For most Australians income in retirement will be funded from a combination of superannuation savings, other private savings and a full or part‑rate Age Pension. Some will choose also to draw down on the equity in their home and perhaps to obtain some paid employment while primarily retired. 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 a number of years, including notably the examination by a Senate Select Committee (Senate Select Committee, 2002) and by industry groups such as ASFA (ASFA, 2004).
Over recent years many policies of government have modified both the superannuation and taxation arrangements for senior Australians in ways that have raised retirement incomes, both for those that have only compulsory levels of superannuation (the Superannuation Guarantee) and particularly for those who choose to save more within superannuation. Investment returns for superannuation funds have also been high, above long term averages. But some other trends, such as continuing increases in longevity, will tend to reduce average annual retirement incomes.
The superannuation system is almost universally regarded as strong, appropriately regulated and sound, with total assets more than doubling over the past 5 years to their current level of over $1000 billion (around the level of Australia’s current GDP). Government policy changes, notably the co-contribution, abolition of the surcharge and the Better Super reforms have been welcomed and well received. Nonetheless the debate on adequacy continues1.
While there is a significant body of published material on retirement income adequacy in Australia, most of this is of a hypothetical or cameo nature, projecting, for example, the expected replacement rate for an individual of given income and savings rate retiring in say 35 years time. The aggregate analyses published in this paper use a comprehensive cohort based model to cover 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 evolution of the retirement income system and changing replacement rates over time is explicitly demonstrated. The estimates provided an update of those in a 1999 Colloquium paper by the author (and Julie Tinnion).
The paper will review various measures of adequacy before presenting new estimates of aggregate adequacy for both the whole Australian population and for subsets by gender and income. The analysis is based on the version of RIMGROUP which has been used for relevant projections of the 2007 Intergenerational Report and incorporates the Better Super Reforms.
The estimates of this paper challenge whether a substantial aggregate savings gap actually exists over the longer term such as is claimed by the Investment and Financial Services Association (IFSA). It also directly considers and questions some aspects of the IFSA modelling.
1 Adequacy is one of the Terms of reference of a current inquiry by the Senate Community Affairs Committee into the cost of living pressures on older Australians.