The uncertainty of retirement

A couple of weeks back, I wrote about the possible changes we could see to superannuation if the ALP is elected to Government at the next Federal Election - expected to be around May 2019.

In terms of policy, there are certainly some differences between the government and the opposition.

However, on 6 November 2018, the Grattan Institute[1] ruffled more than a few feathers with the release of their report ‘Money in retirement – More than enough’.

For years, the debate about how much is enough to live on in retirement has raged.

The well-known ‘ASFA Retirement Standard’ is widely used as the benchmark when it comes to understanding how much it costs to live in retirement, and how much we need to have in super to support a modest or comfortable retirement lifestyle.

Of course, the ASFA Retirement Standard, which establishes the costs of a comfortable and a modest lifestyle for both a single person and a couple, is merely a guide. Currently, the estimated cost of living for a home-owning, debt -free couple wishing to pursue a comfortable lifestyle in retirement is $60,604 pa. For a single person, the figure is $42,953 pa. To support that level of income, including a part age pension in the case of a couple, a couple will need to have around $640,000 in retirement savings, and single person will need approximately $545,000.

Whether the ASFA estimates are appropriate or not will depend on an individual’s plans and desires. For example, a retiree intending to do a lot of overseas travel in retirement may well need considerably more income, as will retirees living in expensive or prestigious homes or resort-style apartment buildings. However, those with more modest lifestyle ambitions may well be able to live quite comfortably on less than the AFSA suggested incomes.

Having said that, the Grattan Institute report suggests that most retirees, even after allowing for inflation, can expect to have a retirement income of at least 91% of their pre-retirement income. The OCED has a retirement benchmark of 70%.

In fact, the report argues that the AFSA ‘comfortable’ standard is ‘more luxurious than the living standard of most working-age households today’[2].

The Grattan Institute’s report push policy debate in relation to retirement funding and makes a number of recommendations, including:

1. Abolishing further increases in compulsory superannuation contributions beyond the current 9.5%. (Compulsory contributions are due to progressively increase to 12% by 2025.)
2. Increase the Commonwealth Rent Assistance by 40% to assist those not owning their own home.
3. Reduce the age pension assets test taper rate from $3.00 per $1,000 to $2.25 per $1,000. (The taper rate is the rate in which the age pension reduces once the value of assessable assets exceed pre-determined thresholds. Before 1 January 2017, the tape rate was $1.50 per $1,000.)
4. The cap on pre-tax superannuation contributions should be reduced to $11,000 per annum. It is currently $25,000.
5. After-tax (non-concessional contributions) should be reduced to a maximum of $50,000. A lifetime cap of $250,000 should be imposed. Currently, the cap is $100,000 per annum for people with less than $1.6m in super.
6. Investment earnings of superannuation funds should be taxed at 15%. Currently, earnings of super funds paying retirement pensions are taxed at 0%.
7. The Seniors and Pensioners Tax Offset should be wound back so it is only available to pensioners. This would result in people who don’t receive the full rate of Age Pension paying some tax on their income.
8. The value of the family home, above a certain value (the Report suggests $500,000) should be included as an asset for assets test purposes.
9. The Productivity should investigate increasing the age at which the Age Pension becomes available to 70. The same age limit should apply to accessing superannuation benefits.
10. The Government should develop its own standards of retirement adequacy and any reference to the AFSA comfortable retirement standard should be removed from government publications and websites – such as ASIC’s Money Smart website.

Needless to say, the Grattan Institute report is controversial. There has been a significant backlash in certain quarters, particularly from the superannuation sector. But, in many ways that it to be expected as superannuation funds survives and flourishes with every extra dollar that is contributed.

Clearly the Grattan Institute is suggesting that Australian’s can live on much less in retirement. I am not sure how that is going to lie with the millions of Australians already in or approaching retirement.

It is now a case of seeing if the Grattan Institute report gets any traction with the political parties. I certainly feel that one or more of the minor parties may embrace a number of the recommendations. Time will tell.

[1] An independent think tank. https://grattan.edu.au/

[2] ‘Money in retirement – More than enough’ (p35) Grattan Institute November 2018