1 Australia's retirement income system


Three pillars of retirement incomes

To ensure that retirement income policy is sustainable in the context of an ageing society, Australia has, for the last two decades, pursued a three pillar approach to the provision of retirement incomes, comprising of:

  • the means tested and publicly funded Age Pension;
  • compulsory private savings through the Superannuation Guarantee arrangements; and
  • voluntary private savings, supported by taxation concessions and direct government payments for low income earners.

Superannuation and social welfare

The purpose of superannuation is to provide retirement savings for people that will give them an overall retirement income higher than the Age Pension alone can provide. Superannuation interacts with the Age Pension through the operation of the income and assets tests (collectively known as the means test). The means test contributes to the affordability and sustainability of the Age Pension. Once a person’s income and assets exceed certain levels (known as the free areas), Age Pension is withdrawn at specified rates.

The design of the means test aims to balance targeting the Age Pension to those most in need while ensuring there is an incentive for self-provision (through working and saving).

A brief history of the Superannuation Guarantee

Private superannuation first emerged for a small group of salaried employees in the 19th century and applied primarily to white-collar employees. Superannuation only covered a minority of Australians, being concentrated among professionals, managers and administrators, public sector employees, and the financial sector.

Between 1908 and the 1990s, most Australians relied on the taxpayer-provided Age Pension for their retirement income.

Compulsory superannuation began with industrial awards agreed as part of the 1985 Prices and Incomes Accord between the Hawke Federal Labor Government and the Australian Council of Trade Unions (ACTU). Under these arrangements, a three per cent superannuation contribution was paid by employers into employees’ individual superannuation accounts from 1986.

The 1985 Prices and Incomes Accord was an important first step towards compulsory superannuation in Australia, however, it had clear limitations. The three per cent contribution rate was not sufficient to provide a significant improvement in retirement incomes except for those on very high incomes. Also, while it was successful in expanding the coverage of superannuation (coverage of the private sector grew from 32 per cent in 1987 to 68 per cent in 1991), it was still not a comprehensive system of compulsory savings.1

The Superannuation Guarantee (Administration) Bill 1992 was introduced on 2 April 1992 by the then Treasurer John Dawkins:

The increased self-provision for retirement will permit a higher standard of living in retirement than if we continued to rely on the age pension alone. The increased self-provision will also enable future Commonwealth Governments to improve the retirement conditions for those Australians who were unable to fund adequately their own retirement incomes. … Lastly, self-provision will increase the flexibility in the Commonwealth’s budget in future years, especially as our population ages and will increase our national savings overall …

Figure 1.1 provides a timeline of the major reforms since the introduction of the Superannuation Guarantee. The superannuation system has not remained static and will continue to change and adapt to the evolving demographic and economic landscape.

Appendix C provides a snapshot of the current state of the superannuation system.

Figure 1.1: Timeline history of superannuation

Figure 1.1: Timeline history of superannuation

1 Australian Prudential Regulation Authority, A recent history of superannuation in Australia: APRA insight: Issue 2 2007 <