MTAWE) provided by the Australian Bureau of Statistics. (Generally speaking, male wages are higher than female wages in Australia). Legislation ensures that the maximum single rate of pension is set at, at least, 25 per cent of MTAWE. This figure is generally seen to have struck a balance between adequacy of benefits and cost to Government. Unlike retirement incomes systems in many other countries, Age Pension is not related to past earnings or contributions. Age Pension has an important redistributive function for people who have not been able to accumulate adequate retirement savings through superannuation schemes or other means. This may include low-income earners and women with limited or broken workforce participation (Dolan and Wallace-Green, 2004, p3). The Age Pension means test is comprehensive and aims to provide consistent treatment of people in similar circumstances. Means testing adjusts the level of assistance to each person’s needs by allowing part- payment of the pension at a rate that takes into account the other resources a person has. Details of the income and assets test are at Attachment A. The means test arrangements, which have broadly been in place since 1909, significantly reduce Age Pension costs. They are expected to play a major role in moderating the long term cost of Age Pension in the face of the ageing of the Australian population. Men qualify for Age Pension from age 65 and women from age 63 years (at 1 July 2005). The qualifying age for women was originally 60 but is progressively increasing to age 65 by 2014. While, as noted, Age Pension income and asset testing arrangements aim to keep Age Pension affordable to the budget, they are generous and allow the vast majority of retirees to access some pension at either the maximum or a part rate. As at June 2004, 77 per cent of the Australian population over qualifying age for Age Pension received a maximum or part-rate Age Pension or a similar means-tested income support payment from the Department of Veterans’ Affairs. Of the people receiving Age Pension, two thirds receive the maximum rate of pension and one third receive a part rate (FaCS, 2004, p214). It is important to note that new Age Pension claimants are coming on to pension with more wealth than their predessessors. As at March 2005, only Page 8 of 36 52.6 per cent of new Age Pensioners (in receipt of age pension for less than one year) are receiving pension at the maximum rate. The lower qualifying age for women, coupled with a longer life expectancy, means women make up a greater proportion of people receiving Age Pension (59.4 per cent in June 2004). Women receiving Age Pension are less likely than men to have accumulated income and assets for retirement and because of their longer life expectancy, have to spread their wealth over a longer retirement period. 65.5 per cent of women receiving Age Pension receive the full-rate compared with 61.6 per cent of men (FaCS, 2004, p214). Role of means testing in targeting Age Pension payments All Australian income support payments are targeted to those in need via means testing. A sophisticated system has developed over the years to administer the means test to ensure the objectives of the system are being met. This is achieved through applying a means test that embraces broad concepts of income and assets (a key exception being that the family home is not included in asset testing). The amount of superannuation assets held by a person can impact on their Age Pension either by way of their superannuation holdings being assessed under the Age Pension assets test or by way of their income from superannuation being assessed under the income test. This helps to ensure that Age Pension payments continue to be targeted at those most in need, and helps to keep Government outlays on Age Pension manageable. Age Pension payments are based on the current needs of individuals. While individuals commencing retirement with significant private income and/or assets may initially qualify for no or limited Age Pension, they may be able to qualify for more Age Pension later in retirement if they run down their wealth during retirement. The means test parameters are kept under constant review to ensure they are meeting the requirements of the community for well-targeted income support. Recent examples of major changes to the means test include: • In 1998, income streams were reclassified on the basis of their characteristics for means test purposes, providing fairer and more consistent treatment. A full or partial assets test exemption applies to certain income streams. This is part of broader Government policy to provide incentives to encourage retirees to draw down on their assets in a steady and predictable manner in retirement. • In 2000, relaxation of the pension income test occurred through a reduction in taper rates from 50 cents in the dollar to 40 cents in the dollar. Pensioners with private income now keep more of their pension. • In 2002, changes occurred so that people who hold their assets in private trusts or private companies receive equal treatment under the means test to those customers who hold their assets directly. • The range of income streams that qualify for taxation and social security concessions was broadened in 2004 to include market linked income streams. Also, the assets test exemption was reduced from 100 per cent Page 9 of 36 to 50 per cent for certain income streams purchased after 20 September 2004. Supplementing retirement incomes through pension concessions and add-on allowances Non-cash benefits and concessions available to pensioners improve the spending capacity of elderly households. Pensioners may be eligible for a range of additional benefits and allowances, depending on their circumstances. • All pensioners, including those on a part-rate of pension, are automatically issued a Pensioner Concession Card (PCC) that entitles cardholders and their dependents to pharmaceuticals listed on the Pharmaceutical Benefits Scheme (PBS) at the subsidised rate (currently $4.60 per prescription). This is around 16 per cent of the amount charged for the general population for PBS medication. • State and Territory Governments provide a large range of other concessions with core concessions being reduced fares on public transport, reduced property and water rates, reduced energy bills and motor vehicle registration charges. • Pharmaceutical Allowance is paid to all pensioners to limit out of pocket expenses for medicines listed in the Pharmaceutical Benefits Scheme. • Pensioners receive a Utilities Allowance ($100 per year for singles, and $50 for each eligible member of a couple) to help pay for the cost of utilities such as gas and electricity. • Rent Assistance may be paid to pensioners who rent accommodation in the private rental market in recognition of the extra costs they face compared to home-owners. About 10 per cent of Age Pensioners receive Rent Assistance, which reflects the high level of home ownership among people of age pension age. • Telephone Allowance is paid to pensioners to assist with the cost of having a telephone. • Remote Area Allowance may be payable to pensioners living in remote areas. It assists with some of the higher costs associated with living in remote areas. Support for retirees outside the Age Pension system While nearly 80 per cent of retirees receive Age Pension (or an equivalent service pension), a further 10 per cent (approximately) receive some support in retirement from the social security system through the Commonwealth Seniors Health Card (CSHC). The CSHC was introduced in 1994 to support and encourage self-provision in retirement for people of Age Pension age whose income or assets mean they do not qualify for Age Pension. The CSHC is available to “self-funded” retirees (that is, those who do not receive Age Pension) with income over the Age Pension income test limits but up to $50,000 a year for single people and $80,000 a year for couples (combined income). The CSHC is not asset tested. Page 10 of 36 The CSHC allows cardholders (but not their dependants) to access the same health and medical concessions that are available to people receiving Age Pension, a $200 a year Seniors Concession Allowance, access to Telephone Allowance and some concessional fares on long distance rail travel. Meeting the health needs of pensioners All Australians have access to free and/or heavily subsidised health care through Medicare, which provides access to: • free treatment as a public (Medicare) patient in a public hospital; and • free or subsidised treatment by practitioners such as doctors, including specialists, participating optometrists or dentists (specified services only). While taxpayers make contributions to the health care system, based on their income level, through the Medicare levy (1.5 per cent of taxable income), pensioners, and many other older Australians, pay no tax and are exempt from the Medicare levy. Australians with adequate means are encouraged to take up private health cover through a range of incentives. Pensioners and CSHC holders receive extra assistance with health care costs. They: • may be ‘bulk billed’ by Doctors (costs charged directly to Government); • have access to a Medicare Safety Net of 80 per cent of out-of-pocket costs for medical services provided out of hospital after a threshold of $306.90 per family or single per calendar year is reached (more generous than safety net for general population); and • pay $4.60 per prescription listed in the Pharmaceutical Benefits Scheme. 4. SUPERANNUATION GUARANTEE – A FRAMEWORK FOR PEOPLE TO SAVE Superannuation Guarantee Up until 1987, superannuation coverage was around 40 per cent and was largely restricted to the public sector and some ‘white collar’ workers. Superannuation Guarantee (SG) legislation was enacted to make superannuation contributions mandatory and to increase superannuation coverage. The SG legislation resulted in compulsory, concessionally taxed savings for retirement through an employment-based system. This system commenced in 1992 and is fully funded for the person who receives the benefit. SG contributions progressed from 3 per cent of salary in 1992 to the maximum level of 9 per cent of salary in 2003. Superannuation funds are managed in the private sector. The funds operate as trusts with a board of trustees. Each superannuation fund is required by Page 11 of 36 law to comply with the equal member and employer representative requirements and is liable under both criminal and civil law to the fund members (Flanagan, 2000, p49). As at September 2004, there were 26.7 million superannuation accounts in Australia (some people have multiple accounts), and 297,819 separate superannuation funds, managing almost $648.9 billion in assets (APRA, 2004, p4). Compulsory superannuation is supported by a strong regulatory regime that encourages and ensures very high levels of employer compliance and superannuation coverage in respect of eligible employees. Employers who comply with their SG requirements can claim the SG as a cost of business and reduce their business taxation. Employers who fail to meet their obligations to make superannuation contributions on behalf of their employees are subject to the Superannuation Guarantee Charge (SGC) administered by the Australian Taxation Office. The SGC is equivalent to the shortfall in superannuation contributions plus interest and an administrative fee and is not tax deductible. SG covers close to 90 per cent of employees and applies to a comprehensive income base with only limited exceptions. SG does not apply to: • workers who earn less than $450 a month, because the administrative complexity outweighs the benefits; • workers over age 70, as people of this age would normally be expected to draw down superannuation benefits; • part-time workers under the age of 18 (generally full-time students); and • self-employed people. Superannuation coverage is very high Australia’s superannuation system has resulted in significant increases in the number of people who are accumulating savings for retirement, due to its compulsory nature, and effective collection and compliance arrangements. A broad coverage of employment circumstances beyond full time employment is important in a labour market where people increasingly work in casual and part time jobs, and helps to ensure protection for a broad range of people. SG coverage is estimated to be high – around 90 per cent of all workers, 96 per cent of full-time employees and 77 per cent of part-time employees are covered. In respect of the exemption from the SG for employees earning under $A450 a month, many of these are likely to be young employees engaged in casual jobs (ABS, 2001). In 2000, some 42 per cent of jobholders aged 15 to 24 years were self-identified as working in casual jobs and 80 per cent of these worked less than 30 hours per week. Of self-identified individuals working in casual jobs, 77 per cent of those aged 15 to 19 and around 35 per cent of those aged 20 to 24 were still at school or undertaking full-time study (ABS, 2002). It is therefore expected that many of the casual employees not Page 12 of 36 covered by SG will, over time, begin to accumulate superannuation savings under the SG system as they move into better-paid jobs. Chart 1 shows the high level coverage under the superannuation system for male and female employees by income level. Chart 1: EMPLOYEES ENTITLED TO SUPERANNUATION IN MAIN JOB By weekly earnings— August 2003 Australia’s retirement income system is still in a transitional phase as many individuals have only accumulated superannuation savings for part of their working lives, since 1992, and some of these savings were accumulated at a lower rate (contributions started at 3 per cent in 1992 and increased gradually until 2003 when they reached 9 per cent). Protection of small superannuation balances Member protection ensures that fees and charges applying to small superannuation accounts (accounts with less than $1,000 invested) are not more than the investment earnings of the account. This measure commenced in 1995 and is of benefit to part-time, casual and seasonal workers, particularly when their superannuation savings are first commenced. Choice of superannuation fund From 1 July 2005, new Super Choice legislation means that many Australian employees will be able to choose which fund their SG contributions are paid into. Allowing employees to choose the fund into which their contributions are paid gives employees more choice and flexibility – and allows them to take their own circumstances and risk preferences into account in making these choices. It will also enhance competition within and between superannuation Page 13 of 36 funds, which should in turn lead to increased returns and put downward pressure on fund administration charges. Access to superannuation Superannuation savings (compulsory and voluntary contributions) are taxed at a concessional rate compared with other savings. The provision of taxation concessions for superannuation is a significant cost to Government, estimated by the Department of the Treasury to be around $12 billion in 2004-05 (Department of the Treasury, 2004, p8-9). Because of the significant taxation concessions provided to superannuation, the Government imposes restrictions on access to Superannuation contributions. Preserved superannuation benefits cannot be withdrawn in cash until a person has reached the ‘preservation age’ of 55 (which is set to increase to age 60 for people born after July 1960. The 10 year transition period for these changes will commence in 2014 and end in 2024). A person can access superannuation savings earlier than preservation age in limited circumstances in the case of severe financial hardship, on compassionate grounds or when people who have lived temporarily in Australia are returning overseas. On reaching preservation age, superannuation benefits can be taken as a lump sum, an income stream or a combination of both. There are strong concessions (through the taxation system and through means testing rules applicable to Age Pension) for people to convert particularly large lump sums into income streams that cannot be cashed out ahead of a term equal to average life expectancy. Chart 2 shows how superannuation balances are expected to grow over time as the SG system matures, for different age cohorts. By 2030, when many individuals will have accumulated significant SG savings, superannuation balances will be more than double those observed in 2000. The estimates assume future SG contributions are made at the 9 per cent rate. Chart 2: Projected superannuation balances Projected superannuation balances by age, 2000-2030 $180 2000 Superannuation balances $160 1999 dollars ('000s) 2010 $140 2020 $120 2030 $100 $80 $60 $40 $20 $0 15-24 25-34 35-44 45-54 55-64 Age group Source: NATSEM Projections in Kelly, 2003, p19 Page 14 of 36 5. VOLUNTARY SAVINGS – OTHER SAVINGS AND INVESTMENTS The third pillar of the retirement income system - voluntary superannuation contributions and other private savings and investments is also supported by taxation concessions for voluntary superannuation similar to those provided for compulsory superannuation. Approximately 20 per cent of all employees with at least one superannuation fund are making some form of voluntary personal contributions, and this increases to over 25 per cent when evaluating the results for employees who also receive employer support (Bingham, 2003, p8). The median voluntary contribution is around 4 per cent of salary (Bingham, 2003, p13). Voluntary superannuation contributions could be made by individuals wishing to have more income in retirement than the SG and Age Pension can provide, by individuals not covered by the SG or by individuals who wish to make up for earlier periods out of the workforce when no contributions may have been made (such as women returning to work after child rearing). Around 276,500 people are self-employed (ABS, 2001, 1321.0). Around 35 per cent of these are estimated to make voluntary superannuation contributions (ASFA, 2002, p62). Contributions from self-employed people of up to $5,000 per year are fully tax deductible and 75 per cent tax deductible for amounts over $5,000. Treasury’s Retirement Income Modelling Unit (RIM) has found that the patterns of saving for self-employed people are different to those for employees. Self-employed people choose to put their savings more into financial assets (shares and managed funds) and housing rather than into superannuation. The take up of voluntary superannuation is a topic of ongoing interest for government, superannuation organisations such as the Association of Superannuation Funds of Australia (ASFA) and investment companies. A number of surveys have indicated that many people wish to have a higher standard of living in retirement than the SG can provide. Educating the community about the standard of living that can be expected from compulsory superannuation, and promoting voluntary superannuation as an option for increasing retirement savings, has been occurring over recent years. Non-superannuation retirement investments Non-superannuation investments such as home ownership and financial investments can provide a significant boost to retirement savings. Often, loans and debts such as home mortgages are repaid using investments and indirectly result in higher levels of disposable income in retirement. Australians value owning their own home. As discussed earlier, older Australians have a high home ownership rate. Home ownership rates are currently 71 per cent for all ages and 83 per cent for households where the Page 15 of 36 head is aged over 65. Outright home ownership for the group over age 65 is 80 per cent (ABS 2002, p216 and 224). This makes an important contribution to the adequacy of retirement incomes and a pensioner’s well being in retirement, as home ownership reduces the cost of accommodation. Data on the percentage of people owning properties for investment purposes is not currently available, but a 1996 survey of taxpayers showed that 11 per cent received income from investment properties (Tinnion, 1998, p24). As financial literacy grows in the community, so too does the level of investment in managed funds and Australian and overseas share markets. Because these investments are not specifically held for retirement, there are limited tax advantages in holding these products, in comparison with superannuation products. Table 2 shows the estimated range and value of assets held by Australians at different age groups in 2000. Table 2: Estimated average family wealth by asset type and age, 2000 Total asset value held Age of Cash Shares Equity in Rental Superannuation Net family deposits home property wealth head equity $ $ $ $ $ $ 15-19 900 0 0 0 500 1,400 20-24 2,200 200 600 200 3,500 6,600 25-29 5,700 2,300 7,100 900 13,400 29,400 30-34 9,300 9,200 27,400 2,700 24,300 72,800 35-39 9,900 20,800 53,300 7,300 37,800 129,000 40-44 11,000 36,800 86,200 13,000 55,900 271,000 45-49 14,000 49,300 114,700 17,500 75,500 271,000 50-54 17,600 59,200 151,400 19,400 93,100 340,700 55-59 20,700 61,300 165,000 18,900 91,700 357,500 60-64 30,100 37,500 164,600 12,900 89,100 334,200 65-69 53,000 19,900 151,300 12,200 33,500 270,000 70-74 48,900 13,700 139,400 10,500 9,400 221,800 75+ 24,400 4,900 104,000 5,200 1,000 139,500 Average 16,600 23,400 82,100 8,800 39,400 170,200 Source: NATSEM - Kelly, 2003, p17 6. VULNERABLE GROUPS – CHALLENGES Australia’s three-pillar retirement income system with a maturing SG system means people will have better retirement incomes in the future. Retirement incomes will be funded through a mix of compulsory savings (SG), voluntary superannuation and other private savings and investments, and some Age Pension for those in need. However there are some people at risk of having low incomes in retirement because they have not been able to accumulate sufficient savings through superannuation and other means. These are generally people who have had Page 16 of 36 less attachment to the workforce through their working lives than others (this can be women who have been out of the workforce because of caring responsibilities, people who have been sick or disabled, people who have been unemployed or employed in low paid employment). Those who are unable to accumulate significant levels of savings are more likely to rely heavily on Age Pension for their retirement income. Table 3 shows average superannuation balances by gender, age group and employment status. Average balances differ markedly between and among men and women, and according to employment status. Table 3: Average Superannuation Balance Average Superannuation Balance ($) Age Group Employed Employed Unemployed Not in the Full-time Part-time Labour Force Men 15 - 24 7,800 1,100 6,400 250 25 - 34 28,600 14,800 5,100 6,300 35 – 44 69,600 23,600 28,000 8,900 45 - 54 122,200 66,700 44,800 43,300 55 - 64 165,500 160,100 38,900 85,000 65+ 74,700 78,000 - 45,900 Total 78,067 57,383 24,640 31,608 Women 15 - 24 7,200 1,000 300 450 25 - 34 26,900 13,700 2,800 8,100 35 – 44 53,800 23,500 3,600 13,200 45 - 54 83,400 43,700 34,500 20,300 55 - 64 76,800 57,800 30,900 41,800 65+ 86,300 79,400 13,000 Total 55,733 36,517 14,420 16,142 Source: Clare, 2004, p5. Data drawn from Unit Record File, 2002 data collection of Household Income and Labour Dynamics in Australia (HILDA) survey. As one would expect, men in full-time employment have much higher balances than those in part-time employment, who in turn have higher balances than those men who are unemployed. Average balances for women are generally lower than those for men, whether they are in full-time or part-time employment, or unemployed. Women can be disadvantaged both by higher rates of part-time work, and not being in the labour force. Even for full-time workers, the average superannuation account balance is lower for women than it is for men, and the disparity starts to widen for the cohort aged 35-44. This may be attributed to lower wages on average for women, and periods spent out of the workforce because of caring responsibilities (Clare, 2004, p5). For older men and women a lack of access to superannuation before the SG was introduced means they may not have had the opportunity to accumulate significant savings for retirement. While we expect this to change over time, as women’s labour force participation increases, there are still challenges for some groups. Page 17 of 36 Lower income workers tend to have relatively low superannuation balances, as SG contributions are drawn from a lower earnings base. Table 4 shows that the differences between men and women in superannuation account balances are smaller for people of similar incomes. However, it is interesting that balances for women still tend to be lower than for men, even when current income is not dissimilar. Table 4: Superannuation Balances by Age group, Gender and Level of Income Average Superannuation Balance ($) Age Group Low Income Medium Income High Income (Gross income (gross income $15,000 (gross income > <$15,000) to 49,999) $50,000) Men 15 - 24 500 10,000 8,000 25 - 34 9,000 20,100 39,400 35 – 44 13,600 40,500 93,400 45 - 54 34,500 70,700 164,700 55 - 64 55,500 104,200 252,000 65+ 16,200 78,700 196,000 Total 21,550 54,033 125,583 Women 15 - 24 600 6,200 6,600 25 - 34 7,900 14,900 49,800 35 – 44 10,400 26,800 82,300 45 - 54 18,000 40,300 156,300 55 - 64 22,900 74,800 127,000 65+ 6,500 39,200 77,600 Total 11,050 33,700 83,267 Source: Clare, 2004, p6. Data drawn from Unit Record File, 2002 data collection of Household Income and Labour Dynamics in Australia (HILDA) survey. Periods out of the workforce, and earlier retirement, also mean a person may have a lower superannuation balance, as SG contributions have been accumulated over shorter periods. Almost half the people coming on to Age Pension do so from another income support payment, and many of these people will have been reliant on income support payments for a long period. This reduces both the period of their potential contribution to superannuation and the period those contributions could compound to provide a higher superannuation balance. While self-employed people are not covered by the SG, as noted earlier, over one third of the self-employed are estimated to make voluntary superannuation contributions. The patterns of saving for self-employed people have been found to be different to those for employees. Self- employed people choose to put their savings more into financial assets (shares and managed funds) and housing rather than into superannuation Page 18 of 36 (Bingham, 2003, p19). This means they may be less likely to be at risk of lower income in retirement. These challenges for particular groups mean it is important to provide a flexible system that provides support for people in a range of different circumstances to continue building superannuation past traditional retirement age, and allow choice about the age at which, and way in which, people draw down their superannuation. This enhances the capacity of people to improve their savings, according to their individual circumstances and preferences, and provides additional support for those who might otherwise be at risk of low income in retirement. These challenges emphasise the importance of increasing workforce participation of vulnerable groups, to the extent possible, so any current disadvantages do not persist and form long-term difficulties that continue through senior years. This highlights the importance of work and savings in younger years, and government policies that contribute to improved work and savings outcomes, as critical to retirement income outcomes. Retirement incomes depend, in part, on workforce attachment A critical factor in determining the level of retirement income is the extent to which a person is engaged with the workforce. This underpins the importance of enhancing workforce participation as a way to boost the retirement incomes of individuals. Analysis undertaken by RIM Unit indicates that SG and Age Pension will deliver substantial spending replacement rates for senior Australians, as a group, over the longer term, particularly for those with a longer working life. It is estimated that a single male retiring in 2032 who has earned average weekly ordinary time earnings throughout his working life, will have the following spending replacement rates in retirement3: • 63 per cent, after 25 years in the workforce; • 67 per cent after 30 years in the workforce; and • 73 per cent after 40 years in the workforce. 7. A FLEXIBLE RETIREMENT BENEFITS SYSTEM Flexibility and choice helps individuals in diverse circumstances A key feature of Australia’s retirement income arrangements is the flexibility and choice they provide around ways individuals can add to their superannuation savings and draw down on those savings. While there is a minimum age at which people can access their superannuation (55 years) and claim Age Pension (65 years for men, 63 years for women), there is 3 Average retirement expenditure compared with expenditure in last year of work. Page 19 of 36 considerable flexibility in the ways people can access retirement benefits. The flexibility of the retirement income system is illustrated in Box 1 below. Box 1: Retirement Income Choices • Draw down some or all superannuation as a lump sum or income stream at any age after preservation age (55 years) but no later than age 75. • Continue to contribute to superannuation (up to age 75). • Claim Age Pension at any age after 65 years for men or 63 years for women or, if working, defer and later claim a pension bonus. • Superannuation and Age Pension can be received while working (pension subject to means testing). The flexibility can help individuals who have not accumulated sufficient superannuation savings through working life to tailor their retirement income arrangements to suit their individual needs and preferences. For example: • individuals can defer accessing their superannuation (and Age Pension) while continuing to work (and in so doing further build their superannuation savings and to accumulate a pension bonus); or • individuals could choose to receive a blend of superannuation income, income from part time or casual employment and, if over age pension age, a maximum or part rate of Age Pension as appropriate. Working longer can help people to accumulate more retirement savings, supplement their retirement income and reduce the amount to which they draw down their savings, helping to smooth the transition from full-time work to retirement, and improve the adequacy of their retirement income in their later years. The possibility of deferring Age Pension relates to the Pension Bonus Scheme, which was introduced in 1998. It is a voluntary scheme that rewards people of age pension age who defer claiming Age Pension and instead continue working for at least one year. The maximum bonus is payable after an eligible scheme member defers Age Pension for at least five years and receives maximum rate Age Pension when they eventually claim. More details on the Pension Bonus Scheme are at Attachment A. Since 1 July 2005, under the “transition to retirement” scheme, a person who has reached their superannuation preservation age (currently age 55 but rising to age 60) will be able to access their superannuation as an income stream without having to advise that they are “retiring” permanently from the workforce. Allowing people to access superannuation benefits in this way, while continuing in part-time or casual work, will give them the option of supplementing their retirement incomes, and enable greater choice and flexibility in managing their retirement, while maintaining some workforce attachment and the social and health benefits that brings (Brough, 2005). Page 20 of 36 Since 1 July 2002, superannuation contributions can be made to the age of 75 years (previously 70 years), to encourage longer workforce participation and greater self-provision in retirement for those who are willing and able to continue working, in particular: • for individuals aged 65 to 69, the SG continues to apply as for younger employees provided the individual works at least 40 hours in a continuous 30-day period in that same financial year; and • while there are no compulsory SG contributions for individuals aged over 70, an individual aged 70 up to 75 may make voluntary superannuation contributions on their own behalf (and receive the taxation concessions available for superannuation). As at June 2004, 9 per cent of people over age pension age were working; • 17 per cent of whom were registered with the Pension Bonus Scheme; and • 32 per cent of whom were receiving Age Pension while they worked. 8. EXTRA SUPPORT FOR CERTAIN GROUPS The Government has introduced a number of measures within the superannuation system that increase incentives for individuals and families to augment their superannuation savings and which provide extra protection for groups at risk of accumulating low superannuation savings in retirement. These measures allow low income individuals additional support should they wish to enhance their superannuation savings above that which can be provided through the SG. These measures also recognise that while for many individuals, being part of a family can provide protection in retirement through access to a partner’s superannuation benefits, it can be desirable that a low income partner build retirement savings in their own right and it is also desirable to secure for both partners equitable access to superannuation savings in the event of divorce. These measures comprise: • government superannuation co-contributions for low-income earners; • taxation incentives for spouse superannuation contributions; • allowing couples to split superannuation contributions between them; and • providing for superannuation splitting in divorce. Superannuation co-contribution for low income earners The Superannuation co-contribution assists low-income and middle-income earners to save for retirement. The scheme commenced in 2003-04 with the Government matching, dollar for dollar up to $1,000, voluntary superannuation contributions made by people with incomes less than $27,500 a year, phasing out completely at $40,000 a year. Page 21 of 36 In the 2004-05 Budget, the Government extended the scheme with the Government putting in $1.50 for each $1 of personal superannuation contributions, up to a maximum of $1,500 a year. The co-contribution phases out completely at $58,000 a year4. Around 541,000 people received around $291 million in government co- contributions in 2003-04. The take-up has been strongest amongst part-time workers and women (Brough, 2004 and 2004a). The Treasury RIM unit projects that a worker earning $36,000 a year (approximately median earnings) who makes enough voluntary contributions to receive the maximum Government co-contribution over a 30 year working life, will have a 28 per cent increase in their superannuation balance on retirement compared with had they not made any voluntary superannuation contributions and had relied solely on the SG to build their retirement savings. Spouse contributions tax offset The spouse contributions measure encourages a higher income spouse to make superannuation contributions in the name of their low-income or non- working spouse to build their retirement savings. Introduced in 1997-98, the measure allows the spouse making the contribution to claim an 18 per cent tax offset on superannuation contributions of up to $3,000 made on behalf of their low-income or non-working spouse. The maximum rebate is $540. This measure is of particular benefit to low income or non working people partnered to higher income earners, who may not have had the opportunity to build their own superannuation balances to the extent desired reflecting in some cases, restricted workforce participation that often comes with family and caring responsibilities. Treasury estimates around 35,000 people benefitted from this measure in the 2002-03 financial years. Splitting of superannuation contributions between couples Australians will have the option to split superannuation contributions with their spouses from 1 July 2006. Implementation details will be settled once consultation with stakeholders is completed. Superannuation splitting will further allow low income or non-working spouses to accumulate their own superannuation. The measure will boost retirement savings and provides greater flexibility and choice for families. Superannuation splitting in divorce Traditionally, in Australia, women have taken on the primary family and caring roles. An individual generally holds superannuation, rather than a couple or a family. In the case of couples, this can mean that the person with reduced 4 $58,000 is 119 per cent of Male Total Average Weekly Earnings. Page 22 of 36 workforce participation will have less access to income in retirement than their spouse. In the case of marriage breakdown, in the past, women were not able to access any of the superannuation savings made by their former spouse. From 28 December 2002, the Family Law Act was changed to allow superannuation to be split following marriage breakdown. Superannuation splitting offers more flexibility in the division of assets on marriage breakdown by providing more options for division of property taking into account current and future needs. It also provides opportunity for individuals who have lower amounts in superannuation to take a greater proportion of their share of the property in the form of superannuation. This approach offers benefits for women who tend to have lesser holdings of superannuation than their spouses. A fund member's superannuation interest may be split with the former spouse while the interest is still in the accumulation phase, or when the member is being paid the benefit. (The member may be either in retirement or continuing to work). Where the member's interest is in the accumulation phase, the former spouse will receive an entitlement as a base amount payment, ie a specific amount of the member's interest. Where the benefit is in the payment phase, it is normally paid on a percentage basis. 9. EMERGING CHALLENGES FOR RETIREMENT INCOME SYSTEMS Expectations around retirement incomes are changing and discussions around retirement income systems and the way in which they respond to the special needs of particular groups in society need to recognise this. Changes are emerging in society, in expectations and in patterns of workforce participation and transitioning to retirement. As noted, Australia is responding to these changes by ensuring its retirement incomes system has the flexibility to allow individuals to tailor retirement arrangements to suit their circumstances. Research in Australia on the baby boomer generation shows people want to have higher incomes to match their active lifestyles. Expectations and preferences about the age at which a person retires are also changing. For example, while the anticipated retirement age among pre-retiree Australians remains under 60, research conducted for the Association of Superannuation Funds Australia shows that it has increased from an average of 58 years in 2001 to 59 years in 2004. Further, around one quarter (24 per cent) of pre- retirees anticipate retiring at age 65 or over – up from 19 per cent in 2001 (Cameron, 2004). Other research shows that a high proportion of a sample of Australian baby boomers hope to work part-time or casually in retirement to supplement the income they receive from superannuation and/or income support (FaCS, 2001). Systems need to be flexible to allow people to choose Page 23 of 36 the time of their retirement, to defer superannuation draw down and/or to continue saving so that desired retirement incomes can be achieved. Messages to the public about the role of government in retirement incomes need to be clear. In the Australian context, people need to understand that government provides a framework for savings and a minimum income for those in need in retirement. Savings for retirement in addition to those provided for by SG are the responsibility of individuals, but are supported by systems of flexibility and choice. Changing employment trends: the workforce participation challenge Australia’s overall labour force participation rate is around 64 per cent (72 per cent for males and 56 per cent for females). There is a marked decline in workforce attachment of Australians of mature age that is aged between 55 to 65, compared to younger groups, and interrupted periods of work for other Australians, especially women as they rear children. While participation rates fall off from age 55 for both males (from 72 per cent to 63.1 per cent) and females (from 56 per cent down to 40.2 per cent) relative to those for younger groups, participation rates for both mature age males and females are trending upwards. These trends are shown in Chart 3. Chart 3: Labour market participation rates Labour market participation rates, ages 15-64 and 55-64, 1993-2003, per cent 80 70 60 50 40 30 Males 15-64 20 Females 15-64 Males 55-64 10 Females 55-64 0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Source: ABS 2005 Yearbook Australia The Australian Government has been working to reduce the barriers that have in the past meant many mature age people have been unable to continue working even though they are willing and able to do so. One important response has been the implementation of Commonwealth Age Discrimination legislation to protect older and younger Australians from discrimination, particularly in the workplace. Over time, this is expected to help change negative stereotypes held by some employers that have impeded the hiring of older workers. Page 24 of 36 A shift to part time and casual work In recent years, there has been a shift towards part time and casual work. Of all employed persons, the proportion employed part-time has increased from 25 per cent in 1996 to 28.5 per cent in 2003-04 (ABS Labour Statistics). Currently, females work part-time hours at a much higher rate than males: • 15 per cent of working males worked part-time in 2003-04; and • 46 per cent of working females worked part time in that year. (ABS, 2005, p170) Treasury has noted that there are some longer-term trends that may support continued strong growth in part-time employment. ABS labour force data reveals that people who do not currently have a job (either unemployed or outside the labour market) are more likely to initially find part-time work, rather than full-time work (Treasury, 2004a). The ageing of Australia’s workforce may see increasing numbers of older workers opting to work on a part-time basis, rather than retiring early altogether. Australia will need to accommodate these preferences. The Australian Government has supported and promoted extensive public debate about work and family issues including balancing work and family/caring responsibilities. This has led to increased public awareness of options and benefits and increased employer flexibility around hours of work, starting and finishing times and part-time employment. The Government is encouraging all types of participation in the labour force. This has significant benefits in maintaining economic self-sufficiency, in keeping people connected to the community and assists in building economic resources for the longer term. While part-time employment may result in reduced retirement incomes compared to those of full-time workers, it brings with it a range of positive benefits, including some provision for retirement. Changing labour force experiences Workforce participation trends for mature age people show retirement at around age 55 years as being common although as noted earlier baby boomer expectations suggest many may wish to retire later, an expectation that may become reinforced as the superannuation preservation age increases to 60. Early retirement may be desirable for some, but can result in reduced savings and more reliance on Age Pension. Women often experience long periods out of the workforce while raising children and often work in a part-time capacity. The effect on labour force participation of family and caring roles that women tend to play are even more noticeable in the case of family breakdown. Page 25 of 36 Family breakdown can diminish wealth and result in more parents relying on income support. Women, in particular, can become vulnerable after marital separation, especially if they are the primary carers of children. When children are young, sole parents may need significant social support as they may not be in a position to work. This may change as children age. These trends underpin recent government initiatives discussed earlier such as supporting spouse superannuation contributions and superannuation splitting after divorce. Chart 4 shows that the likelihood of working and the number of hours worked increases as a woman’s youngest child ages, and particularly once children reach school age. From a retirement incomes perspective, this means superannuation arrangements need to be sufficiently flexible to accommodate the circumstances of the many women who transition back into work after child rearing. Chart 4: Return to work by couple and lone mothers by age of youngest child Proportion Employed 80 70 Part T ime 60 Full T ime 50 40 30 20 10 0 under 2 4 6 8 10 12 14 under 2 4 6 8 10 12 14 1 Mothe r - Couple 1 Lone Mothe r Age of youngest child (years) Source: ABS Census data 2001 Changing employment trends may reduce people’s capacity to earn and accumulate savings unless systems are flexible in terms of scope for working beyond the traditional retirement age and for a gradual transition to retirement. For example, higher levels of education should boost productivity in the longer term, but at the same time, can delay the start of full time workforce participation, and the point at which people begin saving. Chart 5 shows that over time, people have been reducing the number of years they spend in the workforce and increasing the number of years out of the workforce (for example, in retirement or in education). The Chart also reinforces the point that women spend less time in the workforce than men. Page 26 of 36 Chart 5: Years in full-time equivalent work and out of the workforce for selected 1 cohorts , by gender. Years out of workforce 90 FT equivalent work years 80 70 60 50 Years 40 30 20 10 0 1978 1982 1992 2002 2008 1978 1982 1992 2002 2008 Male Selected cohorts Female 1 Year when cohort is 15. Source: Bingham (2003); Australian Government Actuary (1999); ABS (2003). The challenge for Australia is to further lift workforce participation rates across the lifecycle, including for women of all ages and for mature age men. 10. THE FINAL ELEMENT: RESPONDING TO AN AGEING POPULATION Broader social policy and economic reform issues are very much at the forefront of debate in Australia. Despite our economic and social differences, countries in our region face broadly similar demographic challenges in current or coming decades. Australia faces long term challenges associated with a changing demographic structure, and patterns of family formation and composition. The proportion of people over age 65 is expected to grow from 13 per cent in June 2003, to over a quarter of the population by 2051. These trends are illustrated in Chart 6 which shows the projected changes in the proportion of older people in the population from 1950 to 2050 for a number of countries. It is based on the proportion of the population aged 65 + to the population aged 15 – 65. Page 27 of 36 Chart 6: Proportion of older people in the population Proportion of older people in the population - selected countries, 1950, 2000 and 2050 1950 80 2000 70 60 2050 Per cent 50 40 30 20 10 0 a a e ng m lia n na S K re si or pa U U a ra Ko hi ay Ko tn ap Ja st C e al ng g Au Vi of M on Si lic H ub ep R Source: United Nations, 2003 An ageing population means more pressure on the programs and services commonly accessed by older people (retirement incomes, health and aged care). But it also means a smaller proportion of people of workforce age to fund the increased cost of the programs and services a greater proportion of older people will use. There has been substantial debate in Australia on approaches to manage the consequences of an ageing population. The Government has been focussing on early intervention, prevention and capacity building strategies to prevent intergenerational cycles of disadvantage and deprivation. Early intervention, prevention and capacity building will strengthen people and their families and communities now, but also increase their capacity for workforce participation, and ultimately retirement incomes, in later life. At the same time it will help to ensure a sustainable system of support for the elderly. The Australian Treasurer has characterised responses to the challenges presented by an ageing population as “the three Ps”: • Population • Participation • Productivity In respect of population, there is limited scope for Australia to moderate population ageing over the next forty to fifty years through polices to encourage higher birth rates or more immigration. A priority is to increase workforce participation, particularly among those groups where participation is low, and this is behind the increasing focus in Australia on boosting workforce participation for the disabled, for women and for mature age men. Another priority is to also increase the productivity of the economy through such strategies as enhancing economic and social infrastructure, reforming Page 28 of 36 labour markets, tax, natural resource management, innovation policy and regulatory processes. Boosting population, participation and productivity best work if underpinned by comprehensive, and effective, social policies. An example is that workforce participation of women is enhanced if quality and affordable childcare is available. A framework for helping policy makers conceptualise the impact of economic and social policies on individuals is to look at how those interact at different points through their life course. A life course approach recognises that the problems a person experiences in one stage of their life can influence opportunities and outcomes at a later stage. For example, measures that help children develop learning skills at an early stage can strengthen them as adults. In Australia, policy thinking is moving beyond just responding to needs at a point in time – increasingly the focus is on early intervention and prevention to develop people’s capacity to make successful transitions through their life course. A life course approach also recognise that a wide range of parties impact on an individual through life – government, their community, their family and business. Taking a lifecycle approach leads policy makers to develop multi-faceted responses that take account of the complex interactions between, for example, nurturing the young, while at the same time taking care of the old. Retirement is also now viewed in lifecycle terms - as a transition in a working trajectory. Retirement incomes are then seen as the cumulative result of choices and events that have been taken or which have occurred through life. Social policy responses in Australia recognise the life course of individuals and families by: • supporting decisions to have a baby (for example, through a one-off maternity payment at birth, childcare payments and ongoing family payments); • supporting early childhood development (early learning and care programs); • supporting families to balance work and family (flexible workplace arrangements and creating child-friendly communities); • supporting caring (balancing recognition and reward for caring with the opportunity to train, study and work); • supporting individuals and families to make financial choices appropriate for them including how best to manage their money; and • supporting retirement transitions (choice, flexibility and opportunities for gradual retirement). A recent major policy development in this area was the announcement in the 2005-06 Budget of the Government’s “Welfare to Work” reforms which are aimed at encouraging and supporting workforce participation among groups Page 29 of 36 with low rates of workforce participation currently, in particular, sole parents, individuals on Disability Support Pension and the long term unemployed. 11. CONCLUSION Australia’s approach to meeting the needs of people in “at-risk” groups as defined by the Conference is to: • provide Age Pension as a minimum level of support for people in retirement; • provide a superannuation system that is flexible and accessible to individuals in a wide range of circumstances; • support voluntary superannuation savings to enable people to build superannuation savings beyond the compulsory SG contributions, with particular additional support for lower income individuals; • support the access of lower paid or non working spouses to superannuation; • to encourage and support workforce participation of individuals to enable them to accumulate superannuation through a wide range of economic and social policy settings; and • to ensure the Australian economy is well positioned to manage the consequences of an ageing population. A number of the Government’s policies are relatively new and their effects on retirement incomes and behaviours will need to be monitored over time. It is believed that policies that take a lifecycle approach and involve early intervention, prevention and capacity building will not only help Australia to grow economically, but help Australia to address the challenges of population ageing. Page 30 of 36 ATTACHMENT A AGE PENSION – MORE INFORMATION Age pension age Age Pension commenced in 1909. Shortly after its introduction the pension age for women was reduced to 60 years, while remaining at 65 years for men. Since this time, the role of women in Australian society has changed significantly. In recognition of the changing workforce participation for women and changing community attitudes, the age pension age for women is being aligned with the age for men. This change is being introduced progressively over 20 years. Age pension age for women is currently 63 years. The women’s pension age gradually increases until the year 2013, when women will need to be 65 years of age to receive Age Pension. Age Pension rates The maximum rate of Age Pension as at May 2005 is $12,383.80 per year for singles (around 26 per cent of average weekly earnings for males) and $20,680.40 combined for couples (around 43 per cent of average weekly earnings for males). Age Pension Means Test The rate of payment is calculated under both the income and assets tests. The test that results in the lower rate (or nil rate) is the one that applies. As at July 2005: The maximum rate is payable to single people with income below $124 per fortnight and assets below $157,000 (homeowners) or below $270,500 (non- homeowners). Couples receive maximum rate if income is below $220 per fortnight with assets below $223,000 (homeowners) or below $336,500 (non- homeowners). Part pension is payable to a single person living in a home fully or partly owned by them, if their income is below $1329.25 per fortnight and assets are below $317,750 (assets do not include the principal home). If the person is a non-homeowner, assets can be up to $431,250 before pension ceases to be payable. For couples, part pension is payable to couples living in a home fully or partly owned by them, if their income is below $2,223 per fortnight and assets are below $490,500. If the pensioners are non-homeowners, assets can be up to $604,000 before pension ceases to be payable. Page 31 of 36 Add-on allowances The table below shows maximum fortnightly rates of pension and commonly paid allowances, as at March 2004. Maximum rates of pension and supplementary assistance Single Couple (combined) $ a fortnight $ a fortnight Maximum rate pension $476.30 $795.40 Maximum Rent Assistance* $98.00 $92.40 Pharmaceutical Allowance $5.80 $5.80 Telephone Allowance $3.00 $3.00 Utilities Allowance $3.80 $3.80 Sum of above $586.90 $900.40 *Maximum Rent Assistance is payable if rent paid is more than $217.67 a fortnight for a single person and $265.00 a fortnight for a couple. Further assistance to pensioners is provided through the taxation system. Age pension payments are subject to personal income tax but age pensioners are entitled to a rebate that fully protects those receiving the full-rate pension from income tax and the Medicare levy and providing partial exemption for part-rate pensioners. Age Pension administration The Department of Family and Community Services (FaCS) has policy responsibility for Age Pension. Centrelink, established on 1 July 1997 as a Commonwealth service delivery agency, delivers all income support payments on behalf of FaCS. This includes delivery of Age Pension. The Department of Veterans’ Affairs pays Age Pension to a small number of people (around 6,600) on behalf of FaCS (FaCS, 2004, p215). These Age Pension recipients generally have spouses receiving a Veterans’ Affairs payment such as a service pension and prefer to deal with only one service delivery agency. Pension Bonus Scheme – deferral of Age Pension The Pension Bonus Scheme was introduced from 1 July 1998, giving older people an incentive to defer claiming Age Pension and to work past age pension age. This voluntary scheme rewards people of age pension age who defer claiming Age Pension and instead continue working for at least one year. The maximum bonus is payable after an eligible scheme member defers Age Pension for at least five years and receives maximum rate Age Pension when they eventually claim. FaCS data shows around 84,000 people have registered with the Scheme since it began, with people receiving an average tax free lump sum bonus of more than $11,000 in 2003-04. Page 32 of 36 While there is no requirement in Australia for people to work past age pension age, this policy shows the Government’s commitment to encourage longer workforce participation and higher levels of self-provision in retirement. Page 33 of 36 Bibliography Association of Superannuation Funds of Australia Ltd (ASFA), 2002, Submission to Senate Select Committee on Superannuation, Inquiry into Superannuation and standards of living in retirement, website www.superannuation.asn.au Australian Bureau of Statistics (ABS), 2005, Year Book Australia, Commonwealth of Australia, Canberra. Australian Bureau of Statistics (ABS), 2004, Household Income and Income Distribution, Australia, Cat. No. 6523.0, Commonwealth of Australia, Canberra. 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"Retirement incomes for vulnerable groups - Central Provident Fund "