We here in Australia like to think we’ve got it pretty great. And you know what? For the most part, we definitely do.
This goes for our superannuation, too. According to the Melbourne Mercer Global Pension Index (MMGPI), we actually ranked second in the world, a rise from our 2013 ranking of third! This is compared to 24 other countries around the globe.
However, despite our high standing, we did not achieve the coveted A Grade, instead sitting at B alongside the Netherlands.
There’s always room for improvement!
The difference between A and B
Mercer defined their gradings clearly, showing that Australia has room to improve.
- A Grade: “A first class and robust retirement income system that delivers good benefits, is sustainable and has a high level of integrity.”
- B Grade: “A system that has a sound structure, with many good features, but has some areas for improvement that differentiates it from an A-grade system.”
How could Australia improve its super system?
Here are ways that the Australian superannuation system could be improved.
Increase superannuation guarantee rate
Right now, the superannuation guarantee rate (the percentage of your salary that your employer is obligated to contribute to your chosen superannuation fund) is set at 9.5 per cent.
However, there were plans not so long ago to raise this number to 12 per cent. This change was delayed to 2022, then again to 2025 by different governments. Though this delay was to repair some Federal budget issues, it could cause problems when Australian workers reach retirement age and don’t have enough to live out an elongated retirement comfortably.
Head of Wealth at Virgin Money Christopher Sozou says, “Making sure Australian’s have enough Super to live a comfortable retirement will mean less people relying on the age pension. This can only be good for the budget in the long term.”
Mercer also had some ideas to fix the Australian system.
- Increase retirement age: Though retirement age is set to increase to 70 here in Australia, Mercer suggests, to improve our rating, we should introduce a mechanism that allows the age to increase naturally, as life expectancies continue to also increase.
- Increase minimum age: The company also suggested that we should increase the minimum access age to receive benefits from our funds so that we save for longer, rather than draining the account too soon. Mercer believes minimum access age should be no more than five years prior to retirement eligibility.
- Remove barriers: In a 13 October 2014 media release, the company recommended that the Australian government should remove what it called “legislative barriers” to encourage the formation of “more effective retirement income products”.
According to the same press release, many countries measured in the ranking suffer from not encouraging higher private saving, including Australia.
Longevity risk is posed by an ageing population and is used to describe the situation where someone will live longer than their retirement savings. While increased life expectancy is generally a good thing for society, those who are financially unprepared for a longer life risk passing financial burdens onto the next generation. The issue of longevity risk was considered by the recent Financial System Review commission by the Federal Government, but there is not yet a clear solution yet which meets the needs of customers.
The Super System is important to all Australians and the debate on how to make it better is underway, but even as products and ideas emerge, there is yet to be a consistent, strong solution to solving them.
Do you have some solutions to add to the mix?
If you’re not sure about which superannuation scheme is right for your lifestyle, contact us today to see if Virgin Super is what you’ve been looking for.