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Financial Planning
New approach needed for Age Pension: RIR

The Age Pension is a vital pillar of the retirement income system and provides most Australians with a minimum standard of living but a new approach is required to ensure retirees that rent reach this goal.

The long-awaited Retirement Income Review (RIR) acknowledges the Age Pension as providing a safety net for those who do not have the means to create their own minimum standard of living in retirement and secondly as a buffer for retirees whose incomes fall.

The RIR, undertaken by an independent panel chaired by Mike Callaghan and consisting of Carolyn Kay and Deborah Ralston, found groups such as renters are less likely to achieve the minimum standard of living.

"The system should ensure a minimum standard of living for retirees with limited financial means that is consistent with prevailing community standards," it said.

As at June 2019, around 71% of people aged 65 and over received Age Pension or other pension payments with over 60% of these on the maximum rate.

For most households aged 65 and over the family home is their main asset with superannuation making up a small share of their net wealth. But retirees who are renting require additional assistance.

Many stakeholders suggested to the panel a specific increase to maximum rate of rental assistance by 40%.

"Increasing the rate of Commonwealth Rent Assistance will only have a small impact. A new approach is required," the report said.

In addition, the RIR found this increase would "not be sufficient to significantly reduce income poverty among retiree renters" and would narrow the income poverty rate between renters and homeowners.

"This reflects that even after the increase, Commonwealth Rent Assistance would be a small proportion of the housing expenses faced by renters compared to homeowners," it said.

"However, and consistent with the indications of retirees in financial stress, retiree renters on the Age Pension have income poverty rates well in excess of other retirees and working-age groups."

In addition, the inequity gap may increase as the cost of the Age Pension is expected to fall from 2.5% of GDP to 2.3% by 2060, while superannuation tax breaks will rise from 2% to 2.6% of GDP.

"While the Age Pension helps offset inequities in retirement outcomes, the design of superannuation tax concessions increases inequality in the system. Tax concessions provide greater benefit to people on higher incomes," it said.

However, the RIR highlighted the adequacy of the Age Pension in reducing income inequality among retirees because it provides most support as a proportion of private incomes to lower-income earners.

The report found measures suggest the Age Pension has kept pace with community standard with the base rate is about 4% above the wages benchmark.

"For many retirees, the Age Pension provides a higher level of income than they received during their working life," it said.

"The maximum rate of the Age Pension is also above available absolute poverty benchmarks, such as the Henderson Poverty Line."

Read more: Age PensionRIRCommonwealth Rent AssistanceCarolyn KayDeborah RalstonMike CallaghanRetirement Income Review
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