Retirement income adequacy revisited

Dr George Rothman and Cliff Bingham
Publication type


Conference Paper 04/1

Paper presented to the Twelfth Colloquium of Superannuation Researchers, University of New South Wales, 12-13 July 2004.

Most Australians’ incomes in retirement will be funded from a combination of superannuation savings, other private savings and a full or part rate Age Pension. In combination with the taxation system, these income sources will provide retirees with a particular level of spending capacity. Whether this spending capacity is ‘adequate’ has been the subject of considerable examination and debate over recent years, including notably the examination by a Senate Select Committee (Senate Select Committee, 2002) and by industry groups such as ASFA (ASFA, 2004).

Australia’s three pillared retirement income system is now well established. The three pillars comprise the means tested Age Pension and associated social security arrangements, compulsory employer superannuation contributions through the Superannuation Guarantee (SG) and voluntary private savings. The voluntary private savings component includes employer contributions that exceed SG requirements, voluntary member superannuation contributions and other forms of saving such as property, shares and other non-superannuation financial assets. The key policy objective of this system is to enable Australians to achieve a higher standard of living in retirement than would be possible from the publicly funded Age Pension alone. The World Bank and other international bodies have broadly endorsed Australia's approach to the provision of retirement incomes.

The superannuation system is generally regarded as strong, appropriately regulated and sound, with assets more than doubling over the past 7 years to their current level approaching $600 billion.

This paper aims to provide a systematic assessment of the adequacy of retirement incomes for a range of life experiences. It updates and extends work presented to the 1999 Colloquium (Tinnion and Rothman, 1999), with an emphasis on recent Government initiatives. Particular attention is given to the potential impact of the expanded co contribution policy presented in the 2004-05 Budget and to initiatives in the Retirement Income Statement which facilitate working longer, especially phasing down to retirement using part time work.

The first part of the paper considers the concepts used in assessing adequacy and methodological issues arising. The paper then presents hypothetical results for individuals receiving different lifetime levels of income and with different workforce patterns. The adequacy of retirement incomes arising from the full development of the Government’s SG arrangements is considered, together with adequacy issues for the ‘baby boomers’.

The RIMHYPO model of the Retirement and Income Modelling Unit (RIMU), Treasury was used to obtain the results presented in this paper. This model is as described in Tinnion and Rothman (1999) except for updating to include new policies such as the co contribution, changes to the pension asset test and new tax arrangements such as the Senior Australians Tax Offset.