Phil Gallagher, PSM Manager, Retirement and Intergenerational Modelling Unit

DEPARTMENT OF THE TREASURY

AUSTRALIAN RETIREMENT INCOME SYSTEMPresentation for NDRC & Australian Treasury Bilateral Seminar Program 22 December 2008

Phil Gallagher, PSMManager,

Retirement and Intergenerational Modelling UnitTax Analysis Division, AUSTRALIAN TREASURY

•Phone +61 2 6263 3945•email phil.gallagher@ treasury.gov.au

•websites www.budget.gov.au• http://rim.treasury.gov.au

Views expressed in this presentation are those of the author and are not necessarily those of any Commonwealth Agency or of the Government


Objective of the presentation• To introduce the basic design features

of the Australian retirement income system

• To describe some of the basic governance arrangements

• To present some projections of the systems outcomes

• To describe the importance of the ‘superannuation’ (private pension funds) to Australian financial markets


Three Pillar Retirement Income Policy as advocated by the World Bank 1994

• 1) A publicly managed system with mandatory participation and the limited goal of reducing poverty among the old

– eg In Australia the Age Pension is general revenue financed public pension available at 65. It alleviates poverty and is means tested

• 2) A privately managed mandatory savings system

– eg The Superannuation Guarantee requires contributions from employers equal to 9% of wages. Aim is to give retirement income which is a proportion of working life income

• 3) A voluntary savings system.

– In Australia, both superannuation and non-superannuation


Pillar 1: The Public Age Pension

• Maximum single rate - $A14,765 (CY 60,390)• Maximum rate for one married person

$A12,282 (CY 50235)

Income test has free area and 40% reduction rate• Cutout- single $A40,501 (CY165,651)• Cutout couple combined $A67,652 (CY276,700)• Comparison average full time and part time

earnings $A47,595• Comparison average weekly full-time earnings

with no overtime $A60,600 年度


Background to the Superannuation Guarantee

Pre-1992 Superannuation• Prior to 1987 policy relied on tax concessions

– Coverage was only 40%, mostly for high income groups & Government Employees

– Occupational schemes were generous because they were designed in the context of a low age pension

• In 1986, then Government supported a Council of Trade Unions claim for minimum employer contributions of 3% for those covered by awards– Coverage was 80% by 1992 but most of new

contributions were only 3%


THE SUPERANNUATION GUARANTEE (EMPLOYER CONTRIBUTIONS TO PRIVATE FUNDS)

• In 1992 the then Treasurer announced Superannuation Guarantee Charge for employers not making minimum contributions

• Would extend coverage beyond awards 雇用合同 to employees earning over $450 per month (to over 90% of employees)

• Would raise minimum employer contributions to 9% by 2002/03

• Contributions would go to Private funds, many to multi-employer industry funds

• A major improvement in preservation (the laws preventing withdrawal not for retirement) began in July 1999


Superannuation coverageYear % Employees Covered

Full Time Part Time Total

1986 46% 7% 40%

1989 55% 18% 48%

1992 88% 54% 80%

1995 94% 72% 89%

1999 97% 76% 91%

2004 96% 77% 90%

2007 96% 79% 91%


Voluntary retirement saving• Income Tax rates are currently 0, 16.5%, 31.5%, 41.5% and

46.5%• Employer Contributions to Superannuation funds are taxed at

15% • Earnings in funds are nominally taxed at 15% but effectively at

between 5 to 8%• Payouts for those over 60 are tax free• Saving through employer superannuation contributions is

concessional for nearly all taxpayers • Pre-tax employer contributions are concessional against income

tax benchmarks and expenditure tax benchmarks• There is an income tested government co-contribution for after

tax personal superannuation contributions of up to $1500 • For non-superannuation savings, there is a 50% discount for

realised capital gains, and a dividend imputation system for shares 红利获得者的赋税


Australian retirement incomes Government policy & administration roles

Component of retirement income

Department responsible for policy advice & legislation

Agency responsible for administration

RetirementIncome

Publicly-funded,Means-testedAge Pension

CompulsoryOccupational

Superannuation(SG)

Voluntary Private Savings

(incl. superannuation)

Department of Families, Housing, Community Services

and Indigenous Affairs

Department of the Treasury

Centrelink

Department of theTreasury

Australian TaxationOffice (ATO)


Government Regulation of non-government funds

• Prudential – Australian Prudential Regulation Authority

for funds with 5 or more members– Australian Taxation Office for funds with

less than 5 members

• Consumer information – Australian Securities and Investments Commission


Australian Prudential Regulation Authority• Since 1 July 1998, jointly responsible for prudential

regulation of regulated superannuation funds, Retirement Savings Accounts and Approved deposit funds under the SIS legislation.– (previously regulated by Insurance and

Superannuation Commission)• Responsible for:

– operations of funds including approval of trustees, operating standards, annual returns, governing rules, capital adequacy requirements, audits, reserves, preservation rules etc

• FUNDS ARE ALLOWED TO INVEST PRUDENTLY AND DIVERSIFIED ANYWHERE IN WORLD


Australian Securities and Investments Commission

• Since 1 July 1998, jointly responsible for prudential regulation of regulated superannuation funds, RSAs and ADFs under the SIS legislation.

• Responsible for:– regulating consumer protection and market

integrity aspects of superannuation, including information disclosure, complaints resolution, and licensing approved trustees.


INTERACTION OF THE THREE PILLARS


Effect of superannuation on Age Pension status

80

100

120

140

160

180

200

2007 2012 2017 2022 2027 2032 2037 2042 2047

0

20

40

60

80

100

Projected superannuation assets (LHS) full pension (RHS)

part pension (RHS) no pension (RHS)

Per cent of GDP Per cent of people of Age Pension age


1998 RIM Projections of Age PensionTable 4 Projected Cost of Age and Veterans Pensions as percentage of GDP

Various scenariosyear base without SG Universal pension 30 pc pension

1998 - 1999 2.99 2.99 3.68 2.991999 - 2000 2.94 2.94 3.61 3.452000 - 2001 2.94 2.94 3.62 3.45

2010 - 2011 3.06 3.08 3.81 3.61

2020 - 2021 3.55 3.67 4.72 4.22

2030 - 2031 4.07 4.33 5.79 4.86

2040 - 2041 4.49 4.76 6.38 5.33

2049 - 2050 4.48 4.76 6.44 5.32


Replacement Rates for People of Different Incomes and Age

Individual’s age (in years) in 2008

Income as a

proportion of AWOTE 20 40 60

0.75 89.1% 82.6% 62.8%1 78.2% 72.5% 53.6%

1.5 66.8% 61.4% 42.8%2 62.3% 53.8% 35.4%

2.5 59.9% 48.5% 29.7%

AWOTE is Average Weekly Ordinary (full-time) Earnings


Average proportion of age pension in retirement expenditure

Individual’s age (in years) in 2008

Income as a

proportion of AWOTE 20 40 60

0.75 51.1% 55.2% 76.0%1 41.2% 45.8% 69.7%

1.5 26.8% 31.7% 59.3%2 18.3% 23.9% 54.5%

2.5 13.5% 19.5% 52.7%


Projected Population Replacement Rates Including Voluntary Saving

Potential Replacement Ratios All Deciles

0%

20%

40%

60%

80%

100%

120%

2005 2009 2013 2017 2021 2025 2029 2033 2037 2041 2045 2049

Year

Re

pla

cem

en

t R

atio

all

worker


Projected Population Replacement Rates (Including

Voluntary Saving) for Selected Deciles of Career Income

aggregate adequacy

0.40

0.50

0.60

0.70

0.80

0.90

1.00

2005

2008

2011

2014

2017

2020

2023

2026

2029

2032

2035

2038

2041

2044

2047

2050

year

rep

lace

me

nt

rate

dec=2

dec=5

dec=8


SUPERANNUATION IN AUSTRALIAN FINANCIAL

MARKETS


Increasing Importance in the Household Balance Sheet

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

1988 1991 1994 1997 2000 2003 2006

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

deposits

life office reserves

superannuation fund reserves

public sector unfunded superannuation claims

shares and other financial assets

Per cent Per cent


Financial aggregates

• Superannuation directly finances 75% of Australian managed funds

Superannuation assets at 30 June 2008

Assets in Managed Funds June 2008

Value of Domestic Equity Market Capitalisation 30 June 2008

Nominal GDP 2007/2008

($A Billions) ($A Billions) ($A Billions) ($A Billions)1.17 1.32 1.29 1.13


Nominal Returns for a Median Fundto 31 October 2008

• Source: Super Ratings• Rolling 10 year return : + 6.37% pa• Rolling 5 year return: + 6.67%• Rolling 3 year return: + 2.40%• 1 year return: -17.61%• 3 months return: -8.55%• 1 month return: -6.65%

The median fund is the balanced option. Returns are net of fees and tax.


Retail funds have lower returns than other fund types in growth markets because of lower equity proportions

1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11%

Ten-year average return on assets

Retail (excluding ERFs)

Public sector

Industry

Corporate


THANK YOU

QUESTIONS

Phil Gallagher, PSM Manager, Retirement and Intergenerational Modelling Unit

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