Attachment A

RIMGROUP is a comprehensive cohort projection model of the Australian population which starts with a population and labour force model, tracks the accumulation of superannuation in a specified set of account types, estimates non-superannuation savings, and calculates tax payments and expenditures, social security payments including pensions and the generation of other retirement incomes.

These projections are done for each year of the projection period separately for each birthyear gender decile cohort. The model projections begin in July 2000 and incorporate government policies up to and including the Better Super reforms which mostly commenced on 1 July 2007. Aggregate modelling based on earlier versions of RIMGROUP has been of policy significance, for instance, in Gallagher (1995) and Rothman (1997).

Some more details of the RIMGROUP model are given in Rothman (1997) and Gallagher (1995).

Strengths and Limitations

The strengths of RIMGROUP lie in:

• The major new parameter research underlying the model in relation to many distributional aspects of superannuation, non-superannuation savings, labour force dynamics and retirement documented in earlier papers (including Bacon (1995)). Research has been carried out on superannuation sectors not previously extensively researched, such as the public sector, self employed and rollover funds. An extensive set of decrements have also been researched to account for losses on job change, disability, hardship and death as well as retirement. A number of significant new data sets have been created as part of this research. For the current projections RIMGROUP has been benchmarked to the latest available ABS distributional data.
• The comprehensiveness of the model. This includes the integration into RIMGROUP of a full population model, labour force projection model, the endogenous calculation of GDP, an extensive study of retirement, coverage of saving other than superannuation and wide coverage of government payments to beneficiaries and pensioners, together with modelling of taxation, tax expenditures, and national savings.
• The detail incorporated into the model, particularly the strong distributional framework which distinguishes by superannuation account, age, income and gender. Taxation and government payments are also coded in considerable detail. A wide range of distributional results are available as well as key aggregates.
• The very long time frame, to 2060 if required and appropriate.
• The facility to make changes in all underlying parameters and assumptions including the ability to make direct changes through a user friendly interface to the most frequently changed policy and economic parameter settings.

The principal limitations of RIMGROUP lie in:

• In the essential nature of a group model. The model is a very large one incorporating 99,600 records, with a large number of variables calculated for each record and with subgroups formed for those with different superannuation accounts, different ages of retirement and so on. Nonetheless, it is not an individually based microsimulation and there is some necessary ‘pooling’ of work experiences, account balances, income levels and so on. For example, unemployment is viewed as a temporary phenomenon and superannuation accumulation is shared by those working and (temporarily) not working²⁸. Similarly migrants are pooled with others in the model and may dilute the assets of the group they join;
• In macroeconomic linkages being externally imposed rather than endogenous to the model. For example unemployment is exogenously supplied and does not respond automatically to the build up of superannuation or changing retirement rates or other aspects of the economy;
• The assets in the model do not include the unfunded liabilities of public sector DB schemes, even where it can be argued that specified non-superannuation assets of the Commonwealth or States back the liabilities. However the retirement incomes paid from such schemes are included; and
• Some data which continue to be unavailable in the detail needed. The extensive and demanding data base continues to need maintenance and fine tuning.

Demography and Labour Force

The base demographic scenario is essentially identical with middle scenario as published by the ABS. The labour force scenarios have been generated specifically by RIMAU.

Retirement

Retirement can be a complicated process whereby full-time workers may pass through a period of part-time work or become a discouraged job seeker before leaving the work force permanently. Operationally RIMGROUP is based on the concept of full retirement, defined as a person leaving the workforce and not re–entering it. Despite some considerable data difficulties, retirement has been researched in detail by the RIMA Unit, and a sub-model called RETMOD constructed which provides annual projections of full retirement by gender, age and income decile.

Based on these retirement rates, RIMGROUP calculates the number of people retiring each year from each account type and the aggregate value and components of their retirement benefits categorised by the type of retirement (disability or age).

Additional to the basic grouping by gender age and income, 12 retirement subgroups are created depending on type of superannuation coverage and age range at retirement, as there are usually significant differences in retirement income and taxation for such subgroups.

Retirement benefits are then allocated for each sub-group of retirees to six destinations. These are:

• Eligible Termination Payments (ETPs) dissipated with no impact on retirement income;
• ETPs invested in interest bearing accounts;
• ETPs invested in rollover accounts for those under 65;
• ETPs invested in shares or other assets with likely long term capital gains;
• Monies rolled over into allocated pension accounts; and
• Benefits taken as superannuation pensions or monies rolled over to a complying lifetime annuity.

The allocation can be specified by the user.

Numbers of Social security recipients and payments to them are projected by the model both in relation to unemployment and sickness benefits during working life and age and disability pensions upon retirement. Thresholds and withdrawal levels associated with Social Security income and asset tests are modelled in detail, with the user being able to specify the type of indexation to be applied to the tests and to base levels of payment.

Parameter Structure

Parameters which vary by many of the attributes of gender, age, decile and account type are generated as files in a standard format and input through a parameter integration program (which also sets up the basic 99,600 records referred to above). It is expected that these parameters will be varied only infrequently by ‘expert’ users. Many other parameters of an economic or policy significant nature can be varied readily through a user friendly interface which handles variables which vary by time and/or account type. Examples of variables that can be input through the interface include the returns of various superannuation accounts and retirement investments, rates of compulsory superannuation contributions, inflation, rates of increase in average weekly earnings, various social security and taxation rates and the mode of indexation to apply to them.

Base Parameter Settings

These parameters are adjusted to historical rates, with a gradual transition over the forward estimates period to the following long term settings:

• 2.5 per cent per annum for inflation;
• 4.3 per cent per annum for growth of average full-time wages for a person of given age and gender²⁹;
• 6 per 
  cent per annum for the long term bond rate;
• 7 per cent per annum for the average pre-tax return of superannuation funds (after expenses of managing funds but before tax and administrative expenses are deducted separately on a per capita basis); and
• effective tax rates on the earnings of superannuation funds of 3 per cent for defined benefit funds, 4 per cent for established defined contribution funds, 5 per cent for SG funds and 10 per cent for rollover funds.

In RIMGROUP we differentiate between the annual returns for defined benefit funds, defined contribution funds, industry funds and rollover funds. Currently these differences are set at 0.5 - 1.5 percentage points, with the defined benefit schemes having the highest rates and rollovers the lowest.

²⁸ But those permanently unable to work through disability are distinguished and treated separately.

²⁹ The actual wage outcome is impacted by demographic and structural change such as the increasing proportion of work which is part time.