David Rush examines Paul Keating’s recent suggestion of a national insurance scheme to tackle the longevity problem, and puts forward a different solution – a regular premium, with-profits, pure endowment.
The ‘longevity problem’ in superannuation has been known about for a while now, and a number of solutions have been put forward.
In the private sector we obviously have immediate annuities, and potentially now deferred annuities. Challenger have their Liquid Lifetime product and there is also the Mercers investment product.
And there is the Comprehensive Income Product in Retirement (CIPR) proposal put forward by Treasury, but that would essentially use private sector products to provide longevity protection.
Obviously there is the age pension for people to fall back on, but the government would prefer that only to be used as a last resort, to limit the cost to consolidated revenue.
But now Paul Keating has suggested a national insurance scheme to address the problem (see article in the SMH on 23 October “They’re on their own’: Keating plea for retirees who run out of super”).
And maybe it needs a degree of compulsion, as suggested, for people to do what might be unpalatable for an individual, but is necessary for the country as a whole. If people won’t do it voluntarily (by taking some product which pays a benefit on survivorship, thus giving them something extra if they live long enough) then maybe some compulsion is needed (as used to happen in other countries).
The proposal is that the national insurance scheme be funded by a ‘longevity levy’ of 2 to 3 per cent of wages. But unless other superannuation savings are forfeited as part of meeting the benefits, the cost is likely to be too high. This is because benefits will need to be paid to those who live longer than expected, while those who don’t will still be free to pass on what remains of their superannuation savings as an inheritance. The maths is irrefutable – you can’t get something for nothing.
This problem of ‘forfeiture’ has plagued private sector products with low take-up rates. Individuals haven’t taken them up, preferring instead the ‘account based pensions’ which give people control over what they see as ‘their money’. But we know that if they live long enough then their savings must run out. Some products provide a guaranteed minimum benefit on early death, but that must come at a cost – either a higher price or lower long term benefits.
There are additional problems to a voluntary, private sector solution. For example, there is also the conservative investment problem. To offer the guarantees they do, private sector products have to be conservatively invested, and so potentially offer low investment returns.
All of the private sector products suffer from the forfeiture problem and / or the conservative investment problem to some extent or another.
At the Financial Services Forum (FSF) in May a different solution was proposed – a regular premium, with-profits, pure endowment.
- The pure endowment pays out a benefit to survivors (but nothing on death) after a particular period (to address the longevity problem);
- With-profits allows a more aggressive investment; and
- regular premium lessens the amount foregone on early death (while increasing the amount foregone on later death when the implications are less) but recognising that some forfeiture on death is necessary to help provide the benefit to those who survive.
View the Presentation and Audio from David’s session “A Product to Meet Changing Needs in Retirement” at the 2018 FSF.
This product would be in addition to an account based pension. The premiums for the product would be financed by setting aside a proportion of the original superannuation savings (like a deferred annuity) with retirement income in the interim being provided from the balance (via the account based pension).
But, whatever solution is finally adopted, to meet the needs of those who survive, and to keep the cost down, something has to be foregone by those who die. That would ensure that superannuation is used for the purpose intended – to provide for individuals in retirement (however long they live) rather than being passed on as an inheritance.
Otherwise, the $3 trillion so far saved may not be sufficient.
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