The Grattan Institute says most Australians will have enough money in retirement, and so super contributions don’t need to be increased – while recommending tweaking the Age Pension to make it more generous, but potentially raising the pension age to 70.
The conventional wisdom on Australian retirement savings is wrong says the Grattan Institute, in its report Money in retirement: More than enough. Instead of not having enough saved for retirement, the “vast majority” of retirees will be comfortable in retirement under current policy settings.
The report accuses the financial services industry “fear factory” of encouraging the belief of insufficient super savings.
The report points to a NAB survey indicating that most Australians fear they won’t have enough saved for retirement – with around 30% thinking they will have either ‘enough’ or ‘more than enough’.
“These pessimistic attitudes reflect the repeated messaging – primarily from the financial services industry – that Australians won’t have enough for their retirement,” says the report.
The Institute says that many of these claims are based on the “unrealistic” ASFA (Association of Superannuation Funds of Australia) Retirement Standard.
“ASFA’s ‘comfortable’ standard would support an affluent lifestyle more luxurious than most Australians currently have during their working lives. And it misleadingly suggests that anyone with fewer resources will have an ‘uncomfortable’ retirement.”
Grattan calculates that current retirees and existing and new workers can all expect to reach at least a 70% replacement rate of their working income in retirement, with the average worker reaching a 91% replacement rate. A 70% replacement rate is used by the OECD, among others.
“The poorest 40 per cent of workers can expect a pay rise in retirement, because the Age Pension and the income they get from compulsory retirement savings will be higher than the wage they receive during their working life. ”
“Our findings contradict the claims of many in the superannuation industry that Australians are not saving enough for their retirement. Such claims are based on research that overlooks three important issues.”
These issues are: assuming that retirement income should keep up with wages growth instead of inflation, comparing to the ‘comfortable’ ASFA Retirement Standard, and ignoring non-super savings.
Renters at risk of poverty in retirement
However the retirement income system is not working for everyone, according to the Institute, in particularly renters.
“Of course, retirement incomes are not adequate for everyone. Many senior Australians who do not own their own home and have to rent in the private market are at significant risk of poverty. This problem will be worse for future retirees experiencing financial stress in retirement. because younger generations on lower incomes are less likely to own their own home than their parents were at the same age. “
Recommendations: reduce super, boost pension
Given the findings of the report, the recommendations are broadly to reduce savings through superannuation and increase the Age Pension and assistance for renters.
The Grattan Institute recommends that increasing the Super Guarantee rate from 9.5% to 12% be abandoned, with Commonwealth Rent Assistance boosted – along with the Age Pension, by reducing the asset test taper rate.
The Institute also reiterates earlier recommendations, including limiting concessional super contributions to $11,000 a year, a lifetime cap on non-concessional contribution, and including homes in the Age Pension asset test above a threshold. The Productivity Commission should also investigate raising the Age Pension age to 70 and the adequacy of retirement incomes.
Modelling is “unrealistic”, says Industry Super Australia
Industry Super Australia says the claim that a 9.5% SG rate will deliver adequate retirement incomes in the future is “deeply flawed”.
Industry Super Special Retirement Income Adviser Phil Gallagher – former head of the Treasury’s Retirement Income Modelling unit – said Grattan’s modelling was “dubious” and the assumptions “unrealistic and unrepresentative of most Australian employees”.
He said that “three key flaws in the modelling” are assuming that everyone can make voluntary super contributions, assuming an uninterrupted 37 year working life and assuming that retirement living standards shouldn’t keep up with those in the broader community.
“Across all age groups just 12.2% of employees with super make additional concessional contributions but Grattan appear to have assumed that everyone does,” he said.
“This loads up contributions and inflates retirement balances significantly. The methodology adopted appears to skew up contributions for lower earners in particular, resulting in retirement balance projections that are potentially inflated by as much as 45%.”
“There are many other problems including assuming an unbroken career which is not at all representative for women, and setting retirement benchmarks that are not pegged to community living standards. This lowers the benchmark making surpassing it easier to achieve.”
But Industry Super Australia does agree with the recommendations around the Age Pension.
“Unprecedented attack on the retirement aspirations”: ASFA
ASFA has responded by calling the report an “unprecedented attack on the retirement aspirations of ordinary Australians”.
“This report is about two Australias, where the well-heeled high earners have a fully funded retirement and the rest rely on the State,” said ASFA CEO Dr Martin Fahy.
“The Grattan Institute wants to dismantle our world class retirement funding system and replace it with a model that has two thirds of the population relying on the Age Pension,” he said.
ASFA said that as longevity increased, along with health and age care costs, the Grattan Institute’s proposal to stop increases to the Super Guarantee rate would shift the cost of paying for retirement to future taxpayers.
“Superannuation is a long-term savings vehicle and provides a solution for the problems of the decades ahead, not just now. The ratio of workers to retirees will halve from around 4.5 people today to 2.7 people by 2055. Without superannuation, the reality is that retirement will be unaffordable in 30 years’ time,” said ASFA.
“Grattan’s solution is for more Australians to rely on the State and for living standards to substantially decline in retirement.”
“The fact is that the great bulk of Australians want and need a retirement lifestyle in line with the ASFA comfortable level. That is why the ASFA comfortable standard has resonated with the Australian population. Spending $43,000 a year for a single person and $60,600 a year for a couple, does not make you rich.”
Dr Fahy said: “The Grattan analysis in effect wants people in retirement not to have heating in winter, not to take vacations, to get rid of the car, and skimp on prescriptions and other out-of-pocket health care costs.”