Need to focus on total retirement system to move retirees
away from lump sum and towards income products
The objective of Australia’s overall retirement income system should be to provide the vast majority of Australians with an income throughout their retirement that enables their pre-retirement living standards to be maintained, according to Mercer.
In a recent submission to Treasury, Mercer states the objective of both superannuation and the age pension needs to be defined simultaneously. Most importantly, the objective must state the system should provide an income for life, not that superannuation should simply substitute or supplement the Age Pension.
Mercer Senior Partner, Dr David Knox, said, “The Government needs to develop policy that encourages retirees away from lump sums and towards income products because longevity risk is one of the biggest social and economic risks facing our ageing population. We need to step away from the challenge of just setting an objective for super, we need to define the goal for our overall retirement income system.”
“It is important that superannuation relieves pressure on the cost of the age pension, but the system should do much more than that. Australians need a system that is designed to protect them against longevity risk by helping provide an income for life.
“It is too vague to state that super should supplement or substitute the age pension,” he said.
Modelling by Mercer actuaries show that Australians earning above average incomes could still depend on super and receive a part age pension in the later years of retirement.
“Our modelling proves that improving retirement outcomes for Australians requires our policy makers to address all pillars of our retirement income system, opposed to setting isolated objectives for just super. We need a system that aims to deliver a spreading of income over a lifetime for everyone, with some limits,” Dr Knox said.
Mercer’s modelling shows that even for many individuals with above average incomes a part age pension is likely to be paid in the later years of retirement. That is, income from superannuation provides substitution for the age pension well up the income scale and does not cease at median or average incomes.
Complementary roles of superannuation and the age pension
The following graph shows the level of retirement income (in today’s dollars) for an individual who earns income at the 80th income percentile throughout their working career from age 20 to age 67 (the future pension eligibility age) assuming they withdraw from their account based pension at the minimum rate each year.
In today’s dollars, this individual has a projected final superannuation balance of $1.036 million (of which 10% is assumed to be taken as a lump sum) and concessional contributions in their final year of employment of $17,635.
This retiree will not receive any age pension from the Government until age 88, or their 21st year in retirement. Life expectancy at age 67 for someone entering the workforce at age 20 today is likely to be about 24 years. However about 50% of retirees will live beyond this age, well into their 90s.
This modelling allows for the legislated increase in the Superannuation Guarantee to 12% in 2025, some allowance for additional salary sacrifice contributions in line with current experience, as well as the new asset test rules introduced from January 2017.
Mercer is a global consulting 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 more than 20,000 employees are based in more than 40 countries and the firm operates in over 130 countries. Mercer is a wholly owned subsidiary of Marsh & McLennan Companies (NYSE: MMC), a global professional services firm offering clients advice and solutions in the areas of risk, strategy and people. With 57,000 employees worldwide and annual revenue exceeding $13 billion, Marsh & McLennan Companies is also the parent company of Marsh, a leader in insurance broking and risk management; Guy Carpenter, a leader in providing risk and reinsurance intermediary services; and Oliver Wyman, a leader in management consulting. For more information, visit www.mercer.com.au Follow Mercer on Twitter @MercerAu
 This is equivalent to an income of about $100,000 in today’s dollars.
 Research indicates that this is the most common behaviour amongst retirees.