In the projection process many judgements need to be made on future participation rates, retirement ages, future expected returns of superannuation funds, future levels of voluntary contributions, saving outside superannuation, future tax scales, the drawdown patterns of the retired and so on. There is also sensitivity to government policies such as the co-contribution, and the Better Super policies.
Some parameter variations have immediate or almost immediate effect. The drawdown rates on investment are a good example of this. Reducing drawdown over the course of retirement by a plausible amount brings an immediate reduction of replacement rates of the order of 5 per cent with the impact decreasing slightly over time. Conversely if drawdowns were higher than in the base case, replacement rates as measured in this paper would rise. Similarly, government policies such as the Better Super have immediate effect, as can be seen on the earlier charts where 2007 (representing 2007-08) replacement rates are noticeably higher than in 2006.
Alternatively, some parameter variations may have substantial impact only after a substantial period of time. Changing investment returns in our modelling to around 1 percentage point higher than the base case has limited impact initially, but much higher impact after say, a 30 years period, after which retirees (in accumulation funds) will enjoy much higher superannuation balances and consequentially higher retirement incomes. Ten years of higher returns generates about 4% higher replacement rates while 30 years of higher returns increases projected replacement rates by about 13%. Similarly higher voluntary superannuation contributions take a long time to show up in an aggregate analysis.
The replacement rate measure chosen may also impact on the value calculated. Rather than comparing 5 years after and before retirement, a 10 year comparison after to before was assessed. There was very little difference in the replacement rates calculated, with the 10 year calculation proving slightly higher over the longer term (as expected).