Why Australia needs a real retirement income system

What if Australia had a real retirement income system?

Isn't that what super is for?

The super system was legislated in 1992, requiring employers to put aside 3% of employees' wages in super.

While that's a long time in dog years, it's not that substantial for savings that are set aside throughout your working life for your retirement.

Since it started, compulsory employer contributions have steadily grown to 12% and the total super pool to more than $4.3 trillion.

But here's the rub.

For much of its existence, the super system has been focused on building savings for retirement, not on what happens when you get there. In 2022 the government introduced a retirement income covenant, which is effectively a legal obligation on funds to help members maximise their expected retirement income.

And while there have been some improvements, it hasn't been a roaring success.

With the Baby Boomers moving en masse towards retirement, and Gen X following in their wake, the total number of Australians aged 67 or older is expected to roughly double to about 9 million by 2062-63.

About 2.5 million Australians are expected to retire in the next decade alone. And if the super system is to do its job, these people will need secure retirement incomes.

Incomes are our weakness

The 2025 Mercer CFA Institute Global Pension Index ranked Australia as a B+ in its last issue, with us slipping behind Singapore and Sweden for our lowest ranking ever.

The problem?

While we score well for the sustainability and integrity of our system, we fall short when it comes to adequacy of retirement incomes. The tough means test on the age pension is part of the reasoning, but we don't do well when it comes to providing retirement incomes either.

As Mercer Australia Partner Tim Jenkins and global pension expert David Knox write: "It is not a retirement income or pension system. There are no requirements for superannuation fund members to withdraw any part of their superannuation when they retire.

This is in stark contrast to the best pension systems in the world that require most or all of the accumulated benefits to be withdrawn on a regular basis."

They point out that Canada generally requires pension payments to start by the end of the calendar year in which an individual turns 71.

In the UK, an individual can normally make withdrawals from their pension between the ages of 55 and 75. If no withdrawals are made by age 75, a 'benefit crystallisation event' occurs.

In the US, there are required minimum distributions from age 73.

"These requirements mean funds are used to provide retirement income and not for estate planning or intergenerational wealth transfers," Jenkins and Knox write.

"This income-based approach would also limit the growth of superannuation balances during retirement."

Australian retirement incomes

With a 'whatever goes' regulatory approach to retirement incomes in Australia, we see extremes from people withdrawing all their super in one hit to hoarding it for future generations.

This is in contrast to many other countries (see breakout, opposite) that require part or all of the benefit to be taken as a retirement income.

Last June, according to Jenkins and Knox, there were more than 850,000 MySuper accounts for Australians aged 65 or older with an average balance of $116,000. While some of these people might still be working, many will have retired but have not moved their savings to the pension phase, where there is a requirement for a minimum amount to be withdrawn every year.

They say some had little engagement with their super and may not be receiving income that could make a real difference to their standard of living.

"The introduction of an income requirement, together with a moderation of the assets test, would improve the retirement income for many older Australians and improve Australia's ranking," they write.

Did you know?

Australia's superannuation system is one of the largest private pension systems in the world. More than 1.5 million member accounts are in the retirement phase, collectively accounting for approximately $575 billion in member assets.

Best-case scenario

A focus on retirement incomes would put further pressure on the industry to develop better pension products that give retirees security and a decent income.

Worst-case scenario

For many investors, decisions about how and when they take their retirement savings is a personal choice. A reported draft proposal to mandate a drawdown rate for super accounts worth more than $200,000 last year showed that any changes would need to take account of this need for flexibility.

The wild card

Market downturns have a disproportionate impact on retirees who are not in a position to contribute to their fund and wait for better returns.

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