The Effect on Wealth & Income Inequality of the Pillar 2 Component of the Australian Retirement System

Abstract

Pillar 2 of the Australian retirement system was introduced in 1993 with contributions made by employers as a percentage of wages to be accumulated for employees until retirement. As originally introduced, the effect of this Pillar 2 system would have been to perpetuate wealth and income inequality in the pre-retirement phase into the post retirement phase. But the effect of restrictions subsequently introduced on maximum contributions and accumulated assets has been to significantly reduce the inequality between the highest and lowest income groups. The higher income groups however remain the major beneficiaries of the effective tax benefits of the Pillar 2 system. This paper quantifies the effects on wealth and income inequality from the introduction of the Pillar 2 system.