Professor John Piggott

Presenting a comparative analysis of Australia’s pension fund scheme in Frankfurt this week, Professor John Piggott demonstrated that Australia’s unique private pension system (superannuation) had the country well placed to meet the rising costs of the ageing population compared to other OECD countries. However, he says the Australian system is not without its issues.

Australia’s private pension assets total 95% of GDP placing us fourth among OECD countries – behind the Netherlands, Iceland and Switzerland and ahead of the United Kingdom, United States and Canada. This private investment, alongside a means tested Age Pension, reduces the burden on the public purse as the ‘dependency’ ratio of working to non-working Australians increases.

Countries like Greece, France, Italy and Spain have pension systems with little to no private assets, meaning that their retired and older populations are much more dependent on public funding.  This is a situation that, if unchecked, threatens the long term sustainability of pension systems in these currently fragile economies. Even Germany, regarded as the economic bedrock of Europe, has a system as reliant on publicly funded pensions as Italy and Spain. While Germany’s modelled net replacement rate is far more frugal and it has instituted a politically controversial sustainability adjustment to its pension benefits, the risk remains largely in the public sphere.

 While we are yet to see the results of the recent changes to the Australian system, it is expected that the decision to boost contributions from 9% to 12% and raise the retirement age by two years from 65 to 67 will continue to keep Australians in a well-balanced private/public funding position. Along with a stronger means test, it will offset the increase in public risk arising from the recent 11% real increase in the Age Pension.

The fiscal strength of the Australian system is also evidenced by its modest but adequate 59% net replacement rate for average earners and the fact that the strong private asset base provides a better risk balance between private and public provision. This stands in contrast to Greece’s current system which is set to provide 110% of pre-retirement income entirely through public funding.

That is not to say that the Australian system is home and hosed. Our heavy investment in private assets for retirement places increased pressure on individuals to be literate in investment strategies and jargon.

The ABS (2006) survey found that only 37 per cent of Australians have the minimum literacy and numeracy required “to meet the complex demands of everyday life and work in the emerging knowledge-based economy”. Despite the introduction of simpler default investment products through MySuper, there are many choices that remain with the individual. For example, the options for decumulation are still deficient and complex. In the absence of adequate private pension income, individuals might wish to access private housing wealth. But here too they find available products, such as reverse mortgages, daunting.

Our OECD counterparts will have difficulty navigating the treacherous waters of cultural expectations if they attempt to shift their much-loved publicly funded systems to ones encouraging private assets. But as our own private pension system demonstrates such structures have their own unique challenges.

In addition to the temptation for the Government  to continue to tinker with superannuation rules, the Australian system will need to grapple with new and emerging issues. The architecture of choice across the life-course, investment education, even the issue of cognitive impairment in older populations attempting to understand and undertake these complex financial decisions, will be our sticking points in the coming years.  Different issues but no less challenging.

John Piggott is Director of the ARC Centre of Excellence in Population Ageing Research (CEPAR), and Scientia Professor of Economics at the University of New South Wales.