Retirement income is one of the most discussed economic topics in Australian life, and one of the biggest issues is that women generally have much less to retire on. A paper delivered to the Australian Gender Economics Workshop in Perth on Friday by the Grattan Institute’s Brendan Coates asked about the best way to close the gender gap in retirement incomes. His answer highlights the distorted nature of the superannuation system and contains some broader policy implications regarding the impact of raising the superannuation guarantee from 9% to 12.5%.
The problem of the gender pay gap in retirement is quite stark. Coates notes that “men’s superannuation balances at retirement are on average twice as large as women’s”, and men also have much larger non-superannuation savings. This leaves women – particularly single women – “at greater risk of poverty, housing stress and homelessness in retirement”.
But Coates notes that too often the analysis of the problem goes about it the wrong way – with a focus on superannuation. And yet, the reality is that while superannuation does draw much attention in the media and political debate, it is “the least important part of Australia’s retirement income system, and will remain so in the foreseeable future.”
Coates argues that it will be “another two decades before typical retirees have been contributing at least 9% of their wages to super for their entire working lives”. But even younger workers who have long been paying the 9% superannuation guarantee “tend to save more outside superannuation.”
Consider a man and a woman born in 1964. They are now in the early 50s, but they have mostly likely had a very different working life:
Around 80% of men born in 1964 were working full-time during the age of 30-45; by contrast only around 34% of women were employed full-time during those years.
And while the situation has improved somewhat, even for those Gen Xers born in 1974, the differences in working lives are clear:
As Coates notes, boosting the superannuation guarantee “is unlikely to close the relative gender gap in retirement incomes because the guarantee is paid as a fixed percentage of wages, so will simply reflect the current gender gap in lifetime incomes”.
He also notes that boosting the superannuation guarantee impacts the pension as it suppresses the aggregate growth of wages, which in terms suppresses pension increases.
As a result, Coates estimates that “lifting the super guarantee may help close the relative gender gap in retirement incomes since they currently save a smaller share of their income than men, but those extra savings will be largely offset by lower age pension payments”. And what is more, the benefits of such a boost will largely go to the highest income earners:
Coates argues that “higher compulsory super contributions are ultimately funded by lower wages, which means lower living standards for workers today”. Therefore, increasing the super guarantee to 12% “will hurt the living standards of low-income earners, the bulk of whom are women”.
Coates, however, is not arguing against the current superannuation guarantee – indeed he notes it is already doing its job. He calculates that for a median-income earner working for 40 years, and counting compulsory super contributions only, the current 9.5% guarantee and the age pension would “provide the average worker with a retirement income equal to 79% of their pre-retirement wage.”
Coates also argues against allowing more generous super tax concessions designed to improve the opportunity for women to “catch up”’ super contributions in their later working years. He notes that most of the contributions already are made by wealthy men – and any increase in the concessions would merely continue that situation:
Instead, Coates suggests if the issue we are worried about is that women retire with comparatively less savings than men and are at much greater risk of absolute poverty in retirement due to their smaller retirement savings, then policies should be directed at those with lower incomes.
To that end he notes that lifetime benefits of superannuation tax breaks go overwhelmingly to the wealthiest:
Coates argues for limits on contributions from pre-tax income to $11,000 a year, as this would affect those unlikely to receive the pension. He also argues for a limit to life-time contributions from post-tax income to $250,000, or an annual cap on post-tax contributions of $50,000 a year and also that “earnings in retirement – currently untaxed – should be taxed at 15%.”
He argues these three measures would reduce by around $4bn a year the amount of superannuation tax breaks that overwhelmingly go to high-income earning men.
And finally, while increasing the pension would target lower-income earners, Coates argues a better way to assist women and low-income earners would be to boost rent assistance. He calculates that a targeted $500 a year boost to rent assistance for age pensioners would cost $250m a year, and would be “the most efficient way to alleviate the financial hardship among low-paid retirees”.
The paper on the gender gap is welcome not only for highlighting the distortions within the superannuation system – distortions which would be accentuated by raising the guarantee to 12.5% – but it also highlights that the big issue with the gender income retirement gap is the gender pay gap.