ACTIVIDAD MÉTODO DE DESARROLLO

In considering the development of appropriate retirement income policy settings, it is necessary to recognise that not all Australians have had the benefit of compulsory superannuation (at meaningful levels) for the majority of their working lives.

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The average retiree superannuation balance today is $173,000 for men and $90,000 for women.101 Superannuation balances at these levels are clearly insufficient to achieve the pre-stated member and fiscal objectives. As a result, many people will inevitably need to fall back on the Age Pension.

This highlights the relative immaturity of the superannuation system, having only very recently reached material levels of compulsory contributions (i.e. 9% in 2002) and not reaching 12% until 2022.

This is illustrated in modelling commissioned by Westpac from Deloitte Actuaries in Figure 24, which shows the difference in projected superannuation balances at retirement (age 65) for two otherwise identical 18 year old individuals on median income (based on ABS data, assumed to be $38,000 today):

 one who joins the workforce in 1992, with the superannuation guarantee commencing at 4%;102and

 one who joins in 2014, with the superannuation guarantee at 9.5%.

Figure 24. Projected superannuation balances based on workforce join date

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ASFA Research, March 2014. 102

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Projected retirement incomes

Examining these scenarios from a retirement income perspective, Figure 25 shows the level of retirement income an individual on median income will earn depending on the date they entered the workforce.

Figure 25. Indicative level of retirement income by workforce entry date

This analysis also highlights that the superannuation system will deliver a number of positive benefits as it continues to mature:

 raising total retirement income levels;

 increasing retirement income replacement rates; and

 reducing the call on the age pension through a greater proportion of private provision. Thus, there is a greater imperative to ensure the system is properly calibrated for those who will benefit from a mature superannuation system for the duration of their working lives. This group will also have received the full benefits of tax preferred savings - increasing the need to ensure they are not inappropriately reliant on the Age Pension later in life.

The Deloitte modelling found that an individual who commences work at age 18 today and retires at age 65, will have received approximately 70% more superannuation tax

concessions throughout their lifetime (including post retirement), when compared to an equivalent person who entered the workforce in 1992.

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Just as importantly, the Deloitte analysis highlights that, based on current age pension and superannuation policy settings, there is a significant reduction in age pension provision as incomes rise.103 This is illustrated in Figure 26.

Figure 26. Indicative retirement outcomes by income split

In addition to the above, it is also necessary to appreciate the additional challenge posed by increasing longevity. ABS data shows that 25% of all retirees aged 65 and over are

currently living into their nineties and beyond.104

At the same time, increased longevity risk will result in higher health care costs – both for governments and individuals. Retirement income policy settings will therefore need to respond to these needs, by ensuring that individuals are able to afford appropriate levels of health insurance cover during retirement.

This increasing longevity risk combined with the eventuality of adverse health events later in life means it will be inefficient, and in some cases impossible, for all Australians to save for the worst case financial scenario.

Some level of pooling or insurance will therefore be needed to support those who live past mean residual life expectancy from age 65, and who may not otherwise have the means to support themselves for an extended retirement. This residual life expectancy is currently 84 for men and 87 for women, and likely to be significantly longer for subsequent retirees.

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Low Income individuals are assumed to be earning half Median Income (assumed $38,000 for an 18 year old today). Above Average Income are assumed to be earning 50 % more than Median. Higher Income are assumed to be earning double Median Income.

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118 8.1.3 Current retirement market

The vast majority of retirees who purchase a private pension in Australia do so through an Account Based Pension.105 These products provide individuals with a high degree of flexibility on how they structure their investments and how much income they elect to draw down. Essentially, Account Based Pensions are a tax and legal structure within which retiree investors can hold a broad range of assets and construct portfolios that reflect their needs. When portfolios are constructed in a robust way, this product structure provides a high probability of meeting retirement income needs - albeit without any pooled or longevity insurance component.

As highlighted in Westpac’s Initial Submission and observed by the Interim Report,

Australians are largely doing the right thing in retirement. While there is evidence to support disengagement during accumulation, the same evidence is not available for those

approaching retirement. Research has consistently found that there is a very strong correlation between levels of engagement and either age or account balance.106

Evidence shows that, for the most part, members want to make their savings last as long as possible. This is borne out in the increasing take up of retirement income streams and the majority of members only drawing down the minimum level of income required.