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Analysis of the Institute of Actuaries' proposals for reform of the retirement income system

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Phil Gallagher
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Submission to the Strategic Review of the Pensions Income and Assets Test - Conference Paper 94/5

The Government announced its intention to set up the Retirement Income Modelling Task Force (RIM) in May 1992. The joint press release from the Treasurer, the Minister for Finance and the Minister for Social Security stated the purpose of the Task Force as:

"The Task Force will model the impact of retirement income policies over the next half century. It will address key issues, including the implications of the Government's policies for the age pension system as well as for the level of retirement savings - by individual household categories and in aggregate - and for the distribution of retirement income benefits.

The Proposed Retirement Incomes Strategy from the Institute of Actuaries of Australia (1994a) is a major proposal which has attracted a good deal of public interest and has been subjected to quantitative analysis by groups containing members of the Institute (eg Atkinson, Creedy, Haberecht and Knox (1994)), and by the Institute of Actuaries of Australia (1994b). Much of the Institute's analysis has been based upon the National Mutual Retirement Income Policy (RIP) Model as enhanced by the RIM Task Force.

Given the public interest in the Institute's proposals and the Review's discussion of them on pp106-116 of Questions of Balance (Barber, Moon and Doolan 1994), it seemed appropriate for me to pass on my views on the use of the RIP model to analyse the IAA's proposals and to raise some concerns with you about the cost to government of the proposals and about their equity based on analysis using the RIM Task Force's current lifecycle model for individuals and couples, INDMOD.

My original submission to the Strategic Review of the Pension's Income and Assets Test of 16 September:

  • explained why the National Mutual Retirement Income Policy model was unsuitable for modelling the universal age pension proposal of the Institute of Actuaries (1994a);
  • analysed 6 hypothetical baby boomer couples using the RIM Task Force's model INDMOD showing that:
    • the Institute of Actuaries' (IAA) proposal was possibly regressive, yielding lower retirement incomes to those with lower wages while working, and higher incomes to those on higher wages for the cases modelled, and
    • the IAA proposal did not appear to be self funding, with markedly higher costs to Government for those on higher incomes;
  • drew attention to the potentially significant lowering of national financial saving which could come from freezing the SGC at 6%; and
  • discussed broader issues arising from budget neutral universal pensions proposals such as intergenerational and intragenerational equity and identified issues for proposals which seek to use the dropping of tax concessions for superannuation as a funding mechanism.

This supplementary submission seeks to complement the initial analysis by:

  • giving examples from totally different hypothetical couples;
  • further examining the issue of costs to government in retirement incomes analysis; and
  • further examining the nature of retirement saving in the absence of tax concessions.