To fix retirement incomes, let’s start with reining in superannuation

At the end of last month, the government announced yet another retirement incomes review. That we have had so many inquiries by so many different bodies in recent years indicates there are real issues that need resolution.

And while we can hope for bold action to fix the system, a government that won re-election from a scare campaign on a retirees tax – and which seems to be trying its hardest to stay out of the news – is unlikely to take any action that might upset retirees or jeopardise the surplus.

Moreover, it’s not clear the system has reached a crisis point on which the government would be forced to take decisive action.

Yet some hope remains. If this review is to be a success, the important thing will be to identify and support politically viable reforms, while the huge system-wide overhauls are de-emphasised or disregarded.

Superannuation is a good example.

There are good reasons why the compulsory superannuation model should be completely overhauled. The system is set up to channel fees and income to super fund managers. It does not deliver for many participants.

For young people and low income earners, superannuation is a pretty poor deal in reality. The tax benefits are fairly minimal. The high fees are particularly damaging. Unnecessary insurance erodes balances quite quickly.

Even more importantly, forced retirement savings may be undermining the ability of young first home buyers saving for a deposit. In Sydney, where the median house price deposit has more than doubled in recent decades, this isa very significant problem.

Yet, making superannuation voluntary – however appealing this may be – is almost certainly beyond the scope of this review.

However, there are two reforms that would make a genuine improvement to the super system.

First, the minimum income at which super becomes compulsory could be increased. Currently, as soon as someone earns more than $450 a month, they must pay into super. This level has not increased in a number of years.

Increasing the minimum level at which contributions become compulsory, perhaps as high as the full time minimum wage, would be a good starting point in getting people who shouldn’t be in the system out of its clutches. At a minimum, you shouldn’t both be eligible for welfare and be forced to save.

Another thing that should be right at the top of the agenda should be halting the increase in the guarantee rate. There is no case to increase compulsory contributions to 12 per cent of income, and many good reasons not to do so.

Most importantly, as that money is coming out of workers pockets, that the country could probably do with keeping its wage rises.

Similarly in respect of the age pension, it may be prudent to keep the goals small.

The government could look at formally linking the age pension eligibility age to median life expectancy. While the government’s previous attempt to lift the retirement age failed, it is fiscally important that the pension age stay linked to life expectancy.

Second, the government should address the growing gap between age pension eligibility age and the age at which you can access super.

Part of the issue that super exacerbates is differential living standards in retirement, something that is exacerbated by flaws in government policy. And the biggest distortion, at least when it comes to the age pension, is the exclusion of the family home from the means test.

Yet such an option is exactly the kind of reform that this committee will shy away from because it’s only viable politically – if at all – if it were to boost living standards for retirees.

When Matt Taylor and I modelled a proposal to include the family home on the assets test based on a reverse mortgage model, the strongest selling point was not that it would save more than $14 billion a year for taxpayers, but that it would also boost pensioner income by a similar amount.

Yet most arguments to including the family home in the asset test are solely based on fairness, and designed to penalise retirees who own their home. These arguments are highly unlikely to persuade anyone.

One recent such proposal comes from the Actuaries Institute. Although the paper correctly identifies many real issues in the retirement income space, its argument that only home equity above some cut-off be included in the assets test is flawed.

Similar proposals from the Grattan Institute and the Henry Tax Review have found few political supporters.

One big practical problem is that no reliable way exists to value individual homes with sufficient certainty. On the Conversation, one of the authors of the Actuaries Institute paper argues that council valuations could be used. However, these valuations are at best crude approximations of market value.

Given that differences of several hundred thousand dollars in market value and council valuation are possible, how could the government realistically peg someone’s primary income source to such a value?

Nor is there any good reason whatsoever to think including only equity above the median suburb level is “fair”. So someone living in a $2 million, three-bedroom house in Mosman in Sydney – where the median three-bedroom house price on realestate.com.au is $2.5 million – gets a full pension; but someone in a $400,000 three-bedroom house in Casino, NSW, where the median is $282,000, gets their pension cut?

A lot of reform energy in the retirement incomes space from public policy types has been directed into “grand plan” style reforms for the whole system. There is merit in such big picture thinking, even if the details are hard to work out in practice.

Yet in this case discretion may be the better part of valour. It will be better to bow to political reality and focus on small ball reforms that can make a difference, rather than risk another white paper elephant.

Simon Cowan is research director at the Centre for Independent Studies.