(Bloomberg) — Standing with his suitcase beside a cruise ship at Sydney Harbour, silver-haired Australian Chris Hamilton defends his right to draw a state pension — even as his $400,000 private retirement fund reaps a steady income.
“We’ve been very wise and frugal,” said the 70-year-old retired chemical engineer as he prepared to board a 10-day Pacific island cruise with his wife. The trip, to be followed by a European tour later this year, “is one of the things on the bucket list,” he said, adding the government support is a welcome boost rather than a necessity.
More than two decades after Australia set up a compulsory retirement savings scheme, known as superannuation, to wean people off of state pensions, over-generous means testing has resulted in four out of five retirees still being eligible for such welfare. The nation’s A$40 billion ($30 billion) annual pension bill accounts for 10 percent of government spending and is destined to grow in a country with one of the world’s highest life expectancies.
While government pension spending in Australia as percentage of the economy is half the developed world average, the system poses challenges for Prime Minister Tony Abbott’s government as it confronts dwindling revenue and budget deficits forecast for at least the rest of the decade.
The government is backtracking from fiscal tightening in May’s budget, however, and this week put off any changes to superannuation until at least 2016. Besieged by poor opinion poll ratings that triggered a leadership challenge in February, Abbott is wary of alienating well-to-do pensioners that form a bedrock of support for his Liberal-National coalition.
“Abbott knows there’s a big problem, but he also knows Australians punish politicians who seem to mess with their financial security,” said David Burchell, a political analyst at the University of Western Sydney. “The longer the problem is left, the more politically hard and financially difficult it will be to fix.”
Under superannuation, employers are required to pay 9.5 percent of a worker’s wage into a fund that can’t be accessed until retirement. People aged under 50 can channel A$30,000 (Australian dollars) a year into the fund, including employer contributions, rising to A$35,000 for the over 50s, with every dollar taxed at 15 percent. The concessional rate compares with income taxes that rise as high as 45 percent.
Income generated in the fund is also taxed at 15 percent and is tax free when drawn in retirement.
The top 10 percent of income earners receive more than a third of tax breaks while the bottom 10 percent gets nothing, according to the Australia Institute, a Canberra-based research center. The concessions cost the government about A$30 billion a year in lost revenue, the Canberra-based think tank says.
The system is “simply unaffordable and entirely inequitable,” said Richard Denniss, the institute’s executive director. “Rapacious” fees charged by fund managers — estimated by the Grattan Institute at A$20 billion a year — further undermine the system, he said.
While the nation’s A$1.93 trillion ($1.5 trillion) pool of superannuation savings is the fourth largest in the world, the system has yet to make a significant dint in the number of people drawing the state pension.
Critics says that’s down to loose means testing and because people retiring now have only been contributing to superannuation for a part of their working life.