Super tax concessions are only part of the story when it comes to Federal Government support for retirement, according to new analysis by Mercer.
In a paper entitled Tax, Super & the Age Pension: assessing the value of total government support, Mercer found that low, middle and high-income earners all enjoy a fair deal when it comes to retirement funding.
“The level of support the Government provides for retirement income is remarkably level across the income spectrum, irrespective of a person’s lifetime income. Our three-pillar system of compulsory super, voluntary contributions to super and the Age pension, really does provide equitably for all Australians in their retirement,” Dr. David Knox, a senior partner in Mercer’s Retirement, Risk and Finance business said.
The report is an update of one published in February 2010, and takes into account two measures currently being considered by the Federal Senate: increasing the superannuation guarantee (SG) from 9% to 12%, and introducing a low-income super contribution. The data is based on modelling for eight individuals at varying levels of income, from a part-time, low-income earner on $34K per annum, through to a high-income earner on almost $278K.
“This spectrum covers the vast majority of Australian workers’ incomes, and reveals a high level of parity when it comes to Government funding for retirement,” Dr. Knox said.
“High-income earners receive more in tax concessions, as you’d expect, but will miss out on the means-tested Age pension. The result is the level of total Government support provided for retirement income is almost constant across individuals, regardless of their different lifetime incomes.”
These results contradict the commonly held myth that Government support for retirement income increases as incomes rise, according to Mercer.
“To put it simply, the rich are not getting a better deal from the Government when it comes to retirement funding. It’s swings and roundabouts: what low-income earners miss in tax concessions, is made up for in Age pension payments,” Dr. Knox said.
The research confirms the total cost of retirement funding to the public purse is around $400,000, for most Australians who work full-time for 40 years and receive the 12% SG, taking into account both super tax concessions and age pension payments.
The paper also considers the impact increasing life expectancy will have on Government budgets. During the last 25 years, the life expectancy for a 65 year old has increased by 4.7 years for males and 3.6 years for females. With ongoing medical advances, this trend is expected to continue - for example, half the baby girls born in Australia in 2012 are expected to live beyond age 95.
Dr. Knox said: “As Australians live longer, they will also draw an age pension for longer. Supposing an increase to life expectancy of three years - which is a conservative estimate – the Government will need to spend about $50,000 extra in pension payments, for low to middle-income earners, and up to $14,000 for those on higher incomes,” Dr. Knox said.
However, an increase in the SG to 12% will help to offset these increased costs, according to Mercer.
“Increasing the Superannuation Guarantee to 12% will bring two-fold benefits – both increasing the retirement savings pool and reducing the reliance on the Age pension in the future, with minimal long term cost increases to Government,” Dr. Knox said.
Mercer is a global leader in talent, health, retirement and investments. Mercer helps clients around the world advance the health, wealth and performance of their most vital asset – their people. Mercer’s 20,000 employees are based in 43 countries and the firm operates in over 140 countries. Mercer is a wholly owned subsidiary of Marsh & McLennan Companies (NYSE: MMC), a global team of professional services companies offering clients advice and solutions in the areas of risk, strategy and human capital. With 55,000 employees worldwide and annual revenue exceeding $12 billion, Marsh & McLennan Companies is also the parent company of Marsh, a global leader in insurance broking and risk management; Guy Carpenter, a global leader in providing risk and reinsurance intermediary services; and Oliver Wyman, a global leader in management consulting. Follow Mercer on Twitter @MercerAU @MercerInsights