New Treasury stochastic modelling of Australian retirement incomes

Brendan Price and Albert Suryadi
Publication type


Paper presented to the Institute of Actuaries of Australia Biennial Convention, Sydney, 10 - 13 April 2011.

At an Institute of Actuaries of Australia seminar in November 2009, Colin Grenfell challenged Treasury to produce a stochastic version of its retirement income projection model, RIMHYPO. This paper reports on the methodology and results from making this improvement.

RIMHYPO (Retirement Income Model-Hypothetical) models an individual or couple's superannuation and disposable income throughout their working life and retirement. It covers the relevant superannuation, personal tax and social security rules and allows for a broad range of financial products in retirement. The key wages and investment growth parameters are fixed by users.

In the new version of the model, stochastic volatility is introduced to three key parameters: inflation, wage growth and investment returns. This is done using a Wilkie-type model, which captures cyclical behaviour as well as correlation between these parameters, recalibrated to Australian data by Butt and Deng (2010). Some transparent adjustments are made to improve consistency with other estimates.

We report the resulting spread of outcomes such as replacement rates, retirement payouts, and average retirement expenditure. This is contrasted with the deterministic model’s results. The model gives Treasury greater scope for policy analysis. For example, the paper investigates the use of 'expected years of ruin' as a metric for deciding portfolio allocation in the presence of the Age Pension.