OPINION: A Nobel Prize-winning economist explains how super could be restructured around the new retirement income covenant.
After leading the world in the 1990s by embracing defined contribution retirement plans, Australia is redesigning the system to meet the needs of people living in and approaching retirement.
My proposal is for a framework that greatly improves the engineering of the products to deliver retirement income, while leaving the complexity “under the hood” and providing meaningful choices to people planning and entering retirement. The portfolio allocation between risk-free and risky assets would be dynamically adjusted based on each member’s age, projected future contributions and “funded ratio”. This latter term measures the member’s assets divided by their liabilities – assets being how much income their lump sum buys and liabilities being their target income goal.
Once these variables are known, the fund needs only to regularly communicate to the member the funded ratio for progress to the nominated goal and the probability of reaching it. To increase that probability, the fund member has only three choices: save more, work longer or take more risk.Answers to the three questions for default members would be inferred from their age, salary level and the default contribution rate.
Alongside saving more, working longer or taking more risk, members could be offered a fourth choice. This option, particularly significant for Australia where most people’s wealth is tied up in housing, is to generate more benefits from their existing assets using reverse mortgages or downsizing the family home., there is the option of adding a deferred annuity which pays only after age 85, although in Australia, the means-tested old age pension would probably satisfy that need.
First is a guaranteed income for life, delivered through a traditional annuity, the age pension or the now rare defined benefit plan. This may be the optimal solution for someone who has no bequest motive or urgent liquidity need.
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