The demographic transition now under way will give rise to major socioeconomic change, as more Australians make calls on the healthcare and superannuation systems. As the population ages, the proportion of people who are retired relative to those of working age rises, and greater demands are placed on the retirement income system, leading to pressures on Australia’s fiscal position. The proportion of the Australian population aged 65 years or more will have increased from around one in seven in 2005 to around one in four by 2055. Around 2.7 million working-age Australians are on income support – over one in five of all adults of working age. Accordingly, any shortcomings in the superannuation system will take on greater significance.
Before Transition to Retirement (TTR) schemes were enacted, the design of the retirement income system was a major reason for people to leave the workforce. Many older workers wanted to cut down on their hours and would have been happy to accept a reduced wage for doing so, but they did not want to give up work completely. The problem was that superannuation access for those who had reached the preservation age of 55 – the age at which people can access their superannuation savings – but were under 65 was generally conditional on their stopping work entirely.
In 2005, the Australian government aimed to use its TTR provisions to ease economic pressures with, while delivering sustainable retirement incomes for older Australians. The government – like those of many OECD countries – had recognised the increasing capacities of older people to be active in the labour market. For the most part, TTRs focused on increasing the workforce participation of mature aged people (workers aged 50 and over) and contributing to economic growth, since workers would no longer have to give up their employment completely in order to access their superannuation funds.
Before the introduction of TTRs in 2005, workers aged under 65 had to cease employment fully before accessing any superannuation benefits. In 2004, the Australian government noted that this may have led to “people deciding to retire prematurely just so they can access their superannuation”. Accordingly, TTRs were designed principally to address this incentive for early retirement. They allowed workers who had reached their preservation age and wished to reduce but not terminate their work responsibilities (usually by going part-time) to top up their reduced income with some of their superannuation savings. This gave more flexibility to Australians in the management of their pensions. There are two ways Australians aged 60 years or older can use a TTR scheme today: either grow their superannuation and maximise tax savings; or reduce working hours without changing their take-home pay.
The public impact
The major selling point for many employees was the tax benefits: income from superannuation pensions were taxed at a lower rate, allowing employees aged 60 plus to redirect tax savings into their superannuation accounts. Such use, however, was considered inconsistent with the original aim of the policy. This was to enable mature workers to transition to retirement (see The Initiative above) by lightening their workload, while accessing their superannuation to top up their reduced income. To address this issue, the government removed the tax exemption on pension asset earnings for TTRs in June 2017. This was partly due to heavy backlash from thinktanks and foundations, who argued that “tax free super is intergenerational theft”.
Even though TTRs had initially become popular as a tax minimisation tool, after the government removed the tax exemption in 2017 they were still an efficient instrument for increasing workforce participation and contributing to economic growth, according to OECD statistics. In fact, workforce participation rates for older Australians have increased quite dramatically in recent years. Mature age labour force participation in Australia now exceeds the OECD average in almost every age-sex combination. Some researchers have argued, based on an analysis of Household, Income and Labour Dynamics in Australia Survey (HILDA) data, that Australia is likely not just to meet to but to exceed the workforce participation rate of 67 per cent of 55 to 64 year olds by 2049 that the Intergenerational Report recommended.
According to measurements used by the Productivity Commission, as the superannuation system matures in the coming decades, Australians will almost certainly have greater savings to support themselves in retirement. (The Productivity Commission is an independent authority that reviews and advises the Australian government on microeconomic policy; its umbrella organisation is the Department of the Treasury.) The Commission also predicts that households delaying their retirement do so by around two years and will have superannuation balances around 10 per cent larger in real terms when they retire. There is also evidence from the Australia Bureau of Statistics suggesting that TTRs have improved labour supply. The historic trend of early retirement started to turn around in 2006, just one year after TTRs were implemented.
However, a few years into the implementation of the policy, its impact became increasingly questionable to observers. “Transition to retirement is a legally permissible tax minimisation scheme, and from a policy perspective we would identify the fact that the TTR policy is not working as it was originally intended,” said David Haynes, executive policy manager at the Australian Institute of Superannuation Trustees.
Accordingly, in a 2010 report commissioned by the Department of Education, Employment and Workplace Relations, the Melbourne Institute assessed the impact of TTRs. It too concluded that TTRs had “no significant effect” on the workforce participation of mature age men and women. They also claimed, that the ability of full-time workers to use TTRs helps to achieve certain policy goals (see Clear Objectives below), but a number of alternative policies are considered better suited to fulfilling such goals. One of them is raising the preservation age further. Yet, neither of these suggested policy amendments has a strong impact on workforce participation of individuals who retire involuntarily (due to illnesses and corporate or private sector retrenchments), which account for almost 50 percent of men and over one third of women aged 60-64.
Written by Julia Schnatz
This case study is part of a series of international policies that focus on easing the transition to retirement and later life. The case studies and the accompanying report were produced for the Calouste Gulbenkian Foundation (UK Branch).
Public Confidence Fair
Between its implementation in 2005 and June 2015, 148,000 individuals (which represents 5 percent of all Australians aged between 55 and 65) have taken out a TTR, holding members’ benefits worth a total of AUD35.4 billion.
Consistent with expectations, raising the preservation age has indeed encouraged some individuals to retire later and accrue more superannuation savings through TTRs. However, the Productivity Commission’s modelling of results suggest that these impacts are likely to be concentrated in a small proportion of the population.
Many changes have been made to the superannuation system, often driven by the tensions between the stakeholders as well as the lack of common objectives. The absence of agreed objectives contributes to short-term policymaking, adds complexity, imposes unnecessary costs on superannuation funds and their members, and undermines long-term confidence in the system. According to AMP, a financial services organisation that provides superannuation in Australia, the policy is “complex, difficult to understand, inefficient to administer and could result in a substantial number of overpayments by individuals”. This is a particularly problematic issue, since many individuals with low financial literacy are unable to make an informed decision about whether they would actually benefit from TTRs. Hence, the policy achieved only low levels of confidence in some sections of the population.
The financial adviser who lodged Australia’s first registered TTR application a decade ago says that it is a “serious national disgrace” that so many eligible Australians are unaware of their rights. As a result, they are missing out on the opportunity to increase their superannuation balance dramatically in the years just before their retirement, while gaining a big tax break on their regular income.
Stakeholder Engagement Good
A number of stakeholders, mainly Australia’s Productivity Commission and the Department of Social Services, supported TTRs during the design phase, along with a number of many advising academics, who generally considered TTRs to be an incentive for older people to participate for longer in the workforce.
Some stakeholders, such as Australia’s Future Tax System Review, informally known as the Henry Tax Review, recommended in 2010 that the preservation age of 55 years should be gradually increased until it aligned with the Age Pension age of 65. An increase in the preservation age (albeit to different levels) has also been supported by leading think tanks and other institutions, e.g. the Institute of Actuaries Australia, the Australian Council of Social Service, the Grattan Institute, the Centre of Excellence in Population Ageing Research, and a number of academics.
During the policy’s design phase, employers were also engaged in addressing the issue of an ageing population: the Business Council of Australia issued a guide for supporting older workers, which is aimed at encouraging big businesses to keep older Australians in the workforce. The prime minister also asked the Community Business Partnership to suggest practical ways of encouraging the private sector to employ larger numbers of more mature workers.
Political Commitment Good
TTRs were originally announced in the 2004 Federal Budget as part of a major retirement and superannuation policy package. However, some of their operational details had yet to be finalised at the time. The government of Prime Minister John Howard subsequently issued a consultation paper in 2005 that outlined the main aims of the proposed TTRs.
Since 2013, there have been calls for the TTR provisions to be reviewed, one of the most prominent being from the Australian Law Reform Commission (ALRC). The relatively new superannuation system has been subject to ongoing amendment, and a recent chronology of superannuation system changes compiled by the Parliamentary Library serves to demonstrate the importance of retirement policy among government priorities.
Peter Costello, who was the Treasurer at the time the policy was designed, said shortly before TTRs were announced: “the need to prepare for Australia’s changing demographics is one of my highest priorities... Such is the importance of these issues that the government will be seeking feedback from the community about the choices and options we face to increase workforce participation. A series of round-table discussions will be conducted with key players. Interested parties will also be able to make written submissions.” Since the policy had a partially easing effect on fiscal pressures, it faced hardly any political backlash in Australia.
Clear Objectives Fair
The objective of TTRs was to encourage people to remain longer in the workforce by providing flexible rules for accessing superannuation benefits. In addition, the policy aimed to enable individuals with low superannuation savings balances to make additional catch-up contributions as they moved towards retirement. While these objectives seem reasonably clear, they need to be seen in the context of the wider pension system in Australia. On the whole, it has failed to 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”.
As noted in the Productivity Commission report, An Ageing Australia: Preparing for the Future, the government has a number of means at its disposal to manage the fiscal pressures associated with an ageing population. Ideally, policymakers would weigh up the merits of these options before deciding on any given policy response.
Australia was one of the pioneers of the transition to retirement policy design. Treasurer Peter Costello underlined this in 2004, shortly before TTRs were introduced: “The Australian Government provides leadership in promoting community understanding of the economic and social imperatives of greater participation by mature age people.”
The Transition to Retirement rules were introduced into the Superannuation Industry (Supervision) Regulations 1994 to encourage continued mature age workforce participation. The policy was effective in that sense, but research has suggested that in practice the rules may not have met all the overarching policy objectives. The ALRC proposes that the Australian Government should initiate a review of the TTRs to determine what changes, if any, are required to ensure that the TTRs are of broader use for the population. Many Australians are not educated and informed about their superannuation opportunities under this policy. Also, feasibility challenges arose due to the fact that not all of the private superannuation funds offer a proper transition to retirement scheme.
While there were no regulatory barriers preventing this policy from being implemented successfully, behavioural challenges arose because people exploited the TTR schemes as tax instruments. “The TTR provisions allow workers who have reached preservation age to access their superannuation despite not ceasing employment. Full-time mature workers commonly use these provisions for tax minimisation purposes. Such use is inconsistent with their original aim of enabling mature workers to transition to retirement by lightening their workload while accessing their superannuation to top up their reduced income.” Consequently, it would be difficult to argue that such workers fulfil the aims of the TTR rules as envisioned when they were first enacted.
Specifically, although full-time mature workers do not require TTRs in order to maintain their income, it could be argued that the provisions give such workers an incentive to stay in the workforce, due to the lower tax burden. An amendment to the policy in July 2017 made it impossible to use TTRs for tax reasons, when earnings within the funds became subject to a tax rate of 15 per cent. Assistant Treasurer Kelly O'Dwyer said the reasoning behind the change was an issue highlighted by the Productivity Commission: “They actually found that there were a large number of people using the scheme not to scale down their hours, but simply to work full-time and to minimise their tax. Now, that wasn't the purpose behind the scheme,” she said.
The management of TTRs rests with the Australian Taxation Office. However, they found themselves having to deal with a number of implementation flaws, such as those relating to involuntary retirement. An OECD report states that most Australians involuntarily drop out of the workforce well before retirement age: by 57 for women and by 62 for men. In total, almost one half of men and around one third of women who retire between the ages of 60 and 64 do so involuntarily. The Productivity Commission has sought to account for this explicitly by incorporating involuntary retirement into its assessment of the impacts of increasing the preservation age. Such an approach shows that involuntary retirement limits the potential reach of TTRs.
The capacity of individuals who become involuntarily retired to access their superannuation savings before reaching the preservation age is one obvious implementation issue that would need to be considered. Currently, early access provisions apply only in a very limited set of circumstances and, in most cases, only provide for the release of comparatively small amounts. In practice, early release on compassionate grounds is relatively uncommon. Another implementation flaw arose because earnings on funds were tax free, allowing TTRs to be used as a tax minimisation instrument (see Feasibility above).
The Productivity Commission developed the Productivity Commission Retirement Model (PCRM) in 2015 to assess the effects of the TTRs. The Commission proposed to use two ways of assessing performance: benchmarking performance, and identifying and assessing barriers that impede performance. Therefore, it focuses on evidence-based measures to assess the efficiency and competitiveness of the Australian superannuation system. However, critics state that while the Commission has established a sensible approach to the assessment process, and proposed some useful and appropriate assessment criteria and indicators, there are key areas for improvement. For example, the Commission should consider the rationalisation of the number of indicators, including the removal of indicators that are outside the control of the superannuation industry.
The introduction of TTRs in 2005 was part of Australia’s retirement income system as a whole, which comprises three pillars – Age Pension, Compulsory, and Voluntary Savings. TTRs are part of the Voluntary Savings pillar. In practice, the retirement income system is a puzzle that policymakers have often sought to solve in a piecemeal fashion – tackling different policy pieces at different times. Indeed, some of the concerns raised by stakeholders about the retirement income system have arisen due to failures to account for the way that incentives inherent in each pillar combine and conflict with one another. In practice, the three pillars have each developed independently during the course of the history of the Australian pension system. Rather than being the basis for a consistent and integrated retirement incomes policy, they make for an incoherent (and relatively dysfunctional) whole.
A further issue is that access to TTRs may be restricted. Superannuation funds do not all offer the income stream products that enable members to use this option. In these circumstances, members may need to change superannuation funds if they wish to use the TTR rules. However, stakeholders did not raise this as a specific barrier to access. The Law Council of Australia noted that the portability requirements – whereby superannuation funds are obliged to transfer or rollover members’ benefits to another fund on request – should, in principle, provide sufficient access to the TTR rules and regulations. This seems to indicate a misalignment between the government’s interests and the super funds’ agenda.