As Australia faces an ageing population and decreasing housing affordability, the next generation of CPAs are driving calls for a restructure to the retirement income system to mitigate the risk of more Australians living in poverty in retirement.
By Megan Breen
The proposals put forward in this article reflect the views of the think tank participants and don't necessarily reflect the positions of CPA Australia.
The 2015 Intergenerational Report found that Australia’s aged dependency ratio (the number of people over 65 for every working-age person 15 to 64) is expected to double over the next 40 years.
This means there will be fewer taxpayers supporting a growing demand for pensions and services, including health and aged care.
In addition, the rate of home ownership is continuing to decline among young Australians, suggesting more people will face the ongoing costs of renting once they retire.
The superannuation guarantee was introduced 27 years ago with the aim of reducing reliance on the age pension and providing older Australians with an income in retirement.
The most frequently cited reason for this shift is demographic change (i.e. the rising proportion of older Australians and their increased longevity), which it is argued makes the cost of the government-funded age pension unsustainable.
While such claims relating to cost are debatable, it is undisputed that Australians are living longer. In the past 100 years, the life expectancy of Australians has increased by 20 years. At present, Australia has 3700 people aged over 100.
By 2050, Australia will have more than 50,000 people aged 100 years and over.
Australia’s existing retirement income system is based on three pillars: the Age Pension, compulsory superannuation and voluntary savings. While the recently released final report of the independent Retirement Income Review concludes that the existing system is effective and its costs are broadly sustainable, it also notes more could be done to improve financial literacy rates. The final report suggests that the system would benefit from clear objectives to guide future policies and assessment of such policies.
How should the system be restructured to ensure standards of living are maintained, and that appropriate aged and health care support is available for all Australians in retirement?
This question was posed to seven teams who took part in a CPA Australia Policy Think Tank in November 2020. The teams were randomly assigned and given a week to address the issue before presenting their solutions to the judging panel.
Key themes to emerge across the teams included raising awareness about the retirement income system through early education programs, providing opportunities for people to buy their own homes earlier and reforms to superannuation.
The winning team of Victor Oyugi, Khatiza Brown, Liam Smith and Mohammed Obeid chose the name Home Ownership Made Easy (HOME). They impressed the judges with a proposal to enable greater home ownership with a multi-layered approach to deliver this through education, pension, savings and superannuation.
Paul May CPA, director at Novo Super Pty Ltd and CPA Australia Retirement Savings Centre of Excellence member, worked with the team as a mentor and said the condensed nature of the process meant decisions had to be made quickly and the team worked collaboratively to arrive at their solution.
“The team focused on the key theme of home ownership and all brought very different perspectives to the discussions. They worked very well together, and I think it is a fantastic initiative because you don’t often get such a diverse range of members working together on a policy issue – it was invaluable,” says May.
Collaborating online also meant the participants were able to connect from across Australia and broaden their networks across the membership base.
Team member Liam Smith ASA, manager at KPMG Australia, said HOME used online platforms to discuss their ideas, after each person researched the topic and brought their ideas to the group.
“We were randomly put together into teams. Before this we didn't know each other, which was really interesting and made it quite fun as well. At the start, we had lots of different opinions and views, but we were able to work together quite well to work out the best way to go forward with some of them,” says Smith.
According to Smith, HOME’s solution focuses on innovative ways to increase people’s ability to own their own home, arguing accruing a large amount of superannuation that can’t be accessed until you retire, at the expense of paying off a mortgage throughout your career, limits some people’s ability to enter the property market and creates additional expenses for retirement.
The team acknowledged the negative impact withdrawing super funds early can have on the total at retirement age but made the point that withdrawing the funds specifically for a home deposit makes economic sense in the long term.
“By 2056 just two-thirds of retirees will own their homes, down from nearly 80 per cent today. Our angle is that it is a bit absurd for someone to miss out on the compounding benefits of home ownership and have all their money in a superannuation account attracting fees.
“We proposed people under the age of 40 being able to withdraw 50 per cent of the balance specifically for a home fund,” says Smith.
The Age Pension
Khatiza Brown CPA, company secretary and corporate services manager at Alliance Mining Commodities Ltd, says if more people own their home at retirement, it could reduce the number of people accessing the Age Pension if the asset was included in the means test for eligibility.
It could also increase the Age Pension funds available to renters or those in need, which leads to a more equitable system.
“Our approach is to increase home ownership as a means to improve people's retirement income, which is not going to capture everyone. This is why we also looked at the Age Pension and proposed including the principal home of homeowners in the means test.
“At the moment, a homeowner can actually get the same amount of Age Pension as a non-homeowner, because the principal home is not included in the means test.
“If we reduce the number of people reliant on the Age Pension then we can redirect those savings to aged care and health care services,” Brown adds.
Education is key
Mohammed Obeid ASA, graduate financial auditor at the Tasmanian Audit Office, says improving financial literacy rates is another key component of HOME’s solution, arguing that more people need to understand from a younger age that owning a home can help with funding retirement and to improve understanding of the system so that all Australians can make the most of their assets in retirement.
“Financial education should begin as soon as kids are in primary school, and then continue through to high school and beyond.
“We have to change the way people think about spending and saving and that owning a home will reduce expenses in retirement because you're not paying rent, for example,” says Obeid.
Saving for the future
The team also argues that increased home ownership can open doors for retirees to access, create and maintain savings through equity release options (reverse mortgages and home reversion) and by downsizing to a smaller home.
In addition, team member Victor Oyugi CPA, graduate accountant at Sacred Heart Mission, says “retirees who don't own their own home will end up spending their savings and superannuation on rent payments instead of on their costs of living.”
“On retirement, income reduces but expenses tend to stay the same, especially for renters who spend a huge part of their income on rent. With no active income coming in, they have already lost the option to have financial backing to own a home.”
The team says the challenge was an opportunity to look at an important issue and contribute to CPA Australia’s thought leadership and policy positions.
“We all actively participated, and we had a lot of drive and energy, and we were very enthusiastic about the subject matter. I would recommend the challenge to others, even though it was challenging at times, getting to get to know three other people and work together on an important issue in Australia was a great experience,” says Brown.
The CPA Policy Think Tank 2020 ran from 16-26 November. The judging panel was made up of Neil Marshall CPA, director, Neil Marshall Tax & Business Advice; and from CPA Australia, Dr Gary Pflugrath, executive general manager policy and advocacy, Dr Jane Rennie, general manager external affairs and Michael Davison, policy strategist, retirement savings and advocacy.
The judges noted that all teams delivered high quality presentations and were impressed at the considered policy approaches given the tight timeframes and challenges working across different time zones.
“Moving forward, we hope to have more CPA Policy Think Tank events in the future and are already looking at topics for 2021 in the ethics, accounting standards and digital technology space,” says Pflugrath.
Team 1: Zahnia Kentish ASA, Sarah Xiao CPA, Dionie Lippis ASA, Anastasiia Ploshkina CPA
Team 2: Sam Kalimnios CPA, Marjorie Wong CPA
Team 3: Victor Oyugi CPA, Khatiza Brown CPA, Liam Smith ASA and Mohammed Obeid ASA (winners)
Team 4: Judy Gao CPA, Suzanne James CPA, Hugo Lewis CPA, Jeanine Zhong ASA
Team 5: Jak Nuttall CPA, Sashika Abeyratne CPA and Tian Yang ASA
Team 6: Rishi Bhalla CPA, Yulia Firestone ASA, Shakeel Ahmed ASA and Han Jiang ASA
Team 7: Grace Nguyen CPA, Matthew D’Cruz ASA and Fui Wern Chow ASA (runners up)