Super set argue it out over retirement incomes

John Kavanagh Insurance, funds and super
John Daley, CEO of the Grattan Institute.
John Daley, CEO of the Grattan Institute.

The superannuation industry came face to face with one of its strident critics yesterday, when Grattan Institute chief executive John Daley took to the stage of the Actuaries Summit in Sydney to challenge one of the super sector’s widely used benchmarks – the ASFA Retirement Standard.

The Association of Superannuation Funds of Australia’s retirement budgeting tool is popular with retirees (and their advisers) trying to figure out how much money they will need in retirement and how much they will need to accumulate in super to achieve that income level.

When the standard was last updated in March, it estimated that a couple aged around 65 who owned their home would need income of A$61,061 a year to live comfortably. A single person aged 65, who owned their own home, would need $43,255 a year to live comfortably.

The superannuation balances at retirement required to generate those incomes are estimated to be $640,000 for a couple and $545,000 for a single person. The earning rate on the funds producing the retirement income is assumed to be 6 per cent a year.

ASFA says a couple would need $39,848 for a modest lifestyle and a single would need $27,646.

In a report published last November, ‘Money in Retirement: More Than Enough’, the Grattan Institute argues that Australians don’t need that much money to have a good retirement.

It says ASFA’s comfortable standard would support an affluent lifestyle more luxurious than most Australians currently have during their working lives “and it misleadingly suggests that anyone with fewer resources will have an ‘uncomfortable’ retirement.”

Speaking yesterday, Daley said ASFA’s benchmark was flawed because its modelling was based on outcomes for the top 20 per cent of income earners.

He said it assumed constant spending in retirement years, whereas it was well established that spending drops off significantly after age 75 or 80.

And he said ASFA did not properly account for the Age Pension. “Most people get a part pension and we have calculated that it will be about half of average total retirement income,” Daley said.

Increasing the super guarantee from 9.5 per cent to 12 per cent will have less of an impact than people assume because of the effect it will have on reducing pension payments, Daley said.

David Knox, a senior partner at Mercer, said he had some issues with the Grattan analysis.

Grattan measures income replacement rates based on a calculation of the last five years of working-life income. “Many people wind down in the last few years of work but living standards are set in the 40s and 50s when they are at their earnings peak,” Knox says.

Grattan assumes that people work through to age 67, which will be the Age Pension eligibility age from 2023.

“Australia does not have an official retirement age and many people leave the workforce before age 67. We need to model for people retiring at 62 or 64,” Knox says.

Grattan bases its modelling on life expectancy of 92, which Knox says ignores the many people who live much longer.

Grattan’s modelling is based on single people, but Knox says outcomes for couples can be quite different, especially when it comes to Age Pension eligibility.

Knox also says the Grattan modelling does not take account of falling home ownership. Renters have much higher expenses in retirement.

“We need to consider a much broader range of realistic expenses,” he says.

Knox estimates that when all his criticisms of Grattan’s modelling are factored in, it reduces the working-life income replacement rate of the Grattan work from its base case of 89 per cent to 63 per cent, which is below the industry’s target replacement rate of 70 per cent.