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Compulsory super not enough to avoid full pension

The extensive coverage of the government’s superannuation changes is disguising the major issues facing us in the future.

According to the ABS, there were 3 million Australians aged 65 or over in 2015. The National Commission of Audit statistics show that 2.4 million people claimed the age pension in 2014, with over half of them receiving the full pension. By 2050, the ABS figures indicate there will be about 8 million Australians aged 65 and over.

It is widely assumed that most of these people will be self-supporting because of the super guarantee charge (SGC). I would suggest this may be extremely optimistic.

Reality at the coalface

I am the listed financial adviser on a number of workplace superannuation plans. Five of them have a relatively young workforce where the average member age is 30. The average super balance is about $30,000 and the average salary is around $60,000. The 9.5% SGC creates $5,700 of annual super contributions. If their salary rises in line with CPI, and the SGC percentage doesn’t change and they do not make any additional contributions, how much super will they have by 2050 if we assume an average annual return of 7.5% (which is optimistic, and it’s likely to be far less)?

According to the Colonial First State superannuation calculator, a person with this background (let’s call him Joe) will accumulate $343,000 in today’s dollars in 2050 when he is age 63. Will Joe carry on working? An ABS study in 2012–13 (the Multipurpose Household Survey) found that the average age at retirement for recent retirees (those who had retired in the previous five years) was 61.5 years. The study also found that the average intended retirement age for current workers was 63.4.

My experience is that until their late 50s, most people envisage working to 65 and beyond. By the time they reach 60, practically everybody is counting the days to retirement. At that age, hardly any of them were still in well paid, full-time jobs. Consequently, finishing full-time work at 63 is a realistic outcome.

Still rely on the full age pension

Let’s say Joe is married to Josephine who is the same age. It is unlikely that Josephine will have accumulated the same amount of super as Joe. According to the Workplace Gender Equality Agency, in 2015 the average woman retired with 53% less super than the average male. ABS statistics confirm these percentages. On this basis Joe and Josephine will have a combined balance of about $500,000 in super at age 63.

Let’s assume they live in their own home, have a small amount of cash and no other assets. The Association of Superannuation Funds of Australia (ASFA) reckons that a couple needs $59,160 a year for a comfortable lifestyle. Joe and Josephine can’t claim the age pension until they are 67 so if they don’t have any non-super investments, part-time work and drawing down on their super are the only options for the four years after retirement. If we assume they can both find part-time work earning $20,000 a year (on which they will pay no tax), they need to draw down $10,000 a year each from their super to achieve the ASFA target.

If they do this, they could still have $500,000 super by the time they fully retire aged 67. At this stage, they will receive about $15,320 a year in age pension based on the new assets test rules scheduled for introduction on 1 January 2017. If they fund the remaining $43,840 a year ASFA target from their super, their age pension will steadily rise until they are about 76 when they qualify for the full age pension of $31,200 a year.

The only way that Joe and Josephine will not be a burden on the state and draw a full pension is if they make salary sacrifice contributions or accumulate assets outside super. The number of 30-year-olds that salary sacrifice is virtually zero. Generally speaking, they have much more debt than previous generations. They start work later, get married later, have children later, and buy a home later. The result is that as they progress through life, cash flow gets less and less.

In my experience, hardly any households comprising two workers, children and a mortgage have a spare dollar. Loan repayments, child care costs and spending patterns suck it all up. In this environment, it is difficult to see how they can make significant contributions to super to supplement the SGC. Worse still, many households are already dependent on some kind of lump sum injection to pay off their debts when they retire.

When are politicians going to wake up to the fact that it is going to be impossible for the budget to finance 8 million Joes and Josephines to receive the full age pension. The benefits of superannuation need to be explained and marketed to a disbelieving nation. The continuous negative publicity is harmful, and it will not end well.


Rick Cosier is a financial adviser and Principal of Healthy Finances Ltd. This article is general information and does not consider the circumstances of any individual.


May 24, 2019

To Gruba, I respectfully suggest it is up to individuals to create spare dollars. It is your future and you probably won't die young.

There are always lots of things we can easily convince ourselves we deserve, because someone else we perceive as below us is conspicuously enjoying them. Some of the smartest people work in advertising.

I live in a low socioeconomic area, but am continually amazed at the level of patronage in the cafes and restaurants, not to mention the car dealerships and housebuilders.

I was taught by parental example to work hard and live frugally. I bought most of my houses with cash. I did negatively gear a couple when interest rates and marginal tax rates made that sensible.

Over the years this compounds.

The purchase price and depreciation on second hand cars, lower than top-of-the-line phones and computers is so much lower than new cars and latest generation electronics.

May 11, 2018

The government sets an inflation rate of 2-3%, which probably has a lot of benefits, but erodes our retirement nest eggs.

I wonder when taking in the disadvantages of forcing more and more people onto the pension here the balnce lies of setting an inflation rate target, is it going to help or hinder the government

K Gruba
September 23, 2016

Financial literacy is all well and good but as the article mentions, there are no spare dollars to put into super.

I've salary sacrificed a little each year since my early 30's but even that won't touch the sides.

So what do we do? Not buy houses, have families etc?

The entire system is due for an overhaul. But that takes courage and fortitude that doesn't exist in the current system.

David Williams
September 15, 2016

Rick is right but its more than just the money. We are not responding fast enough or smart enough to the steady increases in longevity taking place at all socioeconomic levels.

We must improve personal longevity awareness now so people can see their own role in the social changes which will enable us to manage the future better.

Working longer, taking more responsibility for personal health and welfare, more community and family supported aged care, realistic expectations about intergenerational wealth transfer and sane end of life management are just some of the factors to be managed better to complement our financial responses.

We have made some progress with financial literacy. Improving longevity awareness is a much bigger challenge - but with much bigger benefits.

September 15, 2016

yep, they are selfish and its all short sighted. The policy will simply force more people onto the pension to grab some money quickly now.

Just set an overall limit , say $1.6/2.0 m for an individual (for all super...not just pension mode), double it for a couple or pick a sensible number (e.g.$2.1/2.5m) which gives $100k pa for life and get out of the road!

That way you can put the money in when your own life cycle allows (early or late) with big concessional limit ($50K pa)...BUT DO NOT allow people to have more than the limit in the tax effective 15% zone as why should lower paid people subsidise others once they are very comfortable (say $100+ k pa for a couple) and don't forget you can then have heaps outside super before paying tax, so seriously rich are still really well off.

Its all simple if the aim is to get people off the pension rather than try and grab some money now because they are too gutless to cut spending on people who don't want to contribute to society (save money for people who can't contribute). they are creep ing the concessional limit at the silly $25 k pa because its the one they think will raise money...but people will just change their investments

Susan Long
September 15, 2016

Yes, when are they going to wake up?! I despair of the time and rhetoric which is wasted on this subject. When are they going to explain how much needs to be invested to provide the aged pension, and how much needs to be invested if a higher income is required in retirement. There is much too much emphasis even now, on encouraging people to arrange their investments in such a way that they will still qualify for a part pension and the perks that go with it - and note that fully self retired pensioners do not get any of those concessions. When are people going to be really encouraged to provide for themselves without being called 'rich' and 'having rorted the system'? It is good that the really rich can no longer put millions and millions into super but there are so many anomalies that need to be sorted out for the vast majority of people. Many cannot put extra super away until they are near retirement age. Why not give each person an upper limit of $1.6 million that they can put away over their lifetime and allow them to do it when they can, not this ridiculous annual limit complicated mess? And why take away from current people who would still like to top up their accounts between the ages of 65-74 - this was going to be allowed but has now been taken away because of the changes to the non-concessional contribution limits . If these people have not reached the $1.6 million limit why penalise them? What a mess! And the people creating the mess will have such terrific pensions that they will not have to worry about global financial crises because their pensions will be protected. The ordinary person is not. No wonder politicians are not regarded very highly!


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