The Australian retirement income system scored 76.8 on the 2022 Mercer CFA Institute Global Pension Index and a B+ grade in overall index value after evaluating the retirement income system’s adequacy, sustainability, and integrity. Australia’s retirement income comprises a means-tested government Age Pension at the national level, the Superannuation Guarantee program at the occupational level, and private products at the individual level.
National Level
The Age Pension is a means-tested, pay-as-you-go system funded by general government revenues. Only Australian residents (those who have resided there for at least 10 years in total with no break in residence for at least five years) who pass the income and asset tests (below a particular income and asset threshold) are eligible to get the Age Pension, but some may qualify with a reduced benefit. The current eligibility age is 66 and 6 months and will increase by six months every two years until it rises to 67 in 2023.
The combined couple rate of pension is set at 41.76 percent of Male Total Average Weekly Earnings. The single rate is two-thirds of the combined couple rate. The base pension are indexed twice a year in March and September, in line with the growth in Consumer Price Index and the Pensioner and Beneficiary Living Cost Index, whichever is greater. The pension is increased to the wages benchmark if the wages have a higher growth rate than prices.
Occupational Level
The Superannuation Guarantee is a compulsory employer contribution to private superannuation savings. It is relatively new to the system, introduced in 1992, but has been significant in increasing retirement security. Employers are required to contribute 10 percent of an employee’s earnings to a retirement account for workers between 18 and 70 years of age; the contribution will rise to 12 percent by July 2025. Contributions are not required for very-low-wage and part-time workers. Most employees are free to determine which fund they prefer their employers to pay into, but many allow default investment funds to be applied. Funds can be organized by a financial services company, employer or industry group, or through self-managed funds for five people or fewer.
While benefits in retirement can be accessed through different income streams, the vast majority of Australian retirees choose either the lump sum option or a phased withdrawal product, since there are few incentives to take out annuities. Early withdrawal from these accounts is highly restricted. While these accounts are taxed annually, retirement withdrawals are tax-free. Australians may begin to get superannuation benefits at age of 55 and the age requirement will increase to 60 by 2024. Those who are still working may also access their benefits, but only as a non-commutable income stream.
Starting July 1, 2017, the general concessional (before tax) contributions cap for superannuation dropped from $30,000 to $25,000 for everyone, regardless of age. Likewise, the non-concessional (after-tax) contributions cap dropped from $180,000 to $100,000, and will remain at $100,000 for the 2018/2019 financial year.
As of July 1, 2018, an individual can start to carry forward unused concessional cap amounts. As of July 1, 2019, an individual can play catch-up with concessional contributions (using unused portions of the annual concessional caps from one or more of the previous five years), if the individual has a total superannuation balance of less than $500,000 in super just before the start of the financial year.
Also as of July 1, 2018, the government will introduce downsizer contribution, meant to motivate individuals aged 65 years and above to downsize their homes, and make super contributions up to $300,000 outside the usual non-concessional contributions cap.
Individual Level
Voluntary savings make up the last level of the system. First, this includes voluntary employee contributions to the Superannuation Fund in addition to employer obligations. Second, many different private accounts and savings products are available and are employer-sponsored or individually funded.
Summary Sources
Australian Department of Social Services. “Age Pension.” Updated July 19, 2019. Accessed 1/13/2021.
Australian Department of Human Services. “Age Pension.” Updated September 30, 2020. Accessed 1/13/2021.
Australian Government. “Super for Employers.” The Australian Taxation Office. June 30, 2021. Accessed 07/06/2021.
Australian Government, The Treasury. “Superannuation Reform.” Accessed 1/13/2021.
AustralianSuper. “Why Choose AustralianSuper?” Accessed 1/13/2021.
May, Zachary. “Building a Publicly Sponsored Private Sector Retirement System: Lessons from Australia.” Georgetown Center for Retirement Initiatives. September 2016. Accessed 1/13/2021.
OECD. “Pensions at Glance 2019.” November 27, 2019. Accessed 1/13/2021.
SuperGuide. “Australian Age Pension rates (March 2020 to March 2021).” September 18, 2020. Accessed 1/13/2021.
Rao, Shoba. “New laws and changes that will affect Australia from January 1, 2018 and beyond.” News Corp Australia Network. January 6, 2018. Accessed 1/13/2021.
Current Issues
On June 22, 2021, Royal assent was received and the Super Reforms – Your Future, Your Super – became law. These reforms, beginning July 1, 2021 and November 1, 2021, include four major measures to strengthen and bolster Superannuation funds:
- When employees transfer jobs, their superannuation will follow, thereby reducing the creation of unintentional multiple accounts.
- A new interactive online YourSuper tool to compare data on MySuper products and enable better informed decision making for choosing funds.
- A performance test for superannuation products that will assess whether funds meet an annual objective. If a fund is not meeting the performance goals, it will be required to disclose its performance to its members and will not be allowed to take on new members.
- New duties and responsibilities for trustees of superannuation funds to increase transparency, including providing information about account management prior to Annual Members Meetings.
These reforms are estimated to add almost “A$100,000 ($77,160) to the retirement savings of young workers” and involve the most significant reforms since the beginning of the program in 1992. In addition, to recognize the impacts of the COVID-19 pandemic, Australians will be allowed to replenish their accounts that may have been depleted due to withdrawals allowed under the COVID-19 related early release scheme.
Summary Sources
The Australian Government. “Super Reforms – Your Future, Your Super.” The Australian Taxation Office. June 24, 2021. Accessed 07/06/2021.
Burgess, Matthew, Shery Ahn, and Paul Allen. “Australia Pension Reforms Worth A$100,000 For Each Young Worker.” Bloomberg Wealth. February 8, 2021. Accessed 07/06/2021.
Senator the Hon Jane Hume. “Superannuation reforms pass parliament – making your super work harder for you.” Joint media release with the Hon Josh Frydenberg MP Treasurer. June 17, 2021. Accessed 07/06/2021.
Current Issues
The Treasury Laws Amendment (Enhancing Superannuation Outcomes for Australians and Helping Australian Businesses Invest) bill was introduced in October 2021 and passed in February 2022. Among other things, the Bill amends the Superannuation Guarantee (Administration) Act 1992 to remove the A$450-a-month threshold before an employee’s salary or wages count towards the superannuation guarantee. In their executive summary, the lawmakers assert that the need for this cap no longer exists as its rationale has been since eroded by other legislation. For example, changes to the Treasury Laws that the government implemented in 2018 and 2019 have reduced the impact of financial risks on low-balance accounts. This reform aims to expand coverage of the Superannuation Guarantee to young, lower-income and part-time workers who may earn below the A$450 cap. There are other related reforms in the bill and a summary of each of the individual provisions may be viewed here.
Additionally, the Corporate Collective Investment Vehicle Framework and Other Measures Bill of 2021 passed in February 2022. The new covenant will require trustees to have a retirement income strategy that outlines how they plan to assist their members in retirement. Current legal obligations of superannuation trustees have focused primarily on the accumulation phase and there are no obligations to consider the needs of beneficiaries in retirement. The retirement income covenant will address this gap. A trustee’s retirement income strategy must consider how they will assist their members to balance maximizing their retirement income, managing risks to income, and having some flexible access to savings. This measure aims to give retirees confidence to spend their superannuation savings, while also enabling choice and competition in the retirement phase of the program.
The covenant will require trustees to have their strategy formulated in writing and a summary publicly available from 1 July 2022, however they are not required to give effect to all components of their strategy by this date. Instead, strategies are expected to evolve and develop over time, and it has always been expected that superannuation trustees should consider the retirement needs of their members. The covenant codifies this existing expectation.
Summary Sources
The Australian Government. “Treasury Laws Amendment (Enhancing Superannuation Outcomes For Australians and Helping Australian Businesses Invest) Bill 2021.” Parliament of Australia. Accessed March 23, 2022.
Senator Jane Hume, Minister for Superannuation, Financial Service and the Digital Economy. “Retirement income covenant passes Parliament.” Australian Treasury. February 10, 2022. Accessed 03/30/2022.
Last Updated 3/30/22
Source: Georgetown University’s Center for Retirement Initiatives