In this Financial Policy Brief, Professor Kevin Davis argues that the flip side of the changes to the asset taper test (that pension entitlement increases more rapidly as private assets decline) should not be ignored. For retirees willing to supplement pension receipts by running down assets over their expected life span (rather than leave them as a bequest), the effect of the changes on retirement living standards is substantially less than implied by simply focusing on the immediate change to current pension receipt amount.
But concerns over longevity risk are one reason why retirees may not be inclined towards adopting such a strategy. This highlights the need for policies to facilitate longevity risk insurance products (such as reverse mortgages and CIPRs), as well as changing perspectives that the age pension is partly a mechanism for maintaining moderate retiree living standards while planning to pass on assets as a bequest to heirs. But also problematic for retiree decision making is regulatory risk. Assuming that there won’t be further tightening of pension eligibility rules in the future may not be a good strategy – and this risk can adversely affect willingness to draw-down private assets to improve retirement living standards.
This FPB was prepared by Professor Kevin Davis, Research Director at the Australian Centre for Financial Studies.
The ACFS Financial Policy Brief series provides independent analysis and commentary on current issues in financial regulation, with the objective of promoting constructive dialogue among academics, industry practitioners, policymakers and regulators and contributing to excellence in Australian financial system regulation.
To read more papers in the FPB series, click here.