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Financial Planning
Imbalance in generational retirement income: RIR

The superannuation system encourages Australians to rely on their own savings to fund retirement but the burden on younger generations to fund the Age Pension should not become unsustainable, the Retirement Income Review has stated.

The review noted the Age Pension is funded by working Australians which in turn creates a "generational bargain" where Australians expect the following generation to fund the Age Pension in the same way they did for current retirees.

It defined intergenerational equity as a problem affecting the "fairness in the opportunities and outcomes between people of different generations," and revealed stakeholder interest in achieving it but without consensus on how to do so.

The potential inequity arises as current older Australians have benefitted from higher super contribution caps and increases in property values whereas younger Australians will end up contributing more to super with a higher SG rate.

"Analysis suggests each successive generation will contribute more during their working life to fund retirees' income than the previous generation," the RIR said.

"Different generations have different opportunities to accumulate retirement savings and generate retirement incomes due to forces inside and outside the retirement income system."

The RIR said older generations have had the opportunity to contribute larger amounts to superannuation with unlimited non-concessional contributions until 2006 and higher concessional caps for older people between 2007 and 2017.

Further to this, if property values do not increase as they had for the last generation, younger homeowners may not have the same opportunity to accumulate housing wealth as current older Australians.

But if the decrease in home ownership continues, young people will need to rely on their superannuation or equities as retirement savings.

"These people will forgo the benefits of home ownership in retirement, including the ability to age in a place of tenure. They may be unable to achieve the same retirement outcomes as current home owner retirees," the review said.

The review noted the SG increase would increase self-funding retirement as each generation would have a decreased reliance on the Age Pension.

It also highlighted reducing tax concessions on earnings in assets in the retirement phase would improve intergenerational equity by reducing the cost of these concessions to working-age people.

Lastly, the review made the point that by encouraging retirees to spend more of their savings in retirement would reduce inequality for future generations as inheritances would be lower rather than dying with the majority of wealth.

"If most people continue to die with the majority of the wealth they had at retirement, the maturing superannuation system is expected to increase the size of inheritances," it said.

"Inheritances are distributed unequally, with wealthier people tending to receive larger inheritances."

Read more: Retirement Income Review
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