For Richer, for Poorer

Yesterday’s seminal analysis by the Actuaries Institute, “For Richer, for Poorer” outlines the relative wealth of working Australians from young workers through to those approaching retirement. 

The White Paper explores the importance of superannuation as part of the wealth profile of Australians at retirement and the different financial risks facing fund members.  It was based on analysis undertaken for the Institute by Rice Warner.

A key finding of this report is that, on the whole, the superannuation system is achieving its primary objectives of accumulating assets to fund retirement incomes and of reducing the level of dependency on the Age Pension.

Younger Australians will benefit from high levels of employer superannuation over long periods, so they will retire with more superannuation than those close to retirement today.  However, their overall wealth may not grow very much as they will have a lower home equity component in their wealth.  The research suggests that a 30 year old couple with average wealth will have 12% more wealth (in real terms) at age 65, than the wealth built by a couple aged 60 today.

Single women will not close the retirement gap as men benefit more from employer contributions (which are linked to salaries).  Consequently, many young females will not achieve a comfortable retirement even after a lifetime of employer support.

The combined impact of generous superannuation tax concessions, long periods of real investment returns and expensive housing shows that the top 5% of income earners near retirement have 50 times the wealth of the bottom 5%.  For 30 year olds, the projected gap is only 10-fold, but the variance within each generation does show why many commentators suggest that tax concessions need to be reviewed.

Is there anything that can be done to improve the position?  Here are three key measures proposed by Rice Warner:

Superannuation Fund Earnings

The superannuation industry has an imperative to ensure that retirement benefits remain high for their members.  Investing in growth assets before and during retirement is critical to achieving this goal.  Funds should perhaps be concerned more with enhancing retirement returns, and less about sequencing risk – the latter can be handled by shifting money into cash at the right time and not by changing the overall asset allocation of the fund.

Lowering Fees

Members need to consolidate all their accounts and they should measure their employer’s fund against a few well-known large funds.  Many Australians pay too much for their superannuation.

Taxation and Social Security

Rice Warner is hopeful that the Tax White Paper Task Force will seek a sensible integrated policy, in part to encourage more Australians to be self-sufficient in retirement.  If we could reduce dependency on the Age Pension from 75% to 20% of retirees, we could then afford to pay more to support our poorest pensioners.

In 1992, when Labor introduced mandatory superannuation contributions for all employers, the industry held $170 billion and covered around 70% of the working population.  Today, it has grown to more than $2,000 billion (bigger than Australia’s GDP) and covers more than 95% of the working population.

The Institute’s report shows that our superannuation system does need some changes. The Financial System Inquiry recommended that a new objective be enshrined which focuses superannuation on providing retirement income rather than accumulating assets.  This idea is supported by the Actuaries Institute, guided by the principles of sustainability, flexibility, equity, efficiency and simplicity.

 – Michael Rice, CEO