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Equitable and Sustainable Pensions

Chapter 13. Australian Pensions: An Equitable and Sustainable Arrangement in a Postcrisis World?

Benedict Clements, Frank Eich, and Sanjeev Gupta
Published Date:
March 2014
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Ross Clare


Australia has a classic three-pillar retirement system, comprising

  • A government-financed public pension, called the Age Pension;
  • A mandatory contribution made by employers, generally to an individual account defined-contribution plan; and
  • Voluntary contributions to pensions, primarily to defined-contribution plans, with a substantial proportion of such contributions attracting tax concessions.

This chapter is structured as follows. The next section describes the current structure of the public and private pension systems and their past evolution. The following two sections then set out the challenges facing the Australian retirement system and present recent reforms and reform options. The chapter specifically looks at the issues of sustainability and equity. The government and community are strongly concerned that the assistance provided to retirement income should be allocated fairly according to need. Australia also has a long tradition of support for what is colloquially called a “fair go.” In the context of pensions, this means that no group should face barriers to participation in the retirement income system.

Description of the Pension System in Australia

Current Structure

Public pension system

In contrast to most Organization for Economic Cooperation and Development (OECD) countries, Australia has adopted a public income protection model built around a comprehensive safety net focused on providing point-in-time income support at a flat rate to those most at risk of falling below an acceptable standard of living.

The Age Pension, like other government income transfers in Australia, does not require any history of social security contributions by the person or any history of work; receipt is determined by reaching the eligibility age, being resident in Australia for 10 years with 5 of those years being continuous, and qualifying under the applicable asset and income tests. The Age Pension is currently payable at age 65 but will gradually increase to age 67 by 2024.

Payments are ongoing provided individuals continue to meet eligibility conditions. The average Age Pension payment tends to rise with age as older individuals run down their private retirement savings and their private incomes fall. Older age cohorts also tend to have entered retirement with lower savings compared with those more recently entering retirement.

The maximum annual benefit provided by the Age Pension as of September 1, 2012, was $A 20,1421 for a single person and $A 30,368 for a couple. The Age Pension is adjusted on a regular basis by the greater of the movement in prices as measured by the consumer price index or in total average weekly earnings for males. Thus, it is adjusted to keep pace with increases in the general standard of living in the Australian community. Although both the consumer price index and the average earnings measure have limitations as the basis for adjusting payments to retirees, most alternative measures that have been suggested deliver similar outcomes in the medium to longer terms.

Special adjustments to the payment rate have also been made from time to time, to reflect developments such as the impact of the introduction of carbon pricing or to otherwise deliver an increase greater than the general increase in prices or wages.

The Age Pension is part of taxable income for those receiving it, but because of a variety of rebates, those receiving the maximum benefit generally do not pay any income tax, and as a result, many recipients do not have to file a tax return. As noted above, individuals and couples with income and assets in retirement greater than the applicable thresholds receive a reduced (or no) Age Pension. The thresholds and means test are set such that most persons 65 and older receive at least a partial Age Pension. However, persons at the top of the income distribution because of employment or investment income and assets do not receive any benefit from the Age Pension.

Currently, 75 percent of Australians age 65 and older rely on a full or partial Age Pension for financial support in retirement (Table 13.1).

Table 13.1Number of Pensioners and Aggregate Government Expenditures, 2011
TypeAge PensionersNumber of PeoplePayments (A$ million)
War veteran pensioners age 65 and older228,5104,112
Still working166,029
Self funded629,901
Population ages 65 and older3,183,427
Retirees ages 55–641,361,689
Source: Department of Human Services, Annual Report, 2011–12.
Source: Department of Human Services, Annual Report, 2011–12.

Private pension system

Occupational superannuation, as private pensions are termed in Australia, first emerged in the mid-19th century. The term superannuation was in common usage in the early 19th century to refer to the pension received after retirement. Although it is not entirely clear why the term is used in Australia instead of private pension, it does provide a clear distinction from the government-provided Age Pension. It also is more consistent with the availability of lump sum benefits in Australia, which are taken by a substantial number of retirees.

The coverage of the private system is very broad and uses wide definitions of employer and employee. However, there are some exceptions, chiefly those earning less than $A 450 a calendar month and part-time employees ages 18 years and younger. Moreover, the Superannuation Guarantee does not apply to the truly self-employed (other than to owner-managers who receive wages and technically are employees of companies they control).

Employees are now generally able to choose the fund into which contributions are made by their employers, but many employees have contributions made to the fund that their employer has selected as the default fund or that is specified as a default fund in a collective labor agreement. There are hundreds of corporate, retail, industry, and public sector funds, and nearly 500,000 small Self-Managed Superannuation Funds.

The number of Self-Managed Superannuation Funds has grown, while the numbers of the other types of funds have decreased. Self-Managed Superannuation Funds, which have no close equivalent in any other jurisdiction, are funds for which each member is also a trustee. These funds generally consist of members of a family, have fewer than five members each, and differ from the various individually managed accounts in other countries in that they are private trust arrangements that do not require that a financial institution be involved as a provider. They tend to be used by those with higher account balances and by those who want to exercise personal control over their pension funds.

About 30 percent of the self-employed voluntarily make contributions, partly driven by the available tax concessions. Some self-employed persons have private pensions because they were employees in previous periods. Some contractors who might be regarded as self-employed by other legal provisions are also covered in the compulsory system through the extended definition of employee.

In May 2010, the Australian Treasurer announced that compulsory employer pension contributions were to increase from at least 9 percent, which they were at the time, to 12 percent of wages by July 2019. The gradual increase in mandatory Superannuation Guarantee contributions will start with 0.25 percentage point in the 2013/14 and 2014/15 financial years. For each of the subsequent five years, the Superannuation Guarantee contribution rate will increase by 0.5 percentage point until it reaches 12 percent in July 2019.

Along with mandatory contributions, voluntary contributions can be made from a number of sources:

  • Employers (usually large companies and governments) that choose to pay a higher rate than the law requires for mandatory pensions.
  • Members who make pretax contributions from their salary packages. The ceiling on tax-preferenced contributions, which include the mandatory contribution, has fallen significantly in recent years to $A 25,000 a year. Salary sacrifice contributions are made by about 25 percent of upper income earners but by fewer than 5 percent of low income earners.
  • Members who make after-tax contributions, which are subject to a contribution cap of $A 150,000 a year or $A 450,000 in a three-year period.
  • The government co-contribution, which matches after-tax contributions up to an amount that was $A 500 (a year for low income earners in 2012).

The taxation structure for pensions is relatively complicated, but in broad terms, most members of defined-contribution funds are taxed concessionally (at a flat rate of 15 percent) on both employer and other allowed pretax contributions and the investment earnings in a fund. Benefits, both lump sum and in income-stream form, generally are tax free when received at age 60 and older.2

About 10 percent of employees are in private defined-benefit plans, but most such plans are now closed to new members. Defined-benefit plans also are largely restricted in practice to public sector employees although some large companies have them. In the long term, almost all Australians will have defined-contribution pensions. However, at least some defined-benefit pensioners will linger in the system for many decades to come.

Also important for the living standards of retirees are a high level of home ownership among retirees and government funding on a means-tested basis of residential elderly care and some other elderly care.

Historical Developments

Public pension system

The basic structure of the Age Pension has not changed significantly since 2000. However, in the 2009/10 budget, the Australian government announced increases to Age Pension benefits, particularly for single persons, following an inquiry process that concluded that such payments should be increased.

These increases were introduced along with a suite of budget saving measures designed to offset their long-term costs. The package of changes was projected to be budget neutral by 2021/22 and through to 2049/50 (Gruen and Soding, 2011).

The specific changes that decreased Age Pension expenditures were the following:

  • A gradual increase in the Age Pension eligibility age to 67 years by 2024;
  • An increase in the withdrawal rate of Age Pension in the income component of the means test; after the change, an additional dollar of private income reduces the Age Pension payment by 50 cents, rather than the previous 40 cents; and
  • Closure of a complicated and seldom-used pension bonus scheme under which a higher Age Pension was paid to individuals who met both eligibility requirements and who delayed receiving the Age Pension.

Figure 13.1 illustrates that during the last 10 years, the proportion of the Australian population receiving the full Age Pension has decreased. This is most marked for those between ages 65 and 70 because this cohort has benefited from mandatory private pension contributions for a longer period of their working lives than those who retired 10 years earlier.

Figure 13.1Proportion of the Population Receiving the Age Pension and Self-Funded Retirees, 2000 and 2011


Although the proportion receiving a partial Age Pension has risen only marginally, the proportion of self-funded retirees has increased to a greater extent. Despite this encouraging trend for both individuals and the government, the proportion of older Australians on the Age Pension remains high, reaching more than 80 percent of the population by age 75.

Private pension system

From its earliest days in Australia (with the establishment of a pension fund for its staff by the Bank of Australasia in October 1842) through the 1940s, pensions were only available to a select group of mostly male salaried employees in the public sector and at some large companies. Employer-supported pensions for staff such as manual workers were less common and tended to be less generous, with smaller benefits and smaller employer contributions in plans that also generally were noncompulsory.

By 1974, 32.2 percent of wage and salary earners were covered by private pensions, made up of 40.8 percent of male wage and salary earners but only 16.5 percent of females. Most pension assets were in defined-benefit plans (ABS, 1995).

In 1983, the newly elected Labor Government expressed support for the principles of employee pensions and initiated discussions with the Australian Council of Trade Unions on the possibility of broadening access to pensions as part of the government’s Prices and Incomes Accord with the trade unions.

The process of making employee pensions a virtually universal entitlement began in September 1985 when, with the support of the government, the Australian Council of Trade Unions sought a 3 percent pension contribution to be paid by employers to industry pension funds specified in relevant industrial labor agreements, which set the minimum wages and conditions for many but not all employees in Australia (APRA, 2007).

This submission was supported by arguments addressing the following:

  • Implications arising from the aging of the population, including the workforce;
  • Effects of the early retirement trend;
  • Existing dependence on the government-provided Age Pension and the projected significant increase in the dependence of the elderly on the working population leading to a sharp rise of Age Pension costs; and
  • The fact that a large percentage of the workforce was not covered by existing pension plans and that wide disparities existed in coverage according to sex, industry, occupation, and income levels. In particular, it was argued that women, manual workers, and those in the lower income level were less adequately covered than others.

Arguably, the final point was the most compelling factor for the parties to the proposal, which included the Australian government in office at the time.

As new labor agreements were progressively negotiated according to the guidelines in the national wage case decision, pension coverage increased rapidly. In the four years after the introduction of employer contributions linked to labor agreements, total coverage, which includes the public sector for which rates of coverage were already high, grew from about 40 percent of employees to 79 percent. In the private sector, coverage grew from 32 percent in 1987 to 68 percent in 1991 (ABS, 1995).

This increase in coverage was a major achievement for collectively bargained pensions, but even more was needed to further increase coverage and to increase the rate of contributions. Accordingly, the government announced in the 1991/92 budget that it would introduce a mandatory pension system through implementation of the Superannuation Guarantee. The Superannuation Guarantee system uses the taxation power of the Australian government to provide a powerful incentive for employers to make the required pension contributions. The guarantee part of the Superannuation Guarantee refers to contributions being made rather than to a guarantee of investment earnings or eventual retirement income.

The Superannuation Guarantee system went into effect on July 1, 1992, starting at a minimum contribution rate of 3 percent. A schedule of future increases in the compulsory contributions rate was also set, with a contribution rate for all employees of 9 percent of earnings beginning July 1, 2002. Employers already making contributions meeting the Superannuation Guarantee requirements were not required to make additional contributions.

With respect to the taxation of private pensions, although the basic structure has remained in place since 1988, numerous changes have been made to more detailed taxation settings. Some of these have been put forward as improving the equity of the tax concessions that are provided.

One statistic that received attention in public debate in Australia was that 5 percent of individuals accounted for 37 percent of tax-preferenced pension contributions. However, that figure, calculated by the Treasury, related to 2005/06, when pension policy settings were significantly different from those today. For instance, in 2005/06 a maximum deductible contribution limit of $A 100,587 (a year) applied for each employee age 50 and older, and for the self-employed age 50 and older. For those ages 35 to 49, the figure was $A 40,560 (a year).

Tax-preferenced contributions include employer contributions (including contributions made under a salary sacrifice arrangement in which wages are traded off for extra contributions) and personal contributions claimed as tax deductions by self-employed persons.

However, another important factor has been the desire of successive governments to generate substantial tax revenue to increase the budget surplus or to decrease a budget deficit. A number of such changes have been announced with little or no consultation. Significant compliance and administration costs have also featured in numerous cases.

Income Streams in Retirement

In an ideal world, the objective of pensions would be to provide an income stream for the whole of retirement. However, there are a number of reasons why it is difficult to structure the Australian system around regular, reliable pension payments, including the following:

  • When pension contributions began to be included in labor agreements in 1986 as deferred pay (in lieu of a possible productivity wage increase) it was promoted to members as an addition to the Age Pension. The Superannuation Guarantee pension has increased the value of contributions, but the message has not changed—members are under the impression that the private pension account balance is their own money and they expect payment flexibility.
  • The government allows all members age 60 and older to retire and draw a tax-free lump sum or an annuity. The majority of older Australians also are subject to low or zero personal income tax rates given their low average incomes and various tax rebates. As a result, the incentive for individuals to leave money in the system during retirement is limited.
  • Maximum withdrawal ceilings on account-based, defined-contribution pensions have been eliminated, so no one is forced to draw benefits over time.
  • Members can buy lifetime annuities from the private sector (albeit from a small number of suppliers), but fewer than 100 a year are sold. Consumer research indicates that most Australians are unrealistic about the pricing of an indexed lifetime annuity and expect much more than fair value. Without compulsion or incentives, most members will not buy these products, in which case they may not be covered against the risk of outliving their savings.
  • Many members retire with low benefits and they appear comfortable putting the money in interest-bearing bank accounts rather than leaving it in the pension fund. This may be influenced by their perceptions of bank safety or by their short time horizons under which they do not value higher (but uncertain) returns. They may also value instant access to their funds.
  • Many people today retire with some debt (including mortgages) or the need to make home repairs or purchase consumer durables, and taking a lump sum pension to clear all such expenses or debts upon retirement is a rational decision.
  • About one-third of total pension savings and about half of postretirement pension balances are held in Self-Managed Superannuation Funds that have fewer than five members and for which each member is also a trustee of the fund. Such fund members generally value control highly and are wary of purchasing an income stream from a third party such as a life insurance company or managed fund.

The combination of these factors has made the provision of income streams, particularly those that would protect members from longevity risk, difficult. In addition, transitional arrangements, especially if compulsory, can be difficult because of the plans made by those approaching retirement.

However, the evidence indicates that many Australians do take an income stream from their pension in retirement, albeit one that is account based and to which the individual has complete access. This is particularly so when larger amounts are involved.

Among males ages 60–64, 70 percent of those who have recently retired have pension accounts compared with 90 percent of those who have not yet retired. The average balance is also larger for the former than for the latter, which suggests that those with lower balances are more likely to cash out and invest (or spend) elsewhere.

For women, the drop in coverage is greater, being around 30 percentage points. Again, the average balance for those retaining retirement savings in a superannuation pension, at about $A 255,000, is higher than for those in the same age group who have not retired.

Future Challenges

Many factors will affect the long-term sustainability of the Age Pension, but the most significant are

  • The aging of the population and associated increase in the dependency ratio;
  • Age Pension design; and
  • Growth in private savings and private pensions.

Each of these can be influenced to some extent by changing relevant policies.

The Aging of the Population

The projected increases in the proportion of the population ages 65 years and older, and in life expectancy, will increase the number of individuals potentially eligible for the Age Pension and the period for which they might be eligible to receive it.

However, the aging of Australia’s population structure is not occurring particularly rapidly compared with many advanced economies. Fertility rates have increased in recent years and immigration policies are designed to favor immigrants who, on average, are younger than the general population. Changes to immigration policies and measures designed to influence fertility rates can affect the rate at which the population structure ages, but generally the impact is relatively low.

Although Australia’s total population is projected to continue to grow, annual population growth rates are projected to slow gradually, from 2.1 percent in 2008/09 to 0.9 percent in 2049/50. Australia’s population is projected to grow from about 22 million people in 2010 to 35.9 million people in 2050 (Treasurer of the Commonwealth of Australia, 2010).

Average Australian mortality rates have also fallen significantly, with life expectancies rising for both men and women. These changes have added to population growth and the proportion of older people in the Australian population. As a result, the number of Australians ages 65 and older is projected to grow from about 3 million in 2010 to 8.1 million in 2050. Consequently, the number of people eligible for the Age Pension is projected to increase by about 150 percent by 2049/50.

Another consequence of these demographic changes is that the number of those ages 65 and older relative to the working-age population will continue to increase. This increasing dependency ratio could potentially increase the tax burden on the working-age population to support existing government programs, including the Age Pension. However, the tax burden will be influenced, in part, by growth in the real income of Australians and its distribution between working-age and older Australians. For instance, if the distribution remains constant, the incomes of those in the labor force would be expected to increase.

The rate of GDP growth in Australia has been relatively strong by the standards of advanced economies, partly as the result of good economic management. However, population growth has assisted in achieving this economic growth, as has growth in national savings and investment driven by the boost to household savings from mandatory contributions to private pensions (Treasurer of the Commonwealth of Australia, 2010)

Design of the Age Pension

The fiscal sustainability of the Age Pension system is also aided by a number of its basic design features, particularly the modest level of the maximum benefit, which is defined in absolute terms rather than being related to the earnings of individuals while they were in the paid labor force. Another key design feature is that no benefit, discounted or otherwise, is possible before retirement age.

The means test, through its asset- and income-testing elements, aims to provide the greatest benefits to those most in need while restricting the access of those with higher levels of income and wealth. At the same time, the means test has thresholds and taper rates for withdrawal of benefits that are designed to provide incentives for the accumulation of private retirement savings and self provision of retirement income.

The means test also differentiates between homeowners and those who are not homeowners, so that the family home is not assessed as an asset. Wage income is treated differently from investment income. In addition, income is considered at a set rate relative to assets for some financial, and there are special arrangements for pension income streams received in retirement. A joint means test is applied to couples, which includes de facto spouses and same-sex partners.

Projected Age Pension Expenditure

Australia is unusual in that the future financial impact of programs such as the Age Pension is required to be regularly assessed in what is known as the Inter-generational Report (IGR). The IGR came to life as a key requirement of the 1998 Charter of Budget Honesty Act. The Charter requires an IGR to assess the long-term sustainability of policies during the 40 years following the release of the report, including the impacts of demographic change. The IGR has played a major role in raising community awareness of long-term fiscal challenges and, in so doing, placed greater focus on government decisions with long-term consequences.

Not surprisingly, the various IGRs indicate that population aging will contribute to pressure on government spending and fiscal sustainability. The Australian Treasury projects total government spending to increase to 27.1 percent of GDP in 2049/50, about 4¾ percentage points higher than its projected low point in 2015/16. In today’s terms, that is the equivalent of adding about $A 60 billion a year to government spending.

About two-thirds of the projected increase in spending for the next 40 years is related to health expenditure across all age groups, reflecting pressures from aging, increasing community expectations, and the funding of new technologies.

Growth in spending on age-related pensions and elderly care is also significant, both as a proportion of GDP and in real spending per person. Currently, about a quarter of government spending is directed to health, age-related pensions, and elderly care. The IGR projects that government spending on these functions will increase significantly during the next 40 years, pushing their share of spending to almost one-half.

As a proportion of GDP, spending on health is projected to rise from 4.0 percent to 7.1 percent. Elderly care expenditures are projected to rise from 0.8 percent of GDP to 1.8 percent in 2049/50. Expenditure on age-related pensions is projected to rise from 2.7 percent to 3.9 percent of GDP (Figure 13.2).

Figure 13.2Projected Expenditure by Major Category

(Percent of GDP)

Factors affecting the projections of age-related pension spending include the following:

  • The proportion of pensioners receiving a full Age Pension is expected to decline because of the increased value of individuals’ mandatory pensions and other private assets and income.
  • The proportion of people with a partial Age Pension is projected to increase significantly while the proportion of the eligible age group not receiving any Age Pension is projected to rise slightly.
  • Policies will be changed to reduce expenditures, such as raising the eligibility age for the Age Pension from 65 to 67 and increasing the withdrawal rate in the income test for the Age Pension from 40 cents on the dollar of private income to 50 cents. When the next IGR is prepared in 2015, it can be expected to take into account the increase in compulsory pension contributions from 9 percent to 12 percent. This will further moderate the increase in age-related pension spending, particularly toward the end of the projection period.

Public debate in Australia about the sustainability and equity of government assistance for the aged in Australia has been considerable. However, much of this debate has been based on assertion rather than analysis. For instance, the aging of Australia’s population structure is not sufficient to come to the conclusion that current tax concessions for superannuation are unsustainable.

The projected increase in direct government expenditure on retirement income is not negligible, but it is relatively modest in comparison with many countries: even by the early 2050s, it is projected to remain below the starting point for just about all OECD countries in 2010.

Overall Sustainability of the Retirement Income System Factoring in Tax Concessions for Private Pensions

Australia has a fairly large stock of private pension assets relative to GDP compared with most other countries, reflecting the fact that it is the fourth largest private pensions market as measured by assets. Moreover, given that the system is still maturing (unlike systems in Japan, the United Kingdom, and the United States), the ratio of concessionally taxed pension contributions to national income is among the highest in the world. This ratio will increase further with the gradual increase in the compulsory contribution rate to 12 percent of wages by 2019.

Accordingly, the amount of tax assistance provided to private pensions in Australia also needs to be taken into account when assessing the ongoing sustainability of government assistance for retirement incomes.

The Tax Expenditures Statement published each January by the Australian Treasury provides a starting point for assessing the cost to the government budget of the tax concessions (Treasury of the Commonwealth of Australia, 2013).

The headline figure in the Tax Expenditures Statement claims that the revenue the government forgoes as a result of tax concessions for private pensions was about $A 31.8 billion in 2012, and will grow to $A 44.8 billion in 2015/16. The major components of these claimed tax expenditures comprise revenue of $A 17.1 billion forgone on private pension fund investment earnings in 2012/13 and revenue forgone on employer contributions of $A 13.2 billion. The size of these figures is impressive but they do not actually reflect the overall effect of private pensions on taxation receipts.

The Tax Expenditures Statement estimates equal the revenue that would have been collected if all private pension contributions and income currently contributed or earned had been taxed at the full marginal rate of every member, less the tax revenue actually collected. Among a number of conceptual problems, these estimates do not take account of any of the long-term effects if higher tax rates applied to private pensions. For instance, future retirement balances and the associated tax base would be much smaller if higher taxation applied along the way (Clare, 2012b).

Other problems with the Tax Expenditures Statement estimates for private pensions include the following:

  • In the future, private pensions will aid the government budget, including through a decrease in Age Pension expenditures.
  • The benchmark assumes that individuals’ saving and consumption decisions would not change if the tax arrangements were changed. In effect, it assumes that people would continue to place what they had been putting into private pensions into nonconcessionally taxed investments such as bank accounts.
  • The Tax Expenditures Statement benchmark assumes that capital gains would be taxed at full marginal personal income tax rates, without the 50 percent deduction that applies to all other capital gains received by individuals.
  • High returns associated with long-term managed savings in the form of private pensions are seen as increasing the cost of the tax concessions rather than reducing future claims on the government for retirement income support through the Age Pension.

In total, the amount of government assistance to retirement incomes from Age Pensions and tax concessions for private pensions is unlikely to exceed 6 percent of GDP by 2050 and could be closer to 5.5 percent. By international standards this is a relatively low figure, below the starting point for most other advanced economies and well below the projected level for nearly all other advanced economies and even many developing countries.

Reforms and Reform Options

Addressing the Challenges: Government Priorities

Specific changes to the tax treatment of private pensions

Every Australian government budget in recent years has made changes to the tax treatment of private pensions, to subsidies for personal superannuation contributions, and to unclaimed monies provisions.

Frequent reference has been made to improving the equity of the overall retirement system, but it is likely that the desire to bring in additional revenue and to reduce government expenditures has been the dominating motivation.

Successive Australian government budgets since 2009/10 have, through a combination of tax changes and reduced expenditure on private pensions, improved the budgetary position of the government. In summary, these changes have involved the following:

  • A combination of both temporary and permanent changes have been made to the co-contribution, which is a payment made by the government to the accounts of qualifying low-income individuals who made personal contributions to their private pensions. This has led to a halving of annual expenditure on this measure from the more than $A 1 billion a year that it had previously been.
  • Measures have been taken that led to account balances being paid to the Australian Taxation Office when an account is inactive and the account balance is small or the pension fund had been unable to contact the account holder. Additional revenue was raised by increasing the threshold below which accounts are treated as unclaimed from $A 200 to $A 2,000.
  • Reductions have been made to the caps for contributions that qualify for tax concessions.
  • Scheduled increases to contribution caps based on indexation arrangements designed to maintain their value in real terms have been postponed.
  • A proposed increase in the contribution cap for those ages 50 and older has been postponed.
  • The tax rate on contributions made for individuals with taxable income exceeding $A 300,000 a year has been increased to 30 percent. These proposals have become law or are in the process of being legislated.

New assistance for low income earners

The government has also enacted legislation to provide a new co-contribution of up to $A 500 annually for eligible low income earners beginning in the 2012/13 income tax year. The matching contribution will be 15 percent of the eligible tax-preferenced contributions (including employer contributions) made by or for individuals with adjusted taxable incomes of up to $A 37,000. Individuals will also need to meet a test showing that at least 10 percent of their income is from employment or business sources and that they are residents of Australia or New Zealand. Individuals also can benefit from the co-contribution in regard to personal contributions that are not tax preferenced. By its very nature, the new matching contribution will only provide assistance to low income earners who are subject to either the zero or 15 percent tax rate.

The phased increase in the rate of compulsory contributions to 12 percent will have its greatest impact on low and middle income earners, given that those with higher incomes commonly already receive contributions in excess of 9 percent of wages and will adjust to an increase in compulsory contributions.

Net impact of the changes

Table 13.2 compares the distribution of government tax relief and contribution assistance for pensions in 2009/10 for employees on the basis of current policy settings and what it would have been if a 12 percent mandatory contribution rate, the low-income matching contribution payment, and the current rate of co-contribution had all applied in that year. Although it will be some years before all the measures are fully in place, this approach illustrates the eventual impact on the distribution of government assistance by income level.

Table 13.2Current and Proposed Government Assistance for Pension Contributions by Income Range
Taxable Income Range ($A)Marginal Income Tax Rate (percent)Current Value of Tax Concession and Co-Contribution1 ($A million)Percent of Current Total Tax Concession and Co-ContributionValue of Proposed Total Tax Concession and Government Contributions1 ($A million)Percent of Proposed Total Tax Concession and Government Contributions
All employees12,79710014,953100.0
Source: Clare (2012b).

Takes into account the Medicare levy, the phasing out of the low-income tax offset, and the phasing in of the Medicare liability. Based on 2009/10 tax rates.

Source: Clare (2012b).

Takes into account the Medicare levy, the phasing out of the low-income tax offset, and the phasing in of the Medicare liability. Based on 2009/10 tax rates.

Addressing the Real Equity Challenge

The real issue in regard to equity is that too many Australians have too little in retirement savings rather than too much. Much public debate in Australia has focused on the top 1 percent or 5 percent of income earners, with little or no debate on how to enhance outcomes for the other 99 percent or 95 percent.

If excessive government assistance is a problem, it is restricted to a very small number of individuals, particularly since the introduction of progressively tighter caps on both tax-preferenced and non-tax-preferenced contributions. When properly measured, total government assistance for retirement income in the form of both the Age Pension and tax concessions for superannuation is broadly even across the entire income distribution.

After the recent contribution cap and rebate changes to private pensions, 87.3 percent of the tax concessions for pensions will flow to individuals subject to less than the top marginal tax rate, up from the approximately 85 percent that applied before the changes. The share of total concessions flowing to individuals subject to the top marginal tax rate was about 50 percent in 2007/08, with the reduction in the share since then resulting from the introduction of contribution caps and higher tax rates on the contributions of certain upper income earners together with the top marginal rate applying to a smaller proportion of taxpayers.

Moreover, voluntary contributions have remained flat in the years before 2013 in response to both tax changes and investment return developments. In particular, contribution caps and other changes to pensions are limiting the amount of voluntary salary sacrifice contributions, including by individuals seeking to catch up on contributions late in their careers. Salary sacrifice contributions are made when an individual trades off part of his or her salary for additional employer contributions.

Longitudinal data indicate that a significant proportion of the population has higher incomes (with associated capacity to make higher contributions) for a relatively limited portion of their working careers. A higher contribution cap generally, or at least for those ages 50 and older, would assist those who need to catch up and have the capacity to do so.

The $A 450 a month threshold for the superannuation guarantee mandatory contributions

Although there may have been a rationale for the income threshold below which contributions are not required when the mandatory Superannuation Guarantee pension system was first introduced in 1992, it would make sense to remove it now given that nearly all employees have pension accounts and processes for making contributions are now more efficient. If the threshold were removed, about 250,000 individuals, the majority women, would benefit from higher eventual retirement savings. The cost to both employers and to the Australian budget for removing the threshold would be very modest.

The self-employed

Nearly 10 percent of the labor force is self-employed. Although tax concessions have led to some self-employed saving for retirement through pensions, average balances and coverage have remained relatively low. About 29 percent of the self-employed have no pension savings, and this is a more common situation for males than females. A strong case can be made for extending compulsory pensions to include the self-employed.

Individuals on paid parental leave

Paid parental leave is considered by the government to be equivalent to wages for the purposes of income tax. Consistent with this, it would be appropriate for the Superannuation Guarantee mandatory pension contributions to apply to such payments, which it does not currently do.

One of the reasons that women’s average pension balances are lower than those of men is time out of the paid workforce for parental reasons. Paying Superannuation Guarantee mandatory contributions on parental leave payments would help reduce this difference in entitlements. The effects of compound interest on those pension contributions would also be very favorable given that it is mostly women in their twenties and thirties who take parental leave.

The cost to the Australian government budget would be slightly more than $A 20 million a year.

Indigenous Australians

Indigenous Australians have lower coverage and lower balances in the superannuation schemes, on average than the general population, again largely related to differences in paid labor force experience. Pension coverage for indigenous Australians is about 70 percent for men and 60 percent for women, compared with rates of 85 percent for men and 80 percent for women for the population more generally. Average (mean) balances are also lower than for the equivalent Australian population as a whole (Table 13.3).

Table 13.3Pension Coverage and Pension Holdings of Aboriginal and Torres Strait Islanders(Men and women who were not yet retired, 2006 and 2010)
Percent with PensionsPension Balances of Those with Superannuation ($A)Percent with PensionsPension Balances of Those with Superannuation ($A)
Source: Clare (2012a).Note: Population-weighted results. Not enough cases to break down by age.
Source: Clare (2012a).Note: Population-weighted results. Not enough cases to break down by age.

Increases in coverage and average pension balances of indigenous Australians will clearly be associated with improvements in involvement in paid work and in wages. Labor market measures rather than pension policies drive labor market outcomes.

However, current pension arrangements and administrative requirements do not always mesh well with the circumstances and needs of indigenous Australians, particularly those in remote areas who may have difficulty in communicating with the administrators of their pension funds and in claiming benefits or identifying lost accounts.

There is scope for the pension industry and the regulators to work toward a regulatory framework and administrative arrangements that can better cope with the special needs of indigenous Australians. Such arrangements also would be likely to benefit many other Australians.


The Australian pension system is not without its shortcomings. Among other things, it is

  • Too complex, particularly with regard to the taxation of contributions and fund earnings;
  • Not yet mature enough to deliver a comfortable standard of living for most people in retirement; and
  • Not dealing well with the financial consequences of longevity for the large majority of members who are in defined-contribution schemes.

However, compared with systems in most other countries, it is

  • Sustainable, in that the burden on governments, employers, and individuals are manageable both now and in the future;
  • Comprehensive, in that all Australians benefit from an Age Pension from the government that keeps individuals from poverty in retirement, and with near universal coverage of private pensions of employees and substantial coverage of the self-employed;
  • Equitable, in that when all the elements of the system are looked at together, the amount of government assistance is broadly comparable across the income distribution; and
  • Helping to strengthen the financial system, in that assets in the pension system are invested in the real economy rather in notional securities issued by a central government.

    Australian Bureau of Statistics (ABS)1995Superannuation Australia (Canberra: Australian Bureau of Statistics).

    Australian Prudential Regulation Authority (APRA)2007A Recent History of Superannuation in AustraliaAPRA Insight Issue 2.

    ClareRoss2012aEquity and Superannuation—The Real Issues (Sydney: Association of Superannuation Funds of Australia).

    ClareRoss2012bThe Equity of Government Assistance for Retirement Income (Sydney: Association of Superannuation Funds of Australia).

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    Department of Human Servicesvarious yearsAnnual Report (Canberra: Department of Human Services).

    GruenDavid and LeighSoding2011Compulsory Superannuation and National SavingEconomic Roundup Issue 3 (Canberra: Australian National Treasury).

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    Treasurer of the Commonwealth of Australia2010Australia to 2050: Future Challenges The 2010 Intergenerational Report (Canberra: Treasurer of the Commonwealth of Australia).

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    Treasurer of the Commonwealth of Australia2013Tax Expenditures Statement 2012 (Canberra: Commonwealth of Australia).


At the end of 2012, 1 U.S. dollar was equal to 0.932 Australian dollars.


Thus, with T representing taxed contributions, t representing concessionally taxed investment income and capital gains of the pension institutions, and E representing benefits exempt from tax, this system can be characterized as ttE. By comparison, the U.S. tax arrangement for most types of is EET.

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