Actuaries Institute issues warning about superannuation shortfalls

From

Elayne Grace

In a submission to Treasury, the Actuaries Institute finds:

  • More people risk falling outside superannuation guarantee as gig economy expands.
  • There is scant encouragement for Australia’s older workers to keep working.
  • Complexity and uncertainty dominate at the point where superannuation, the Age Pension and Aged Care meet.

The Actuaries Institute says more Australians will fall outside the retirement income system as the gig economy grows, and the cost will be borne by all Australian taxpayers.

In a paper submitted to Treasury’s Retirement Income Review Panel, the Institute identifies shortcomings in Australia’s retirement policies, including the fact few Australians understand its objectives.

There is a belief among older Australians that they are entitled to an Age Pension but “there is a belief among younger generations that the Age Pension may not be there when they retire,” it states.

“Accumulation based superannuation puts inflation, investment, longevity, expense and other risks into the individual’s hands,” the submission noted.

But “there is a real risk that the Age Pension, plus an individual’s superannuation savings combined, may not be sufficient to provide an adequate retirement income due to a combination of factors.” These could include low contributions, insufficient investment returns, a reluctance to spend or because people live too long, outlasting their money.

The government-appointed Panel called for submissions to help identify how Australians are supported in retirement; the role of the Age Pension, compulsory superannuation and voluntary savings, including home ownership. It will also review public finances, distribution issues across the population over time, and current policy settings.

The Actuaries Institute makes significant contributions to public policy debates, especially in the areas of retirement incomes and superannuation, chief executive Elayne Grace said.

“This review is extremely important, and the institute has already done a significant amount of research that can valuably inform the panel’s deliberations,” Ms Grace said. Australians need a much clearer understanding of how much money they can expect to get during retirement, how this changes as their contributions rise and fall, how much Age Pension they might receive, what impact investment returns have on outcomes, and how super and the Age Pension interact with Aged Care.

Nathan Bonarius, who chaired the working group that prepared the report said: “To answer a basic question such as ‘how much can I spend in retirement with 90% confidence it will last for life?’ can entail millions of stress-testing calculations.” Only a minority of Australians get financial advice that allows them a level of comfort around their retirement savings.

The paper also says that as Australia’s economy changes, and a greater number of people work as casuals or contractors, it is likely some people will retire with much less.

“Going forward, universal coverage for all workers should be the goal of the SG (Superannuation Guarantee) system, whether people are employees, self-employed or participate as part of a growing gig economy,” the paper states. Without coverage, the only fall-back position will be the Age Pension, a cost borne by all taxpayers including those who saved through the SG and made voluntary savings.

The paper warns history shows that “voluntary saving decisions made by households are generally inadequate.”

Other points made to Treasury include:

  • The retirement income system has few specific incentives that encourage or support older Australians who wish to remain in the workforce, and in some instances, there are disincentives. While workforce participation rates for over 65s have risen to 15.3% from 10.1% over the last decade, this is likely the result of need rather than encouragement. It notes that the Treasurer has suggested older Australians may need to learn new skills to remain in the job market but 80% of Australians’ training happens before the age of 21.
  • At retirement, superannuation assets are not efficiently converted into retirement incomes due to a lack of risk pooling and an over-reliance on account-based pensions. But modelling shows retirement incomes have the potential to increase by around 15 to 30% by combining an account-based pension with products that insure longevity risk. This comes at the cost of death benefits and a loss of flexibility. But it allows retirees to spend with confidence.
  • When a person dies the residual balance of their superannuation account/fund averages around one quarter to one third of the starting balance. This leakage to beneficiaries is an inefficiency of our superannuation system. The Institute has called for much deeper longitudinal research, similar to data collected in the United States in the Health and Retirement Survey, to help government and the private sector understand whether ageing Australians are living well.

It says there is little evidence on the adequacy of retirement income in Australia because of a lack of good quality data. Australians tend to underspend in retirement for fear they will outlive their money. Some retirees are net savers. But a lack of data means it is difficult to know if retirees have an adequate level of income. The United Kingdom, China and European nations conduct comprehensive retirement and health research, which addresses the challenges of ageing populations.

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