Beyond the Headlines: One Million Unwashed is not the issue!

The Australian retirement landscape is complex and nuanced, yet recent headlines proclaiming that "1 million Australians are still in the accumulation, while over 65 years old, phase, and this needs to change" paint an overly simplistic picture of a multifaceted issue.

While it's true that a significant number of older Australians remain in the accumulation phase of superannuation accounts past the age of 65, the reasons behind this trend and its implications are far more intricate than such headlines suggest. To truly understand the situation, we must delve deeper into the evolving nature of retirement, the diverse circumstances of older Australians, and the complex interplay between superannuation, the Age Pension, and individual financial needs. This article aims to unpack the nuances behind these attention-grabbing headlines and explore why a one-size-fits-all approach to retirement phase transitions may not be appropriate in today's dynamic economic landscape. By examining factors such as continued workforce participation, financial literacy, the impact of recent economic volatility, and the changing definition of retirement itself, we can gain a more comprehensive understanding of why many Australians are choosing to remain in the accumulation phase. Moreover, we'll explore whether this trend necessarily represents a problem that needs "fixing," or if it's a reflection of the system's flexibility in accommodating diverse retirement pathways.

The Current Landscape

To understand the full picture, we must first look at the current state of affairs. According to the 2021 Census, there are 1,260,400 full-time workers aged 65 and over in Australia, with 706,000 males and 554,400 females. This significant number of older Australians in the workforce challenges traditional notions of retirement and highlights the changing nature of work and retirement in the 21st century.

Financial Realities: The financial situation of older Australians adds another layer of complexity to the retirement puzzle. As of FY22, the median superannuation balance for those aged 65-69 was $198,715. While this figure might seem substantial, it falls short of the amount needed for a comfortable retirement, as estimated by the Association of Superannuation Funds of Australia (ASFA). Moreover, debt levels among older Australians are significant. In FY21, the average debt for those aged 55 and over stood at $242,000. This debt burden can significantly impact retirement decisions and financial well-being in later life.

The Superannuation Conundrum: The issue of Australians remaining in the accumulation phase past the age of 65 is not simply a matter of tax optimisation. While it's true that pension phase accounts offer tax advantages, the decision to convert superannuation to pension phase is influenced by various factors:

• Continued Workforce Participation: Many Australians are choosing to work longer, either out of necessity or personal preference. AustralianSuper reported a year-on-year increase of 45% in the number of members aged 65-69 recommencing contributions between 2021 and 2022. This trend reflects changing attitudes towards work and retirement, as well as economic realities.
• Flexibility and Control: Keeping funds in the accumulation phase can provide greater flexibility, especially for those who are uncertain about their future work plans or anticipate significant financial changes, such as selling a property or business.
• Contribution Opportunities: Remaining in the accumulation phase allows for continued contributions, which can be beneficial for those looking to boost their retirement savings in their later working years.
• Transfer Balance Cap: The limit on how much can be transferred to the pension phase (currently $1.9 million) means that some high-balance individuals must keep a portion of their super in the accumulation phase.
• Transition to Retirement (TTR) Strategies: TTR schemes offer a middle ground, allowing individuals to access some of their super while continuing to work and contribute.

The Trust Factor

One significant barrier to addressing these issues is the lack of trust in superannuation funds. Only 21% of Australians in this age cohort trust their super fund to provide advice. This trust deficit poses a significant challenge in helping individuals navigate the complex retirement landscape.

Generational and despite "surveys" the view of those over 65 years of age and not advised is of a bank based transactional advisor. For this generation, the bad memories and shared experiences of friends and family define the view of the profession.

First Principles Approach

To truly address the retirement challenges facing Australia, we need to approach the issue from first principles, considering the fundamental goals and challenges of a retirement system

Goals of a Retirement System:

• Ensure adequate income for retirees
• Provide financial security and reduce elderly poverty
• Distribute financial burden fairly across generations and income groups
• Encourage self-sufficiency while providing a safety net

Key Challenges:

• Demographic shifts: ageing population and increasing life expectancy
• Economic factors: changing labour markets and economic uncertainties
• Fiscal sustainability: balancing government support with budget constraints
• Individual behaviours: encouraging saving and financial literacy

Core Components:

• Public pension system
• Mandatory savings
• Voluntary savings
• Regulatory framework
• Financial education and guidance

Key Principles:

• Adequacy
• Equity
• Sustainability
• Efficiency
• Simplicity
• Flexibility

Evaluation Metrics:

• Replacement rates
• Poverty rates among the elderly
• Fiscal costs and projections
• Labour force participation rates of older workers
• Savings rates and account balances

Trade-offs to Consider:

• Mandatory savings vs. individual choice
• Government support vs. individual responsibility
• Simplicity vs. tailored solutions
• Short-term costs vs. long-term benefits

Addressing the Complexities:

1. Workforce Participation: The increasing number of Australians working past the traditional retirement age necessitates a more flexible approach to retirement planning. Policies should support those who choose or need to continue working while also ensuring adequate protection for those unable to do so. Health of the individual, regardless of age, needs to play a role.
2. Financial Education: Given the complexity of the superannuation system and the low trust in super funds, there's a critical need for improved financial education. This education should start early and continue throughout an individual's working life, helping people make informed decisions about their retirement planning. The role of the employer in this space is critical.
3. Personalised Approaches: The diversity of individual circumstances calls for more personalised retirement planning solutions. This could involve tailored advice services that consider an individual's unique financial situation, health status, and retirement goals.
4. Regulatory Reform: The regulatory framework should be reviewed to ensure it supports flexibility while maintaining system integrity. This might include reassessing preservation age policies, contribution limits, and the interaction between superannuation and the Age Pension. Wealth inequality is cemented in taxation treatments and segment diversity issues (i.e. religion, sex, etc.).
5. Addressing Debt: With significant debt levels among older Australians, strategies to help individuals manage and reduce debt as they approach retirement should be considered. This could involve financial counseling services or policy measures to discourage excessive debt accumulation later in life. This is also linked to regulatory reform, whereby equity in property is traded to the government in later life to facilitate debt reduction. This could be securitized so as to not impact federal deficits.
6. Improving Trust: Rebuilding trust in superannuation funds and the broader retirement system is crucial. This could involve greater transparency, improved communication, and demonstrable alignment of fund activities with member interests. This also relates to regulatory reform for financial advisors and a crackdown on property investment spruikers.
7. Holistic Retirement Planning: Retirement planning should be viewed holistically, considering not just superannuation balances but also other assets, potential inheritance, health costs, and lifestyle factors.

Conclusion

The issue of one million Australians remaining in the accumulation phase past 65 is far more complex than headlines suggest. It reflects broader changes in how Australians approach work, retirement, and financial planning in later life. While there are certainly areas for improvement in Australia's retirement system, simplistic solutions risk creating unintended consequences and failing to address the diverse needs of older Australians. Moving forward, policymakers, financial institutions, and individuals all have roles to play in creating a more robust and flexible retirement system. This system should be able to accommodate the changing nature of work and retirement, provide adequate financial security, and empower individuals to make informed decisions about their financial futures. By approaching the issue from first principles and considering the multifaceted nature of retirement in the 21st century, Australia can work towards a retirement system that truly serves the needs of its ageing population. This will require ongoing dialogue, research, and a willingness to adapt policies and practices as circumstances evolve. Ultimately, the goal should be to create a retirement system that provides security and dignity for all Australians in their later years, while also being sustainable and fair across generations. This is a complex challenge, but one that is crucial to address for the long-term well-being of Australian society.