Most Australians will struggle to save enough for a comfortable retirement or even to meet their aged care costs, according to research commissioned by the CSRI and carried out by Phil Gallagher of Industry Super Australia, formerly the retirement income modeler at Federal Treasury for 21 years.
“These results are a wake-up call to policymakers,” said CSRI founder and executive director Patricia Pascuzzo of the research. “Even after contributing to superannuation at 12% for most of their working life, most retirees will still not meet the comfortable retirement benchmarks.”
The report comes less than a month before the CSRI brings together political, policy, academic, industry and community leaders in Canberra for a forum aimed at building consensus on ways to achieve a more sustainable retirement income system.
The CSRI identifies a number of options for improving retirement income adequacy. These include making extra personal contributions, improving access to secure income streams in retirement, and making use of other capital including home equity. However, the best approach is likely to use a combination of these options.
Another way of measuring adequacy is to look at potential spending in retirement compared to that during people’s working lives. Commonly used targets are 65 or 70 per cent of pre-retirement levels.
The analysis found that to meet this replacement rate, people on median full-time wages and above would need to make voluntary contributions above 12%. The research is based on the assumption that the superannuation guarantee will rise to 12% by 2025 from the current rate of 9.5%.
For those who don’t make voluntary contributions, only men and couples on 1.5 times the average wage are likely to achieve a wage-indexed comfortable income benchmark through their compulsory super payments, Gallagher’s analysis found.
For women, whose careers are often interrupted by child rearing, the situation is even tougher. The analysis shows they would need to earn twice the average full-time wage to achieve the comfortable income benchmark with only the mandated super contributions.
Men who receive the average wage or less and women on twice the average wage or less would need to make extra contributions to their super to have a comfortable retirement.
Separate research early this year by the Australian National University revealed more than 20% of pre-retirees believe they won’t have enough to retire adequately. It also shows 24% men and 34% of women are concerned they may become a burden on their families.
Ms Pascuzzo said if people don’t have enough for a comfortable retirement, they also will fall short of what they need for aged-care services.
The Association of Superannuation Funds of Australia (ASFA) defines a comfortable annual income for single retirees as $43,062, which they estimate can be achieved with superannuation savings of $545,000 and the age pension. For couples, it defines a comfortable income as $59,160, which they estimate can be obtained with super of $640,000.
Gallagher’s analysis found most now entering the labour force will fall short of those targets if they rely on the compulsory super and age pension alone. And the majority of the population will require either a full or part age pension, making the age pension setting crucial for future retirement income.
This all provides particular challenges to the federal government as it seeks to fix the budget. Increasing longevity only compounds the problem.
Ms Pascuzzo said against this background it seems inevitable that budget sustainability will necessitate making more effective use of all of people’s household assets to ensure they have adequate retirement living standards and can afford aged care.
“We need to take a holistic approach to all of these issues – super, the age pension, aged care, housing, workforce participation and gender inequity – if Australians are to feel confident about their future retirement,” she said.
These and other issues will be addressed at the CSRI’s Leadership Forum in Canberra on 12-13 October. The forum will feature presentations by Financial Systems Inquiry Head David Murray, Financial Services Minister Kelly O’Dwyer and her opposition counterpart, Senator Katy Gallagher, alongside key industry, academic and community leaders.
Among the specific policy issues to be considered are:
• Should the phased increase in the compulsory contribution rate to 12% be accelerated?
• How can we make more effective use of superannuation assets at retirement through income stream products?
• Given most people’s biggest asset is their house, should we encourage or make it easier for people to access the equity in their homes to supplement their incomes in retirement? And how would this affect access to aged care?
• Should we consider options to encourage older Australians to remain engaged in the labour market in those cases when they are able to continue in paid work.
• How do we address the gap in superannuation between men and women?