Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 320

Why Grattan’s got it wrong on super

The Federal Treasurer recently announced a review of Australia’s retirement income system. While the scope and details of this review are not yet finalised, it is important at this early stage to challenge and correct some of the recent findings published by the Grattan Institute.

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.

A check on the assumptions

Take for example Grattan’s assumption that we are single when we retire. In fact, 70% 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.

Income replacement rates after work finishes

It concludes 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%, while the average full time income worker will have a net replacement rate of 78%, well above the objective of 70%. 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% of their previous income, while the average full-time earner will have a net replacement rate of only 58%. 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% 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% 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.

Importance of the retirement review

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.

 

Dr David Knox is a Senior Partner at Mercer. See www.mercer.com.au. This article is general information and not investment advice.

 

RELATED ARTICLES

Spending in retirement and the taper rate

Three strategies for retirees to spend their super

Why do most retirees spend less than the age pension?

banner

Most viewed in recent weeks

11 lessons from my lousy $50K profit on Afterpay

Afterpay listed at $1 in 2016 and traded recently at $70. How should an investor treat a small holding in a 70-bagger when each new level defies the experts? Should true believers let the profits run?

Which companies will do well in the turmoil of 2020?

While the shutting of Australia’s borders to international travellers and quarantine measures is damaging to certain sectors of the economy, it is not uniformly negative for all companies.

Why are we convinced 'this time it's different'?

Investors tend to overstate the impact on investments when something significant happens and they assume the future will be different. COVID-19 has been dramatic, but is it really that unusual?

Howard Marks' anatomy of an unexpected rally

Markets can swing quickly from optimism to pessimism, and while there are more positives now than in the bleak early days in March, the market is ignoring many negatives. Risk is not rewarded at these levels.

Welcome to Firstlinks Edition 363

The stock market continues to defy most equity pundits and push through fears of ongoing recession, job losses, business closures and a second virus wave. But if there's one factor in Australia specifically that is seriously underestimated, it is the loss of stimulus from population growth and immigration.

  • 25 June 2020

Welcome to Firstlinks Edition 364

Australian shares had their biggest annual loss for eight years in FY20 while Wall Street just had its best quarter since 1987. Whatever happens from here, we will look back in a couple of years and say the outcome was obvious. We will either say, "Of course markets rose as governments injected unlimited liquidity, medical science found treatments and the economy rebounded" or "Of course markets fell as businesses collapsed, millions of jobs were lost forever, the virus was resilient and consumers changed forever."

  • 1 July 2020

Latest Updates

Investment strategies

11 lessons from my lousy $50K profit on Afterpay

Afterpay listed at $1 in 2016 and traded recently at $70. How should an investor treat a small holding in a 70-bagger when each new level defies the experts? Should true believers let the profits run?

Shares

How did shares perform in FY20 and where to from here?

Compared with most years in the last decade, FY20 performed poorly due to the virus, and now dividends are falling. There are three things to watch this year as support policies are wound back.

Shares

Which companies will do well in the turmoil of 2020?

While the shutting of Australia’s borders to international travellers and quarantine measures is damaging to certain sectors of the economy, it is not uniformly negative for all companies.

Investment strategies

Six types of big data are unlocking real insights

Data science is increasingly embedded into the research process of investment teams with the resources to exploit new technologies. The way the data is integrated and interpreted is crucial.

Investing

Will value stocks benefit from the market's inflection point?

As the world gradually emerges from the aftermath of COVID-19, many are questioning if now is value’s time to shine? How can value stocks deliver outperformance in today’s environment?

Fixed interest

Less than 1% for 100 years: watch the price risk on long bonds

Do you think investors can only lose heavily on bonds if the credit defaults? When bondholders accept 0.88% for 100 years, there is great potential for serious pain somewhere along the journey.

Economy

Five industries profoundly changed by COVID-19

Even when the virus is finally contained, the business landscape will look very different. A critical issue is the ability of consumers to find product substitutes. Many people like what they find.

Exchange traded products

Wirecard shows not all ethical ETFs pass the smell test

The strictness of screening processes can vary between ethical ETFs, and many rely on indices without additional oversight. This can result in stock inclusions that may not pass the ethical ‘smell test’.

Sponsors

Alliances

© 2020 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use.
Any general advice or class service prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, has been prepared by without reference to your objectives, financial situation or needs. Refer to our Financial Services Guide (FSG) for more information. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.