The financial literacy of older Australians has come to nothing

In 2004, I attended the launch of the federal government program Consumer and Financial Literacy Working Group (CFLT). The event, held at the State Library of Victoria, showcased the “who’s who” of financial services. ‘Money’ host Paul Clitheroe was the newly appointed chairman and Mal Brough was the Howard government’s finance minister who was responsible for the results.

The future of financial literacy for all Australians indeed looked rosy.

A report (shared by Assistant Treasurer, Helen Coonan, June 2004) identified a major consumer financial literacy gap and the task force was formed to address it. At the launch, I asked which specific cohorts would be targeted by this new initiative. The answer was that high school students, Indigenous Australians and those from culturally or linguistically diverse (CALD) backgrounds were identified as most at risk of low financial literacy.

Fair enough. I then asked, given the surge of some 5.4 million baby boomers rushing into retirement, if pre-retirees with low financial literacy might also become a priority.

“Yes, that’s a good idea, they’re definitely on our radar”was the president’s response.

Well, here we are nearly two decades later and it’s fair to wonder how those ambitions have contributed to the financial literacy of retirees in the meantime. Have we made progress?

I am not afraid. There’s a big zero on the Taskforce bulletin.

Where is the financial education?

Along the way, we’ve seen a steady stream of government inquiries, many for all the right reasons. Some were politically charged, such as the Tim Wilson-led Parliamentary Inquiry into the “Pension Tax” which was a thinly veiled campaign vehicle for the Liberal Party in the 2019 election year (I can say this because I attended one of the town hall meetings).

Royal Commission into Misconduct in Banking, Superannuation and Financial Services was broad in scope and was imposed on a government reluctant to reveal the depths of financial impropriety, which it eventually did. We have also seen initiatives such as Financial Advisor Standards and Ethics Authority (FASEA) come and go with little real impact.

Are consumers better off, especially as lawyer Michelle Levy’s Quality of Advice Review proposes removing some of the consumer protections introduced over the past decade?

Depending on how you value financial advisors, you can consider the departure of almost 40% of advisors from the industry in recent years as a good thing or a bad thing. Either way, the number of financial advice providers has dropped dramatically and it’s hard to see what has replaced this service.

Understanding retirement is essential

When the task force was launched in 2004 and the super mandatory was just over a decade later, there was $649 million in savings held in the superannuation. Today, that amount is $3.3 trillion, dwarfing almost all other pots of cash in the Australian economy.

It’s easy to think of this money in aggregate form, but it’s essentially the life savings of nearly 16 million men and women.

Commentators still cling to the Association of Super Funds Australia (ASFA) estimates for “comfortable” pensions, meaning the oft-cited target of a $1million nest egg is generally accepted as necessary to lead a reasonable retirement life. But that’s at odds with ASFA’s own measures of real savings: an average retirement nest egg of $310,240 for men and $246,632 for women or, even worse, median amounts of $138 $337 and $107,897 respectively.

The gap between rich and poor older Australians has widened significantly since 2004 and our retirement income system supports this gap.

Here’s how. The more work income you earn, the more you benefit from the “fixed” contribution rate for the pension guarantee (SG), currently 10.5%.

Say you’re Sally, earning $200,000 a year, then $21,000 a year is automatically invested in your designated super account. This balance will compose well. Sally may also make an additional contribution and be able to afford a good accountant, and perhaps the costs of setting up an SMSF.

Or maybe you’re Larry, who does his own tax filing because his $25,000 salary doesn’t allow for outsourced financial aid. His SG contribution is also 10.5% per year, but only a contribution of $2,625 will reach his super account each year. With such a low salary, he is unlikely to make any additional contributions. Of course, her balance increases, but well below Sally’s rate.

Since 2004, there has been a proliferation of fintech products and online advice. Now, social media “influencers” are offering advice on how to grow your wealth. Not only has this added to the noise and confusion around financial advice, however legally questionable it may be, these “influencers” may also have been the preferred source of information for (mostly young) retirees who withdrew funds during the Covid years, reducing their ultimate super savings to a shadow of what they might have been.

Information must reach the right people

Which brings me to 2020 report of the Retirement Income Review (RIR) and its conclusions. He seems to be largely happy with our system, while noting some pressure points along the way.

I am surprised. As a long-time observer of consumer confusion over changing retirement planning goals and legislation unlike the IRR, I am far from happy with the status quo.

I think financial planning for retirement in Australia is in a sorry state. It’s like we’ve been running up and down in place for about 20 years.

The need has never been greater – but who will break this conflict? Australia is expected to have more than 10 million retirees in the next 20 years, and according to Money magazine, 40% of super fund assets will be held by retirees by then. The RIR asked for more emphasis on decumulation. That’s good, but the products are complex and the product information is even more so. Most product disclosure statements (PDS) can best be described as the antithesis of plain English.

Some 71% of pensioners still receive a full or partial pension. The combined income and asset test for eligibility is far from easy to understand and the duration and application process is a nightmare for many, some of whom drop out. Others phone in and join the 43 million calls a year that Centrelink still cannot handle. For those who are – or will be – self-funded and often self-directed information-driven investors, there is a plethora of material. But ASIC finds that most Australians are still unaware of the difference between general and personal advice, or what they can reasonably expect from the product supplier or adviser.

There is too much at stake to be wrong. The potential for increased incomes (and therefore life opportunities) for millions of retirees, not to mention the benefits to the wider economy and health savings, deserves urgent attention.

We could do much better, starting with widespread government support for the need to improve financial literacy. Consistent and authoritative information could be provided by TAFE institutions, local governments and workplaces, just as we do with language education. The beleaguered Centrelink Financial Information Service (FISO) offering could also be significantly boosted.

But who has the political will and energy to change this landscape of confusion and complexity? The answer escapes me. If anyone can see a glimmer of light in this depressing and pointless scenario, I’d love to hear what it is.

Kaye Fallick is the founder of Stay logged in website and SuperConnected enews. She has been a commentator on retirement income and aging demographics since 1999. This article is general information and does not take into account anyone’s situation.

Geraldine L. Melton