There is a fundamental issue of trust that is at the heart of the superannuation system.
Superannuation fund members trust that the government will not dramatically change the rules about when they can access their savings. The government, for its part, trusts that citizens will use the money for what it is intended – funding at least part of the cost of their retirement.
For the super industry and government policy makers the so-called "lump sum mentality" has centred on the notion that – left to their own devices – fund members will squander the lump sum when they retire and along with it the government’s tax concessions when they fall back onto the age pension to fund their lifestyle.
Certainly the flexibility of the Australian system and choices available to super fund members make the possibility of drawing down a lump sum, spending it and then relying on the age pension a potential scenario.
However, the scale of the problem with retirees taking lump sums it seems has been over blown within the industry.
A report released this month by the Productivity Commission provides a thorough and robust discussion around the lump sum issue and the apparent threat to the system it poses.
According to the commission’s 110 page report a relatively modest number of retiring super fund members take their super as a lump sum – around 16 per cent.
However, when the lump sum withdrawal amounts are analysed a clearer picture of investor behavior appears. The vast majority of the lump sums are taken by people with low account balances – typically those with less than $10,000 in super.
Where account balances are that low – and we need to remember that people retiring in recent years have not had the benefit of super for a big portion of their working lives – then taking the lump sum is certainly not an abuse of the system but rather an entirely rational decision in the circumstances.
Further the productivity commission report dives deeper into what lump sums taken from super are being spent on. Some industry pundits regularly use the apocryphal illustration of someone going off on the big holiday trip before settling down to draw on the government pension.
No-one should begrudge a retiree a decent holiday after a long working life but according to the commission report far from squandering their lump sums most people use the money prudently to either pay down debt, invest in income stream products or buy durable goods to be used in their retirement years.
Yes that may well include a car upgrade – about 14 per cent – but the largest component – about 25 per cent – use the lump sum to pay down a mortgage or invest in home improvements. It is true those "investments" are less tangible in terms of supporting a retirement lifestyle than an income stream product.
However, when you combine the lump sums used to buy a new car with mortgage repayment/home improvements then around 40 per cent of lump sums taken out of the super system are being used to improve people’s living standard in retirement – even if it is somewhat indirect.
A key finding from the productivity commission report is that the vast majority of super fund members with sizeable balances- i.e. above $100,000 – are making sensible and conservative decisions in terms of retirement income drawdown options rather than taking lump sums.
The other side of equation – the government’s options regarding accessibility – are also explored in the report.
No one argues with the evidence that on average we are living longer although the report sensibly points out that one of the great challenges of retirement policy setting is the incredible variety of individual circumstances.
The report has modelled the financial impacts of the preservation age increasing to 65.
This is a good news option for the government in the sense that according to the Productivity Commission study, there would be annual fiscal improvement to the budget bottom line of around $7 billion by 2055 and there would be a modest improvement in workforce participation.
However, the Productivity Commission report’s bottom line is that before any such major shifts are made there is a need to develop a “common set of objectives, informed by the principles of sustainability and efficacy”.
In that sense the work of the Productivity Commission is a strong endorsement of the Financial System Inquiry and the need to be clear – at both a government level and in the public mind – about what the overriding objectives of the superannuation really are.
The alternative is where piecemeal changes to the system continue to erode trust rather than build on the obvious strengths of the system.
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Robin Bowerman is Head of Market Strategy and Communication, Vanguard Australia. As a renowned market commentator and editor Robin has spent more than two decades writing about all things investment. |
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