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The report highlights that half of those with an account-based pension are withdrawing their super at the legislated minimum rate, resulting in substantial balances remaining unutilized. According to the Grattan Institute, many retirees are net savers, with their super balances continuing to grow post-retirement due to fears of outliving their savings.
“This is not how it was meant to be,” said Brendan Coates, the report’s author and director of the housing and economic security program at Grattan. “Too few retirees are enjoying the benefits of the savings they built up during their working lives.”
Complicated Retirement Planning
Retirement planning complexity is a major issue, with about 80% of Australians finding it challenging to manage their super balances effectively. Coates noted that the current guidance for retirees is insufficient, as it primarily steers them towards account-based pensions, requiring them to manage their spending to avoid depleting their funds prematurely.
Proposal for a Government-Backed Annuity Scheme
The Grattan Institute’s solution involves offering all Australians the option of a lifetime annuity. An annuity would provide retirees with a regular, guaranteed income for life, addressing the uncertainty around how much to withdraw annually. The institute suggests that a government-run scheme could increase annuity uptake, offering a more secure and understandable option for retirees compared to private providers.
“Relying on super funds to deliver annuities at scale is unlikely to work,” the report stated, pointing out that super funds have resisted previous government efforts to promote annuities.
Encouraging Uptake and Boosting Incomes
The institute proposes that retirees should be encouraged to allocate 80% of their super balance above $250,000 into a government annuity as a default option. This reform could potentially increase retirees’ incomes by up to 25%. For those with balances below $250,000, the age pension would provide a minimum lifetime income.
No Cost to Taxpayers
Coates emphasized that administering such a scheme would not burden taxpayers. “People would be using their super balances to buy the annuity, and the government would manage those funds, paying out the annuities from the pool of funds collected from annuity purchases,” he explained. Moreover, the government annuity provider would pay a levy to the government, reducing the financial strain on public resources.
Trust in Government-Run Schemes
The report suggests that retirees may be more inclined to trust a government-run scheme over private providers, which could increase the overall adoption of annuities. This is because many Australians find it difficult to trust private providers to offer fair deals on complex financial products.
Conclusion
The Grattan Institute’s call for a government-backed annuity scheme aims to reshape the way retirees manage their superannuation, ensuring they can better utilize their savings for a secure retirement. The proposal reflects a shift towards more direct government involvement in the superannuation system, potentially transforming it from a savings scheme to a more comprehensive retirement income system.