Grattan concludes that most Australians can look forward to a better living standard in retirement than they had while working. This conclusion is simply not true. Grattan has simplistically based its future modelling on a series of unrealistic assumptions that do not reflect the experiences of the average Australian.
Take for exampleGrattan’s assumption that we are single when we retire. In fact, 70 per cent of us have a partner, a factor crucial to assessing the amount of age pension received in retirement, particularly in the early years. In short, most people will not receive as much age pension as assumed by Grattan.
Grattan’s assumption that we will all work until the future pension eligibility age of 67 will also come as a shock to most Australians who retire a few years before the pension age and rely on their superannuation and other savings for income in these years.
And, what of the half of us who will live beyond 92 years, the age Grattan asserts we will no longer need retirement income, based on the average life expectancy for a 70-year-old in 2055? Grattan makes no allowance for regular income after that age.
For instance, Grattan bases its calculations on the average income received during the 25 years of retirement. Due to the wage indexation of the age pension, the real value of this income increases over time. This means that income in the early years of retirement is much lower than the figures quoted by Grattan.
It goes on to conclude that the median income worker will have a net replacement rate (that is, the rate at which retirement income replaces earnings or income prior to retirement) of 89 per cent, while the average full time income worker will have a net replacement rate of 78 per cent, well above the objective of 70 per cent. This is not a realistic scenario for most Australian households.
Mercer’s figures suggest that the median income workers will have a net replacement rate in the order of 68 per cent of their previous income, while the average full-time earner will have a net replacement rate of only 58 per cent. These figures hardly suggest that Australian retirees will have a better standard of living in retirement than while working, as asserted by Grattan.
These revised net replacement rates, which allow for the legislated increase in the Superannuation Guarantee to 12 per cent of earnings, provide a much more realistic picture of the future for most Australians entering the workforce today. While the median-income earner may be able to maintain their previous standard of living based on the 70 per cent benchmark, the average full-time earner will need to save additional funds, over and above compulsory superannuation, to maintain their previous standard of living throughout retirement.
One final point: Grattan suggests that future income from superannuation can be replaced by increased age pension payments, with savings to the Government. This ignores the very human need for retirees to sometimes access finances in case of unexpected events. Unforeseen incidents and costs do occur during the retirement years, including changes to the age pension. Given this, it is vital that retirees have access to some capital, which the age pension does not allow for. Superannuation and the age pension are not the same.
The forthcoming review is an opportunity to consider the wide range of situations faced by Australians as they approach retirement. We cannot assume that everyone is a home owner, is single, will retire at the pension age and will live to 92. Accepting that policy development must rely on future modelling, it needs to be more comprehensive than the single cameo used by Grattan.
The review must also consider the objectives of the whole retirement income system and not restrict itself to superannuation. We need to review the integration of the various pillars of financial security in retirement - the age pension, superannuation, voluntary saving and housing - so that the total system delivers improved outcomes for all Australians in a wide range of situations.
For more information download ‘A Review of Grattan’s Work on Super’.
Dr David Knox BA PhD FIAA
Senior Partner, Senior Actuary
David is a Senior Partner at Mercer and Senior Actuary for Australia. He is the National Leader for Research and the actuary to the Tasmanian and Western Australian public sector superannuation plans
He was the industry expert of the three-person team who conducted a review of Military Superannuation for the Australian Government and is the lead author of the Melbourne Mercer Global Pension Index which compares more than 30 retirement income systems around the world.
Before joining Mercer in 2005, David was at PricewaterhouseCoopers and prior to that was the Foundation Professor of Actuarial Studies at The University of Melbourne. In his two decades in academia, he acted as a consultant to a range of financial organisations, in both the private and public sectors, specialising in the superannuation and retirement incomes area. He has spoken and written widely in this area and has served on many Government and industry committees.
David was an independent Board member of Australian Prudential Regulation Authority from 1998 to 2003 and President of the Institute of Actuaries of Australia in 2000.
He has a Bachelor of Arts and Doctorate (which focussed on pensions) from Macquarie University and is a Fellow of the Actuaries Institute.
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