The Grattan Institute has strongly argued over the last two years that the Superannuation Guarantee rate should not increase from the current level of 9.5 per cent to 12 per cent.
At Investment Magazine’s recent Retirement Conference, I argued that Grattan’s research results – which suggest that most Australian workers can expect to receive a retirement income of at least 70 per cent of their pre-retirement earnings – were misleading and did not represent the complete picture.
However, before getting into the details, let’s note that Grattan and Mercer agree that Australia’s retirement income system has three pillars; namely the means-tested age pension, the compulsory Superannuation Guarantee and voluntary saving, made within and outside super.
We also agree that a reasonable target for the level of retirement income is about 70 per cent of an individual’s after-tax income received before retirement.
However, that is where the agreement ends. Let’s consider three major issues with the Grattan approach.
First, they assume that everyone will work until age 67, the new pension eligibility age. That is not reality. Most people retire between ages 60 and 67 for a variety of reasons. In some cases, it may be voluntary, but in most cases, it is not. It may be due to retrenchment or the fact that their body is simply worn out. In other instances, it may be to care for an ageing parent or partner or to provide grandparent support so that other family members may stay in the workforce.
Australia does not have a retirement age. Superannuation benefits are available from the preservation age, which is increasing to age 60, seven years before the pension age. Whilst the disability support pension and Newstart allowance may be available to some retirees, this level of support is limited. Hence, the overall retirement income system needs to recognise that superannuation provides many Australians with financial support prior to the pension age. It is unrealistic to assume this will not continue.
Second, Grattan assumes that retirement income should increase with price inflation. OK, but they also recognise the age pension will continue to increase with wages, which normally rise faster than prices. The result of this modelling is that the real value of the retiree’s income gradually increases from age 67 to age 92, where the model stops.
Grattan averages the level of real income over these 25 years and shows that most individuals will receive an average replacement rate of more than 70 per cent during retirement. However, it is well below 70 per cent for most income earners in the early years of retirement and then increases later. Indeed the OECD calculates that the net replacement for an average income earner in the first year of retirement is only 39 per cent.
Third, the Grattan results are based on one set of assumptions with limited sensitivity testing. As with all modelling about the future, we know assumptions will not be borne out. After all, we are discussing a period of more than 60 years.
Given that all the risks rest with the individual in the Australian system, it would be much more useful to show a distribution of results that allow for a range of economic circumstances as well as different labour market experiences, households and life expectancies.
In summary, a long-term model based on one set of assumptions should not determine the most appropriate SG rate over the long term. Rather, we need to consider a range of possible outcomes as well as several cameos that reflect the diverse experiences of the Australian community.
In addition, COVID-19 has changed our society and will affect our long-term economic assumptions. Investment returns are likely to be lower for a period and the federal Government budget will be under pressure for many years to come. This is likely to lead to increased taxation (including on superannuation) and/or stronger means testing on Government benefits, including the age pension.
These outcomes will adversely affect the level of retirement income in future years.
Hence, now is not the time to change course. Rather, the planned increase to 12 per cent should continue so that more Australians can look forward to a dignified retirement where, in broad terms, they can maintain their previous living standards.
David Knox is a senior partner at consultant Mercer and senior actuary for Australia. He is the national leader for research and the actuary to the Tasmanian and Western Australian public sector superannuation plans.