The results presented in this paper are based on a number of assumptions about factors such as earnings rates, rates of wages growth, inflation, retirement age and life expectancy4.
A sensitivity analysis was performed to evaluate the impact of reducing the assumed pre-tax investment return by 1 percentage point (to a 6% per annum nominal return), while another was performed to evaluate the impact of a 0.5 percentage point increase in inflation (up to 3% per annum). These impacts were tested for the 30 years of full time work case, using current income levels of $40,000 (capturing the impact of the government co-contribution) and $150,000 (capturing the impact of abolishing the superannuation surcharge).
As this paper highlights proportional improvements against a base SG case, a reduction in the underlying investment earnings rate for both base and additional saving has little to no impact on the percentage improvements in savings at retirement that can be achieved (although this may vary a little depending on whether the reduction in investment returns is attributable to lower dividends, capital gains or fixed interest returns). The percentage improvements in annual retirement expenditure typically decline by around a half to one percentage point, reflecting the fact that a lower percentage of the retiree’s expenditure is now being provided by their own saving and a greater percentage by the age pension, which of course does not grow (and may fall) in value when private saving increases.
Again, due to the percentage improvement nature of the analysis, adjustments to a parameter that affects both the base saving and any additional saving, such as inflation, will have minimal to no impact on the percentage improvements in savings at retirement that can be achieved (although this may vary a little if inflation were to fluctuate significantly over a member’s working life). The percentage improvements in annual retirement expenditure are very similar for the $40,000 income case, but can increase by over 1 percentage point for the $150,000 case. The reason for this is that the thresholds for the means tests (both income and asset) for the aged pension are indexed by CPI, and therefore a greater rate of indexation increases the thresholds applicable during retirement. This leads to increased receipt of aged pension as the member draws down upon their superannuation assets. It does not have the same significant impact upon the $40,000 income case, as with the utilisation of a 50% asset test exempt pension, this person is not projected to exceed the asset test threshold under either a 2.5% or a 3% inflation assumption.
Overall the results are quite robust to plausible changes in the parameters used.
4 All hypothetical cases presented assume a 7% per annum nominal rate of earnings (after fees but before tax), wage growth of 4% per annum and inflation of 2.5% per annum.