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
DEPARTMENT OF THE TREASURY
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
DEPARTMENT OF THE TREASURY
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
DEPARTMENT OF THE TREASURY
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
DEPARTMENT OF THE TREASURY
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%
DEPARTMENT OF THE TREASURY
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
DEPARTMENT OF THE TREASURY
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%
DEPARTMENT OF THE TREASURY
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
DEPARTMENT OF THE TREASURY
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)
DEPARTMENT OF THE TREASURY
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
DEPARTMENT OF THE TREASURY
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
DEPARTMENT OF THE TREASURY
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.
DEPARTMENT OF THE TREASURY
INTERACTION OF THE THREE PILLARS
DEPARTMENT OF THE TREASURY
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
DEPARTMENT OF THE TREASURY
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
DEPARTMENT OF THE TREASURY
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
DEPARTMENT OF THE TREASURY
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%
DEPARTMENT OF THE TREASURY
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
DEPARTMENT OF THE TREASURY
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
DEPARTMENT OF THE TREASURY
SUPERANNUATION IN AUSTRALIAN FINANCIAL
MARKETS
DEPARTMENT OF THE TREASURY
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
DEPARTMENT OF THE TREASURY
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
DEPARTMENT OF THE TREASURY
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.
DEPARTMENT OF THE TREASURY
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
DEPARTMENT OF THE TREASURY
THANK YOU
QUESTIONS