Most Australians will access almost all of their pre-retirement income in their twilight years, according to think tank Grattan Institute, which is advocating against raising the rate of Superannuation Guarantee payments.
Many surveys by an array of businesses and organisations have suggested that Australians will be forced to live on much lower incomes in their retirement years.
In July this year, a MYOB poll of business owners found that less than a third feel quite or very well prepared for their retirement.
But Grattan Institute modelling – conducted as part of its report Money in retirement: More than enough – suggests we are worrying needlessly, claiming that most Australians currently working can look forward to income of “at least 91 per cent of their pre-retirement income”.
In fact, it asserted that retirees today enjoy a better standard of living in retirement than during their working lives, and that many individuals on a low income will actually benefit from a pay rise once they retire, as their superannuation combines with the aged pension.
“The financial services industry ‘fear factory’ encourages Australians to worry unnecessarily about whether they’ll have enough money in retirement,” Grattan Institute CEO John Daley said.
One factor, according to the report, comes down to outgoings rather than income.
“Australians tend to spend less after they retire, and even less into old age. Their medical costs increase but are largely covered by the taxpayer,” said the Institute.
“Many retirees are net savers, and current retirees often leave a legacy almost as large as their nest egg on the day they retired.”
Industry pessimism ‘overlooks important issues’
According to the report, industry claims are aimed at trying to boost the volume of funds under their management.
And their definition of what constitutes a comfortable lifestyle during retirement “overlooks three important issues”.
“First, a lot of research assumes that incomes in retirement should keep up with wages growth. Implicitly, they assume that a retiree needs an income 28 per cent higher at age 92 than when at age 67, even after accounting for inflation,” the report states.
“But our analysis shows that Australians tend to spend less after they retire, even when they have money to spare. Therefore, retirement incomes should be measured after accounting for inflation, rather than wages.
The second factor, the report suggests, is that standard used to define comfortable relies on the lifestyles of the wealthiest Australians.
“Some research compares retirement incomes to the ASFA ‘comfortable’ standard. But that is too high – the standard was set to reflect a lifestyle typical for the top 20 per cent of retirees at the time,” it said.
“Average living standards in Australia before retirement are lower than the ASFA benchmark for living standards in retirement. The average household can only reach the ‘comfortable’ benchmark in retirement by living less than ‘comfortably’ before retirement. This report instead uses the 70 per cent replacement rate benchmark as a better measure of adequate retirement incomes.”
Finally, the report said that non-super savings are often not included in calculations, distorting the true value of funds and assets that Australians have access to upon retirement.
“Not all wealthier retirees have an investment property portfolio, shares, bank deposits and a business, but most have something beyond their super and their home,” it said.
Of course, that something can include a business, which many self-employed build as their primary retirement nest egg in lieu of paying themselves full, or even any, superannuation.
Renters the exception to the rule
Not everyone is exempt from the so-called “fear factor” to which Mr Daley referred though.
The report found that some Australians on low incomes who also rent their housing, especially those in Sydney and Melbourne, are at a distinct disadvantage.
It said those not benefiting from the retirement income system will also grow over the coming years, due to the fact that “on current trends, home ownership for over 65s will decline from 76 per cent today to 57 per cent by 2056”.
Don’t raise the Superannuation Guarantee
In welcome news for employers, the report argues that there is no need to hike employee super contributions from the current rate of 9.5 per cent.
“Planned increases in the rate of compulsory superannuation contributions to 12 per cent by July 2025 should be abandoned,” it said.
Other noteworthy recommendations from the report include:
- Commonwealth Rent Assistance should by raised by 40 per cent from its current amount.
- Super tax breaks should be reformed further, including tightening caps on additional pre-tax contributions.
- Include the value of the family home in the means test for the pension.
- The Productivity Commission should investigate the impacts of raising the retirement age to 70.