Most analyses of retirement income adequacy in Australia are of a hypothetical nature, projecting, for example, the expected replacement rate for an individual of given income and savings rate retiring in say, 35 years time. Aggregate analyses such as published here add value by covering the range of labour force experiences including part time work, differing retirement ages, differing total superannuation contribution rates by age, gender and income and the contribution of savings outside superannuation. The projected evolution of the retirement income system and changing replacement rates over time is also explicitly shown.
The analysis in this paper based on the RIMGROUP model finds that replacement rates are likely to be higher than projected in the author’s analysis in 1999 using an earlier version of RIMGROUP. Longevity has increased faster than previously expected but earnings from superannuation funds have been very strong and a raft of government policies, including the co-contribution and abolition of the surcharge, has acted to improve retirement incomes. Starting from moderate levels of just over 50% currently, replacement rates will be lifted by the Better Super reforms (including improvements for those already retired) and the maturing of the SG arrangements. Replacement rates are projected to continue to rise strongly reaching levels of 70% or more in the medium term (ten years or so), levels that are usually judged adequate by most observers. Over the course of 20 to 25 years the projections indicate replacement rates for most groups of 80 per cent or more. None of these replacement rates assume any contribution to spending in retirement from reverse mortgages or part time paid work while primarily retired.
In the projection processes many judgements need to be made on future participation rates, retirement ages, future returns of superannuation funds, future levels of voluntary contributions, saving outside superannuation, future tax scales, the drawdown patterns of the retired and so on. Taken together with required simplifications to make the RIMGROUP model a manageable size, it should be clear that the projections are not unique or precise and have some necessary uncertainty around them. Some indicators of the scale of this uncertainty have been addressed in the sensitivity section.
Notwithstanding such uncertainty, based on the analysis in this paper, once the SG arrangements are reasonably mature, prospects have been greatly enhanced for future cohorts of retirees and there appears to be no aggregate savings shortfall or saving gap. Over the medium to longer term, replacement rates for women are projected to exceed those for men (although absolute retirement incomes will remain lower). Higher decile cohorts, where the SG alone would not be enough, are seen to be making sufficient saving voluntarily, both within and outside superannuation, to provide similar (sometimes higher) replacement rates to those of lower deciles.
As these are strong conclusions, the author has sought to understand why this conclusion is so different to IFSA’s position that there remains a substantial savings gap of around $450 billion dollars. The paper argues that the difference primarily reflects a major understatement in the Rice-Walker /IFSA projections of the significance and value of the government age pension - by round $700 billion dollars. Once such an adjustment is made to the R-W analysis there appears to be no aggregate savings gap and depending on assumptions, perhaps a small surplus.
As noted above, there is no unique definition of adequacy and numerous (plausible) assumptions have been made to arrive at these conclusions. Even where the aggregate picture is positive for future cohorts, individual circumstances will vary and different replacement rates will be appropriate for different individuals. Life expectancies continue to exceed past projections, allocated pensions are subject to market variations, and individuals may wish to consider additional savings (or delaying retirement) if they want their standard of living in retirement to keep pace with improvements in broader Australian living standards. Government policy innovations over recent years such as the co-contribution and Better Super reforms provide strong incentives to save more and to participate in the workforce for longer.