tag:theconversation.com,2011:/ca/topics/retirement-income-6027/articlesretirement income – The Conversation2023-05-17T13:23:14Ztag:theconversation.com,2011:article/2047662023-05-17T13:23:14Z2023-05-17T13:23:14Z91% of sub-Saharan African workers don’t save for old age: why that’s a problem and how to fix it<figure><img src="https://images.theconversation.com/files/523614/original/file-20230501-28-ys3s45.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Sub-Saharan Africa has the lowest level of pension savings in the world</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/nigerian-naira-notes-pension-jar-elderly-759556243">Shutterstock</a></span></figcaption></figure><p><em>Less than 10% of the workers in sub-Saharan Africa save for old age, <a href="https://www.ilo.org/wcmsp5/groups/public/@ed_protect/@soc_sec/documents/publication/wcms_849597.pdf#page=32">the lowest</a> rate for any region in the world. That implies most of the breadwinners today won’t be able to afford basic items after retirement. A pension plan is meant to commit employers to make regular savings so that employees will continue to earn after retirement. The Conversation Africa asked Owen Nyang'oro, a financial economist, about Africa’s pensions and why they need to be fixed.</em> </p>
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<h2>What’s the state of sub-Saharan Africa’s pension savings?</h2>
<p>In a <a href="https://www.wider.unu.edu/sites/default/files/Publications/Working-paper/PDF/wp2022-95-pension-funds-in-sub-saharan-africa.pdf">recent study</a> of retirement savings in sub-Saharan Africa (other than the francophone countries), we established that the continent’s pension funds are diverse in architecture, coverage and performance. But they mostly lag behind in reforms compared to other regions. Pension savings are also low compared to other regions. Only 19.8% of people above statutory retirement age receive a pension in sub-Saharan Africa, and just 8.9% of the labour force <a href="https://www.ilo.org/wcmsp5/groups/public/@ed_protect/@soc_sec/documents/publication/wcms_849597.pdf#page=32">is covered by pension schemes</a>. This is much lower than the global average where 77.5% of people above statutory age and 53.7% of workers have pension coverage. </p>
<p>Pension schemes in sub-Saharan African countries are characterised by low contributions due to low earnings, high informality, high financial illiteracy levels and lack of proper information about the benefits of adequate contributions for future pension withdrawals.</p>
<p><a href="https://www.oecd.org/daf/fin/private-pensions/Pension-Markets-in-Focus-2022-FINAL.pdf">Market data</a> shows that South Africa, with pension fund assets valued at about US$330.3 billion in 2019 (latest country update), is the continent’s top performer in absolute terms. Nigeria, which had assets worth US$32.6 billion, Kenya with US$13.7 billion and Namibia with US$13.3 billion were the <a href="https://www.oecd.org/daf/fin/private-pensions/Pension-Markets-in-Focus-Preliminary-2021-Data-on-Pension-Funds.pdf#page=2">other top pension savers</a> in 2021. </p>
<p>Countries with low pension savings at the end of 2021 included Mozambique with US$224 million, Zambia (US$745 million) and Angola (US$861 million). </p>
<p>But in proportion to the <a href="https://www.oecd.org/daf/fin/private-pensions/Pension-Markets-in-Focus-2022-FINAL.pdf#page=11">size of the economy</a>, the best performers in 2019 included Namibia (95.4%), South Africa (82.6%) and Botswana (51.9%). Angola, Mozambique, Zambia, Nigeria and Ghana trailed with pension assets below 10% of their gross domestic product.</p>
<p>Generally, Africa’s pension assets are very small compared to the 2021 retirement funds of say, the United States (US$40.0 trillion) or the United Kingdom (US$3.8 trillion). </p>
<h2>What’s peculiar about Africa’s population?</h2>
<p>The majority of the population is young and <a href="https://data.worldbank.org/indicator/SP.DYN.TFRT.IN?locations=ZG">fertility rates</a> are high. The old-age dependency ratio (the number of elderly people for every economically active person) is low compared to other regions, averaging <a href="https://population.un.org/wpp/Download/SpecialAggregates/EconomicTrading/">5.5 in 2022</a>, and the ageing population is small but increasing. The annual population growth rate in sub-Saharan Africa was 2.5% in 2022, which is more <a href="https://www.un.org/development/desa/pd/sites/www.un.org.development.desa.pd/files/wpp2022_summary_of_results.pdf">than three times the global annual average of 0.8%</a>.</p>
<p>With much <a href="https://www.un.org/ohrlls/news/young-people%E2%80%99s-potential-key-africa%E2%80%99s-sustainable-development#:%7E:text=Africa%20has%20the%20youngest%20population,to%20realise%20their%20best%20potential.">younger populations</a> and relatively <a href="https://data.worldbank.org/indicator/SP.POP.GROW?locations=ZG">high population growth rates</a>, the number of dependants in sub-Saharan African countries is increasing at a slightly faster rate, and over time the numbers of elderly people needing social support will also rise. It is projected that the number of elderly persons in the region will grow at <a href="https://www.un.org/development/desa/pd/sites/www.un.org.development.desa.pd/files/wpp2022_summary_of_results.pdf#page=20">annual rates above 3% between 2022 and 2050</a>. </p>
<p>The concern is that <a href="https://www.ilo.org/global/research/global-reports/world-social-security-report/2020-22/lang--en/index.htm">only one in five</a> people of pensionable age receives an old-age pension compared to over three in four people globally. </p>
<p>High levels of unemployment and the large <a href="https://theconversation.com/yes-africas-informal-sector-has-problems-but-the-answer-isnt-to-marginalise-it-188234">size of the informal sector</a> – which <a href="https://www.ilo.org/global/publications/books/WCMS_626831/lang--en/index.htm">accounts</a> for over 89.2% of the labour work force – mean that the elderly will continue to face income challenges. Households are also becoming smaller and changing from multi-generational (made up of grandparents, parents, children and grandchildren) which offer social support to the elderly, to skipped-generation (where grandparents live with grandchildren in the absence of parents) or one-generation (where the elderly live by themselves). </p>
<h2>What are the benefits of a good pension system?</h2>
<p>The primary goal of pension savings is to provide income and livelihood in old age. However, pension savings can also be mobilised to finance productive activities and improve living standards.</p>
<p>The continent’s annual infrastructure funding gap (the difference between resources required and what’s available) is <a href="https://www.afdb.org/fileadmin/uploads/afdb/Documents/Publications/African_Economic_Outlook_2018_-_EN.pdf#page=16">estimated</a> at between US$68 billion and US$108 billion. Resources to meet the infrastructure gap could be mobilised from pension funds. This requires good governance and removal of any regulatory obstacles. Pension funds can also support development of capital markets and improve ease of trade in the capital market through their investment activities.</p>
<p>Pension funds can also reduce public borrowing, and improve efficiency of the labour market by creating incentives for formalisation of businesses.</p>
<h2>How should countries improve pension savings?</h2>
<p>African governments can boost pension savings in four ways:</p>
<ul>
<li><p>Increase pension participation and coverage by including the unemployed and those in the informal sector. This could be achieved through a targeted universal pension scheme and greater financial literacy. The countries should have a mix of universal schemes and schemes with payroll deductions and employer contributions.</p></li>
<li><p>Bundling pensions with other products. Bundling pensions with other products such as life insurance cover, and even matching contributions to encourage greater participation and long-term savings in pension funds. Favourable tax considerations can also enhance the growth of contributions and assets of pension funds.</p></li>
<li><p>Use of technology. Leverage innovations in digital technology to increase pension savings. The region <a href="https://www.gsma.com/sotir/wp-content/uploads/2022/03/GSMA_State_of_the_Industry_2022_English.pdf">accounts for 53% of active mobile money accounts in 2021</a>. Use of digital technology could increase coverage, especially in the informal sector. It can make enrolment and contribution to pension funds easier.</p></li>
<li><p>Review regulatory frameworks of the pension sector to open it up to the unserved population. There is also a need to streamline management of pensions and minimise costs of administration, especially for private pensions. This will allow pension funds to extend investments to other assets, including foreign ones, to improve returns.</p></li>
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<p>Sub-Saharan African countries are likely to gain from a well-developed pension system that provides adequate income to the elderly. This will in turn reduce the need for social protection, provide financing for infrastructure development, and support the development of capital markets. </p>
<p>All this calls for deliberate reforms to facilitate growth of pension savings. Countries should prioritise pensions within their development plans, address informality in the labour market and take advantage of technological advancements and the youthful population.</p>
<p>A well-developed pension system will improve the region’s financial stability through reduced budgetary strain as funds become available for development. It could also open up capital markets and improve the labour market, thus leading to growth.</p><img src="https://counter.theconversation.com/content/204766/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The article is based on a study prepared within the United Nations University World Institute for Development Economics Research (UNU-WIDER) project: "The domestic savings shortfall in developing countries - what can be done about it?" which is part of the Domestic Revenue Mobilisation programme financed through specific contributions by the Norwegian Agency for Development Cooperation (Norad).</span></em></p>The number of elderly people in need of support in Africa is projected to grow at annual rates above 3% up to 2050.Owen Nyang'oro, Lecturer, University of NairobiLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1806802022-05-25T20:16:34Z2022-05-25T20:16:34ZSuper co-contribution has cost $10 billion to help the wrong Australians – so let’s scrap it<figure><img src="https://images.theconversation.com/files/463807/original/file-20220517-20-1d61h1.jpg?ixlib=rb-1.1.0&rect=0%2C915%2C6440%2C3302&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>Concerned that many people won’t have enough retirement savings even with compulsory superannuation, since 2003 the Australian government has had a scheme to encourage low and middle-income earners to voluntarily put more into superannuation.</p>
<p>The <a href="https://www.ato.gov.au/individuals/super/in-detail/growing-your-super/super-co-contribution/">Superannuation Co-Contribution Scheme</a> currently provides 50 cents for every dollar voluntarily contributed, up to A$1,000, by anyone earning less than $42,000. (There are tapered co-contributions for those with incomes up to $57,000.) </p>
<p>To date the scheme has cost more than $10 billion – or $12.7 billion in today’s dollars. Last financial year it paid out about <a href="https://treasury.gov.au/sites/default/files/2021-05/TSY_PBS_2021-22.pdf">$127 million</a>. Over the next three years it is expected to cost <a href="https://treasury.gov.au/sites/default/files/2021-05/TSY_PBS_2021-22.pdf">$365 million</a>. </p>
<p>So what is it achieving? Not much, it turns out. </p>
<p>Our <a href="https://melbourneinstitute.unimelb.edu.au/__data/assets/pdf_file/0009/4096548/RI-01-22.pdf">analysis</a> of taxation data since 2000 suggests the scheme has made little difference to lifting voluntary super contributions by low and middle-income earners. </p>
<p>Most significantly, our findings indicate the scheme does little more than provide a bonus to those who would have put money into super anyway.</p>
<p>Given the need to rein in public debt, the new Albanese government should consider discontinuing the co-contribution scheme as “low-hanging fruit” – an easy budget cutback that will harm few people.</p>
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Read more:
<a href="https://theconversation.com/how-to-camouflage-150-billion-in-spending-call-it-tax-expenditure-176236">How to camouflage $150 billion in spending: call it 'tax expenditure'</a>
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<h2>How we analysed the scheme</h2>
<p>The co-contribution scheme was introduced 2003-04 by the Howard government as part of its “<a href="https://parlinfo.aph.gov.au/parlInfo/download/media/pressrel/SCC56/upload_binary/scc561.pdf;fileType=application%2Fpdf#search=%22media/pressrel/SCC56%22">Better Superannuation System</a>” reforms meant to encourage higher contributions.</p>
<p>Initially the co-contribution was dollar-for-dollar. In 2004-05 it was increased to $1.50 for every dollar. In 2009-10 the Rudd government reduced it to $1 and in 2012-13 the Gillard government cut it to 50 cents.</p>
<p>To <a href="https://melbourneinstitute.unimelb.edu.au/publications/working-papers/search/result?paper=3559160">evaluate the scheme</a>, we used a data set from the Australian Taxation Office known as the <a href="https://taxpolicy.crawford.anu.edu.au/publication/ttpi-working-papers/19025/ato-longitudinal-information-files-alife-individuals-new#:%7E:text=public%20policy%20research-,The%20ATO%20Longitudinal%20Information%20Files%20(ALife)%3A%20Individuals%20%2D%20A%20new,dataset%20for%20public%20policy%20research&text=Abstract%3A,administrative%20datasets%20in%20the%20world.">Australian Longitudinal Information Files</a> (ALife). This contains a 10% anonymised sample of Australian superannuation and tax records that currently goes back to 1991. </p>
<p>We analysed records from 2000 onwards, looking at the super contributions of anyone who earned less than $80,000 for at least one year between 1999-2000 and 2016-17.
This totalled 1.3 million individuals. Of these, 730,000 were eligible for a co-contribution in at least one year.</p>
<p>Before the scheme began, about 14.5% of those subsequently eligible for the co-contribution made voluntary contributions to superannuation. </p>
<p>Our analysis shows only marginal effects on the rate of voluntary contributions – even when the co-contribution rate was double or three times higher than it is now.</p>
<p>At a co-contribution rate of 50 cents on the dollar, the scheme has increased contributions by 1 percentage point. </p>
<p>At the previous rate of $1, the increase in super contributions was 1.5 percentage points. Even at the past rate of $1.50, it was just 3.5 percentage points.</p>
<p>In reading these estimates it’s important to note they aren’t simply percentage changes to the 14.5% contribution rate prior to the scheme. They are generated by an econometric model that has allowed us to measure changes in super contributions when people gain or lose eligibility for the co-contribution scheme, then compare those to changes in contributions of people whose eligibility did not change.</p>
<h2>Who has benefited most?</h2>
<p>The biggest increases in contributions were by high-income earners who happened to qualify in a particular year due to a temporary drop in income, as well by partnered women. </p>
<p>Those normally in the top 25% of income earners were four times more likely to take advantage of the scheme than those normally in the bottom 25%. </p>
<p>Women with partners were more than twice as likely to contribute as single women or men with partners, and four times more likely than single men. The likely explanation for this is that the scheme has been used by women with higher-earning partners.</p>
<p>The following chart shows these average effects across the life of the scheme.</p>
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<p><strong>Impacts on sub-group voluntary after-tax contribution rates</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/464136/original/file-20220519-14-n3i9xs.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Impacts of the Superannuation Co-contribution Scheme on sub-group voluntary after-tax contribution rates, average across match rates." src="https://images.theconversation.com/files/464136/original/file-20220519-14-n3i9xs.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/464136/original/file-20220519-14-n3i9xs.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=311&fit=crop&dpr=1 600w, https://images.theconversation.com/files/464136/original/file-20220519-14-n3i9xs.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=311&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/464136/original/file-20220519-14-n3i9xs.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=311&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/464136/original/file-20220519-14-n3i9xs.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=391&fit=crop&dpr=1 754w, https://images.theconversation.com/files/464136/original/file-20220519-14-n3i9xs.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=391&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/464136/original/file-20220519-14-n3i9xs.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=391&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="attribution"><a class="source" href="https://melbourneinstitute.unimelb.edu.au/__data/assets/pdf_file/0009/4096548/RI-01-22.pdf">Melbourne Institute</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
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<p>Strikingly, our analysis indicates those taking advantage of the scheme would have made slightly higher voluntary super contributions without any co-contribution. </p>
<p>The difference is slight – on average of $20 to $50 a year, depending on the co-contribution rate – but the whole point of the scheme is to encourage higher contributions, not provide a subsidy for people to contribute at the same (or a marginally lower) rate. </p>
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Read more:
<a href="https://theconversation.com/yes-women-retire-with-less-but-boosting-compulsory-super-wont-help-157412">Yes, women retire with less, but boosting compulsory super won't help</a>
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<h2>Failing to make a difference here and overseas</h2>
<p>These disappointing results from the scheme are in line with findings of similar schemes in the United States and Germany. </p>
<p>There are two possible reasons. </p>
<p>The first is that people may be unaware of the scheme. But we find no evidence for this. For example, our analysis indicates those who use tax agents – who are likely to be aware of the scheme and pass on such knowledge to their clients – are no more likely to use the scheme than those who do their own tax return. </p>
<p>The second reason is the more obvious one. </p>
<p>Most people on lower incomes don’t have spare cash to put into super. This is why increases have been minor even with a matching payments rate three times higher than now. If you don’t have the spare cash, it doesn’t make much difference a what rate the co-contribution is set. </p>
<p>Our findings cast serious doubt on the point of the superannuation co-contribution scheme. Despite its relative simplicity and generosity, it has done little to lift the retirement savings of low and middle-income Australians as intended. </p>
<p>The real beneficiaries of the scheme have been the small minority of eligible people who were already contributing. For them, this has been a windfall that has allowed them to reduce their personal contributions while still achieving their desired contribution levels.</p>
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<em>
<strong>
Read more:
<a href="https://theconversation.com/retirement-incomes-review-finds-problems-more-super-wont-solve-150529">Retirement incomes review finds problems more super won't solve</a>
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<img src="https://counter.theconversation.com/content/180680/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Cain Polidano receives funding from Australian Research Council. </span></em></p><p class="fine-print"><em><span>Ha Vu receives funding from the Australian Research Council. </span></em></p><p class="fine-print"><em><span>Marc Chan receives funding from the Australian Research Council. </span></em></p><p class="fine-print"><em><span>Roger Wilkins receives funding from the Australian Research Council. </span></em></p>Our research shows the co-contribution scheme does little to help low and middle-income earners. The new Albanese government should consider discontinuing it – saving hundreds of millions of dollars.Cain Polidano, Senior Research Fellow, The University of MelbourneHa Vu, Senior lecturer, Deakin UniversityMarc Chan, Professor, Department of Economics, The University of MelbourneRoger Wilkins, Professorial Fellow and Deputy Director (Research), HILDA Survey, Melbourne Institute of Applied Economic and Social Research, The University of MelbourneLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1311512020-02-25T18:57:51Z2020-02-25T18:57:51ZOlder and poorer: Retirement Income Review can’t ignore the changing role of home<figure><img src="https://images.theconversation.com/files/316795/original/file-20200224-24651-e7femb.jpg?ixlib=rb-1.1.0&rect=353%2C344%2C5254%2C3388&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/worried-senior-old-couple-discuss-about-1338826637">natasaelena/Shutterstock</a></span></figcaption></figure><p>The assumption that retired people have minimal housing costs underpins the settings of our retirement incomes system. But the real state of housing for older Australians today makes it critical for the <a href="https://treasury.gov.au/review/retirement-income-review">Retirement Incomes Review</a> to look at the evidence that now challenges this assumption. </p>
<p>When announcing the <a href="https://treasury.gov.au/review/retirement-income-review/TOR">terms of reference</a>, federal government ministers <a href="http://ministers.treasury.gov.au/ministers/jane-hume-2019/media-releases/review-retirement-income-system">acknowledged</a> the critical role of the home in a good retirement by including it in the third pillar of the system, voluntary saving.</p>
<p>The fact is the soaring costs of land and housing in Australia over the past three decades have effectively destroyed the asset base on which our retirement income system relies.</p>
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<a href="https://images.theconversation.com/files/316765/original/file-20200224-116128-p7ocmn.gif?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/316765/original/file-20200224-116128-p7ocmn.gif?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/316765/original/file-20200224-116128-p7ocmn.gif?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=502&fit=crop&dpr=1 600w, https://images.theconversation.com/files/316765/original/file-20200224-116128-p7ocmn.gif?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=502&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/316765/original/file-20200224-116128-p7ocmn.gif?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=502&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/316765/original/file-20200224-116128-p7ocmn.gif?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=631&fit=crop&dpr=1 754w, https://images.theconversation.com/files/316765/original/file-20200224-116128-p7ocmn.gif?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=631&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/316765/original/file-20200224-116128-p7ocmn.gif?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=631&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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Read more:
<a href="https://theconversation.com/fall-in-ageing-australians-home-ownership-rates-looms-as-seismic-shock-for-housing-policy-120651">Fall in ageing Australians' home-ownership rates looms as seismic shock for housing policy</a>
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<p>The <a href="https://www.ahuri.edu.au/research/final-reports/319">proportion</a> of home owners aged 55 to 64 years who owe money on a mortgage has more than tripled from 14% in 1990 to 47% in 2015. The rate has doubled among those aged 45 to 54, as has the ratio of mortgage debt to income (from 82% to 169%). This ratio has blown out from 72% to 132% for those in their last decade before the retirement age.</p>
<p>These debts will greatly reduce retirement incomes. The impact will only grow as successive generations take much <a href="https://theconversation.com/were-delaying-major-life-events-and-our-retirement-income-system-hasnt-caught-up-127231">longer to enter the property market</a> and live with higher housing debt much later in life than previous generations.</p>
<p>The numbers of older Australians who have never owned a home, or have <a href="https://theconversation.com/were-delaying-major-life-events-and-our-retirement-income-system-hasnt-caught-up-127231">fallen out of home ownership</a> before retirement, have also exploded. In particular, older women (55-plus) in private rental housing grew in number by an extraordinary 39% between 2006 and 2011. </p>
<p>This trend is directly linked to a 28% rise in homelessness among older Australians over the same period. Women over 55 are the <a href="https://www.agedcareguide.com.au/talking-aged-care/more-older-australians-without-a-a-place-to-call-home">fastest-growing cohort at risk of homelessness</a>.</p>
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<a href="https://images.theconversation.com/files/316770/original/file-20200224-116109-1ee72t0.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/316770/original/file-20200224-116109-1ee72t0.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/316770/original/file-20200224-116109-1ee72t0.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=202&fit=crop&dpr=1 600w, https://images.theconversation.com/files/316770/original/file-20200224-116109-1ee72t0.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=202&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/316770/original/file-20200224-116109-1ee72t0.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=202&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/316770/original/file-20200224-116109-1ee72t0.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=254&fit=crop&dpr=1 754w, https://images.theconversation.com/files/316770/original/file-20200224-116109-1ee72t0.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=254&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/316770/original/file-20200224-116109-1ee72t0.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=254&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Projected changes in housing tenures of older Australians between 2016 and 2031.</span>
<span class="attribution"><a class="source" href="https://theconversation.com/fall-in-ageing-australians-home-ownership-rates-looms-as-seismic-shock-for-housing-policy-120651">Source: Rachel Ong ViforJ et al, calculations from HILDA Survey and ABS population projections</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<h2>Failing to meet retirees’ needs</h2>
<p>The housing market is clearly failing older people. Any consideration of retirement incomes must grapple urgently with the implications this will have for retirees.</p>
<p>Australian policymakers currently take a segmented approach to housing for older people. </p>
<p>The retirement village model is expensive to enter and to <a href="https://percapita.org.au/wp-content/uploads/2017/08/Retirement-housing-in-Victoria-2502017.pdf">exit</a>. It’s the preferred housing model for <a href="https://www.agedcare101.com.au/retirement-living/types-retirement-living/retirement-villages">just 8%</a> of retirees. </p>
<p>“Down-sized” units often provide unsuitable multi-level accommodation and lack the amenities <a href="https://theconversation.com/eight-simple-changes-to-our-neighbourhoods-can-help-us-age-well-83962">older people need to thrive</a>. As a result, these units often <a href="https://theconversation.com/why-older-australians-dont-downsize-and-the-limits-to-what-the-government-can-do-about-it-76931">fail to attract older buyers</a>. </p>
<p>Stamp duties are another barrier.</p>
<p>As a result, many older people stay in large homes they find increasingly difficult to manage and which would better suit young families.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/half-of-over-55s-are-open-to-downsizing-if-only-they-could-find-homes-that-suit-them-130531">Half of over-55s are open to downsizing – if only they could find homes that suit them</a>
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<h2>Home’s greatest value is social</h2>
<p>To fully understand the role of home in providing a comfortable and dignified retirement, the review panel has to go beyond traditional concepts of housing as a financial asset. It must consider the full emotional and social role of home in the lives of older people. Per Capita’s Centre for Applied Policy in Positive Ageing in collaboration with The Australian Centre for Social Innovation is launching the <a href="https://percapita.org.au/our_work/home-for-good/">Home for Good</a> project today.</p>
<p>The real value of the home for older people isn’t financial, <a href="https://www.tacsi.org.au/future-of-home/importance-of-home-as-we-age/">research</a> by <a href="https://www.tacsi.org.au/">The Australian Centre for Social Innovation</a> shows. Its greatest value is as a safe and private space from which to connect with the outside world, express identity and build social relationships.</p>
<p>Recent <a href="https://percapita.org.au/wp-content/uploads/2019/09/Mutual-Appreciation_formFINAL.pdf">research</a> by the <a href="https://percapita.org.au/our_work/centre-for-applied-policy-in-positive-ageing/">Centre for Applied Policy in Positive Ageing</a> at <a href="https://percapita.org.au/about/">Per Capita</a> confirmed older people experience home as a social as well as financial asset. Exploring models of co-housing with older women, we found even women in secure housing, such as home owners or public housing tenants, would move to other housing that offered a sense of belonging within a connected community.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/316794/original/file-20200224-24690-1hck2hj.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/316794/original/file-20200224-24690-1hck2hj.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/316794/original/file-20200224-24690-1hck2hj.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/316794/original/file-20200224-24690-1hck2hj.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/316794/original/file-20200224-24690-1hck2hj.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/316794/original/file-20200224-24690-1hck2hj.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/316794/original/file-20200224-24690-1hck2hj.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/316794/original/file-20200224-24690-1hck2hj.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Housing that offers a sense of community belonging is highly valued.</span>
<span class="attribution"><span class="source">Shutterstock</span></span>
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</figure>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/i-really-have-thought-this-cant-go-on-loneliness-looms-for-rising-numbers-of-older-private-renters-118046">'I really have thought this can’t go on': loneliness looms for rising numbers of older private renters</a>
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<p>In the economic narrative that drives policy thinking about housing in Australia, we lose sight of this intrinsic link between home and community. Policymakers are confusing an attachment to the bricks and mortar of the family home with the desire for a socially located space that suits the occupants’ age and abilities and is connected to community.</p>
<p>That older people are not emotionally wedded to the family home, but rather seeking communities of belonging, challenges traditional assumptions about ageing in place.</p>
<h2>Suitable housing choices in short supply</h2>
<p>Australian Housing and Urban Research Institute (<a href="https://www.ahuri.edu.au/about-us/who-we-are-and-what-we-do">AHURI</a>) research has confirmed older Australians are willing to move from the family home to ideal housing. The research found a “<a href="https://www.ahuri.edu.au/research/final-reports/317">housing aspiration gap</a>” between the desires of older Australians for homes in small, regional towns and policy settings that prioritise the family home.</p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/what-sort-of-housing-do-older-australians-want-and-where-do-they-want-to-live-120987">What sort of housing do older Australians want and where do they want to live?</a>
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<p>The research doesn’t explore why traditional neighbourhoods are no longer meeting the demands of older people. However, we do know gentrification and increasing density have remodelled many suburbs. Many older people are vulnerable to isolation as families and neighbours move away and the pace and character of community life change.</p>
<p>Well-travelled and consumer-savvy baby boomers might also be more open to seeking alternatives to staying put. </p>
<p>Whatever the motives, older Australians have a clear need for more diverse housing options.</p>
<p>We need to develop a bolder vision for housing in retirement, to move beyond an economic framing of housing wealth to one that enables us to build connected and vibrant communities that support people to age well.</p>
<p>This demands we rethink models of home ownership, developing financial and legal products that support shared equity and co-ownership, and diversify development models, encouraging the housing choices for which older people are crying out.</p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/co-housing-works-well-for-older-people-once-they-get-past-the-image-problem-79907">Co-housing works well for older people, once they get past the image problem</a>
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<p>As many more retirees remain in rental properties into old age, we must also find ways to increase tenant control and provide secure tenure. We need uniform tenancy laws covering private rental housing across the nation. </p>
<p>And we must actively design neighbourhoods that encourage neighbourliness, combining privacy with informal networks of social and practical support, companionship and care.</p>
<p>Achieving these changes begins with accepting that every Australian has a right to secure housing. Like health care, a secure and stable home is fundamental to quality of life. It should be delivered as a universal basic service.</p>
<p>It will take significant reform before we have a housing system in which Australians of all ages and abilities live in thriving, connected and safe neighbourhoods. </p>
<p>This shift from housing as a commodity to home as a community will take time, investment and, most importantly, imagination, but the potential for Australia to build a world-standard housing system for retirees is there for the taking.</p>
<hr>
<p><em>Per Capita’s Centre for Applied Policy in Positive Ageing is launching its Home for Good project in collaboration with The Australian Centre for Social Innovation today. Read more about the project <a href="http://bit.ly/home-for-good">here</a>.</em></p>
<p><em>This article was co-authored by Kerry Jones, Director: Systems Initiatives, at <a href="https://www.tacsi.org.au/about/">The Australian Centre for Social Innovation</a>. The centre is generously supported by the Wicking Trust.</em></p><img src="https://counter.theconversation.com/content/131151/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Emma Dawson is the Executive Director of Per Capita. Per Capita’s Centre for Applied Policy in Positive Ageing receives funding from the Wicking Trust. </span></em></p><p class="fine-print"><em><span>Myfan Jordan is the Director of Social Innovation at Per Capita’s Centre for Applied Policy in Positive Ageing (CAPPA). The centre receives funding from the Wicking Trust.</span></em></p>More older Australians are carrying housing debt later in life, or not owning homes at all, but lack suitable alternatives to the family home. The result is lower incomes in retirement.Emma Dawson, Honorary Fellow, School of Social and Political Sciences, The University of MelbourneMyfan Jordan, Associate, Health Ageing Research Group (HARG), La Trobe UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1219562019-08-15T11:57:28Z2019-08-15T11:57:28ZGrattan on Friday: How ‘guaranteed’ is a rise in the superannuation guarantee?<figure><img src="https://images.theconversation.com/files/288167/original/file-20190815-136217-1kyukcs.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Failure to further strengthen the compulsory super system would be disadvantageous to many future retirees and be an added burden on a later generation of taxpayers. </span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/back-view-full-length-portrait-old-1244647195">Shutterstock</a></span></figcaption></figure><p>Soon after the election Treasurer Frydenberg flagged there would be an inquiry into retirement incomes. Since then, no details have emerged.</p>
<p>But there is gossip around Canberra there might be some action in the next couple of weeks on a review that would report before the end of 2020.</p>
<p>This issue, with compulsory superannuation its pointy end, and that of industrial relations, on which minister Christian Porter is doing a stocktake, have common threads in political terms.</p>
<p>They will test the clout of powerful interests outside the parliament, and of backbench activists within the Coalition. Meaning, they will test the Prime Minister.</p>
<p>In another life, Peter Collins was a NSW Liberal treasurer and opposition leader. These days, he’s deputy chair of Industry Super Australia, which he previously chaired for six years.</p>
<p>Collins told a Rice Warner summit on superannuation in Canberra on Monday that Scott Morrison had the opportunity to “reset the relationship” with industry and public sector superannuation funds, after the negativity of the Turnbull government - which was preoccupied with trying to curb union power in the industry funds. (It was less than pleased when the industry funds emerged from a Productivity Commission inquiry a good deal shinier than the retail funds.)</p>
<p>Collins also recounted how a few weeks ago, US Commerce Secretary Wilbur Ross had invited IFM Investors, the infrastructure investment vehicle for many industry funds (and overseas pension funds of a similar nature), to join the US Investment Advisory Council. This is described as “established by the Secretary of Commerce to solicit private sector advice on the promotion and retention of foreign direct investment” to the US.</p>
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<em>
<strong>
Read more:
<a href="https://theconversation.com/there-is-a-problem-with-retirement-incomes-but-it-isnt-the-super-guarantee-120591">There is a problem with retirement incomes, but it isn't the super guarantee</a>
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<p>It seemed the US administration had a rather more positive attitude to industry and public sector funds than the Coalition government.</p>
<p>Collins also points to the scope, under a “reset relationship” for these funds to do more on the infrastructure front in Australia. “There is no other pot of gold” for infrastructure, he says.</p>
<p>Not surprisingly, these funds are hanging out for the terms of reference for the retirement inquiry, in particular how they impact on the legislated rise due to start from mid-2021, to take the superannuation guarantee gradually from the current 9.5% to 12% by 2025.</p>
<p>The Productivity Commission saw the need for “an independent public inquiry into the role of compulsory superannuation in the broader retirement incomes system”. Others question the case for an inquiry when the various policy settings appear to be in place.</p>
<p>The PC has reported on necessary administrative reforms. Changes have already been made to the tax treatment of superannuation. Overhaul of the aged pension system doesn’t seem on the radar. </p>
<p>And, crucially, the rise in the super guarantee is baked into law - and, Morrison says, into Coalition policy.</p>
<p>But some are suspicious (and others hopeful) the retirement inquiry could pave the way for the government to seek to defer the July 2021 rise, and then put to the 2022 election the proposition that workers should be able to get the money through wage increases rather than having it locked away.</p>
<p>This would also set up a convenient issue for wedging Labor, which would be committed to the guarantee increasing. It’s easy to see the line – it could be portrayed as another case of the ALP wanting to “increase taxes” rather than giving employees their money.</p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/voluntary-super-a-good-way-to-increase-womens-dependence-on-men-120979">Voluntary super: a good way to increase women's dependence on men</a>
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<p>If it all sounds too Machiavellian, it is worth remembering the Coalition has form on the issue.</p>
<p>The Howard government proposed workers should be able to “opt out” of the compulsory scheme and receive wage increases instead, although this didn’t go ahead. The Abbott government deferred rises until 2021.</p>
<p>New Liberal senator Andrew Bragg, who addressed Monday’s conference (although he avoided the guarantee issue for political reasons) is one of a number of Coalition backbenchers who oppose the rise to 12%. They are looking to the inquiry to leverage change.</p>
<p>They have an ally in the Grattan Institute, which argues the increase to 12% should be abandoned, maintaining “it would effectively compel most people to save for a higher living standard in retirement than they enjoy during their working lives”.</p>
<p>The temptation for scrapping the rise, or having some “opt out” system, becomes stronger when wages are flat – a problem reinforced by the latest figures this week.</p>
<p>But there is a strong counter case that such a course would be bad in practical and policy terms.</p>
<p>There’s no certainty workers would actually get the extra money, or all of it, in wage increases. Attempting to compel that would be complex and fraught.</p>
<p>More importantly, failure to strengthen further the compulsory system would disadvantage many individual retirees in the future and be an added burden on a later generation of taxpayers, as more people would be pushed onto full aged pensions.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/vital-signs-amid-talk-of-recessions-our-progress-on-wages-and-unemployment-is-almost-non-existent-121813">Vital Signs: Amid talk of recessions, our progress on wages and unemployment is almost non-existent</a>
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<p>While many Liberals don’t like the compulsory aspect of the super guarantee, it’s the history of the scheme (one of Paul Keating’s legacies) and most particularly the unions’ role - and the flow-on power that gives unions - that really rile them.</p>
<p>One would think, however, that much about compulsory superannuation fits with Liberal philosophy, which emphasises self reliance.</p>
<p>Admittedly the argument for workers having immediate access to their money, at a time of life when they face their most severe cost-of-living pressures, is seductive. But it short term thinking, from the points of view of both individuals and governments.</p>
<p>Much of the debate is being conducted around modelling, stretching out decades, calculating the competing financial implications for low income workers. But modelling, with its assumptions, carries a degree of false precision. It also represents one-dimensional thinking.</p>
<p>People on low incomes are naturally going to spend any extra money rather than save it. Yet for these people savings are what they need for the long term. This applies especially for women, for whom more, not fewer, ways should be found to augment their superannuation.</p>
<p>Forced saving might be unpleasant in the moment, but valued at the time of a more comfortable and secure retirement. Promises of the money being used for wage increases carry political appeal for a government now, but future governments would benefit if the aged pension burden is contained by a healthily growing compulsory super scheme.</p><img src="https://counter.theconversation.com/content/121956/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Michelle Grattan does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Liberal senator Andrew Bragg is one of the Coalition backbenchers who oppose the scheduled superannuation guarantee rise to 12%. They are looking to the retirement incomes inquiry to leverage change.Michelle Grattan, Professorial Fellow, University of CanberraLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1062372018-11-06T19:14:23Z2018-11-06T19:14:23ZWhy we should worry less about retirement - and leave super at 9.5%<figure><img src="https://images.theconversation.com/files/244054/original/file-20181106-74754-18c9lhn.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Most retirees are financially secure. Many earn more than they did while working, the Grattan Institute finds.</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>It’s conventional wisdom that Australians don’t save enough for retirement. Most workers themselves <a href="http://csrm.cass.anu.edu.au/sites/default/files/docs/ANUPoll-ageing-money-feb-2016%257B%255C_%257D0.pdf">think</a> they won’t have enough to retire on, and their concerns are <a href="http://nabnews.efront-flare.com.au/wp-content/uploads/2017/08/MLCWealth-%2520Sentiment-Survey-Q1-2017.pdf">rising</a>. </p>
<p>But the conventional wisdom is wrong.</p>
<p>Our new report, <a href="https://grattan.edu.au/report/money-in-retirement/">Money In Retirement: More Than Enough</a> shows that most people who are actually retired <a href="https://www.mebank.com.au/getmedia/2046702b-39c0-457b-8950-80d75e716bcd/ME-s-14th-Household-Financial-Comfort-Report_August-2018.pdf">feel more comfortable financially</a> than the Australians younger than them who are still working. </p>
<p>Retirees of today tend to slow their spending as they age, tend to keep saving in retirement, and often leave an legacy almost as big as the nest egg they had on the day they retired.</p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/the-myth-of-the-ageing-crisis-168">The myth of the ageing 'crisis'</a>
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</em>
</p>
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<p>When surveyed today the retirees of the future might be worried about their retirement, but economic growth means they will almost certainly be on even higher incomes than retirees today.</p>
<p>These findings might seem surprising: they contradict the repeated messaging from the financial services industry that Australians won’t have enough for retirement. </p>
<p>But that industry’s claims are based on research that overlooks two important points.</p>
<h2>Retirees spend less over time</h2>
<p>Much of the research assumes that retirees need to save enough to enable their incomes to <a href="https://melbourneinstitute.unimelb.edu.au/downloads/working-paper-series/wp2014n05.pdf">keep</a> <a href="https://www.actuaries.asn.au/Library/Opinion/2015/ForRicherForPoorerRetirementIncomes2WEB.pdf">climbing</a> throughout their retirement in line with general wage growth. </p>
<p>Implicitly, it assumes that a retiree needs to spend 25% more at age 90 than at age 70, after accounting for inflation. </p>
<p>But our analysis shows that retired Australians tend to spend less over time, even those who have money to spare. </p>
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<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/244006/original/file-20181105-74754-1c9ftyn.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/244006/original/file-20181105-74754-1c9ftyn.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/244006/original/file-20181105-74754-1c9ftyn.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=415&fit=crop&dpr=1 600w, https://images.theconversation.com/files/244006/original/file-20181105-74754-1c9ftyn.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=415&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/244006/original/file-20181105-74754-1c9ftyn.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=415&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/244006/original/file-20181105-74754-1c9ftyn.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=522&fit=crop&dpr=1 754w, https://images.theconversation.com/files/244006/original/file-20181105-74754-1c9ftyn.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=522&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/244006/original/file-20181105-74754-1c9ftyn.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=522&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<p>Young retirees might chalk up frequent flyer points, but they do it less as they get older. </p>
<p>Spending tends to slow at around the age of 70, and falls rapidly after age 80, to just 84% of what was spent at retirement age.</p>
<p>Even the wealthiest retirees spend less as they age. At the other end of the scale, pensioners receive discounts on everything from car registration to rates.</p>
<p>Our research finds that retirees spend less over time on food, alcohol, tobacco, clothes, furnishings, transport and recreation.</p>
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<p>They spend more on health care as they age, but Medicare <a href="https://theconversation.com/young-australians-set-to-pay-for-government-policy-mistakes-35250">largely shields them</a> from the full costs. The modestly higher out-of-pocket costs they do pay are mainly due to <a href="https://theconversation.com/private-health-insurance-premium-increases-explained-in-14-charts-92825">rising premiums</a> for private health insurance.</p>
<p>Not only do most retirees not draw down their savings throughout retirement, many add to them. </p>
<p>Even among pensioners, one recent study found that the median (typical) pensioner <a href="http://journals.sagepub.com/doi/abs/10.1177/0312896216682577">still had 90%</a> of what he or she retired on after eight years.</p>
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<p>
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<strong>
Read more:
<a href="https://theconversation.com/poor-and-rich-retirees-spend-about-the-same-64297">Poor and rich retirees spend about the same</a>
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<p>This means that calculations about the adequacy of retirement savings ought to be based on whether they are enough to maintain buying power (at best) rather increase it in line with wage growth.</p>
<p>Many <a href="http://www.industrysuperaustralia.com/publications/reports/nearly-half-of-australians-will-not-have-a-comfortable-retirement/">prominent studies</a> also ignore non-super savings, which are <a href="https://theconversation.com/the-superannuation-myth-why-its-a-mistake-to-increase-contributions-to-12-of-earnings-66209">material</a>, especially for wealthier households. </p>
<p>They lead to misguided calls for ever-higher super contributions in order to ensure reach the point where super alone is enough to provide an adequate retirement income, even though many households will have income from other sources.</p>
<h2>Most will have enough super</h2>
<p>Our modelling shows that people starting work today will have adequate retirement incomes: workers of all income levels will retire on incomes at least 70% of their pre-retirement earnings – the so-called replacement benchmark used by the Organisation for Economic Cooperation and Development and the <a href="https://www.mercer.com.au/our-thinking/mmgpi.html#contactForm">Mercer Global Pension Index</a>. </p>
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<p>In fact the median (typical) worker can expect a retirement income of 91% of his or her pre-retirement income. </p>
<p>This means that many low-income Australians will actually get a <em>pay rise</em> on retirement.</p>
<p>Even workers in their 40s and 50s today – many of whom didn’t benefit from the present high rate of compulsory super contributions for their entire working lives – can expect a retirement income of about 70% of their pre-retirement incomes.</p>
<h2>So compulsory super can stay at 9.5%</h2>
<p>It means that that there is no obvious case to lift compulsory super contributions from 9.5% to 12% of salary as presently legislated.</p>
<p>Doing so might further boost retirement incomes (especially among those low and middle earners unable to compensate for the higher contributions by winding back other savings), but at the expense of providing lower incomes while working. </p>
<p>As the <a href="http://taxreview.treasury.gov.au/content/FinalReport.aspx?doc=html/publications/Papers/Final_Report_Part_2/chapter_a2-2.htm">Henry Tax Review</a> noted, higher compulsory super contributions are ultimately funded by lower wages than would have been the case, meaning lower living standards while in work.</p>
<p>As it happens, higher contributions would do little to change the retirement incomes of low and middle income Australians. Their extra superannuation income they provided would cut their age pension payments. </p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/the-superannuation-myth-why-its-a-mistake-to-increase-contributions-to-12-of-earnings-66209">The superannuation myth: why it's a mistake to increase contributions to 12% of earnings</a>
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<p>Higher compulsory contributions would also damage pensions in another way. </p>
<p>The age pension is <a href="https://www.dss.gov.au/our-responsibilities/seniors/benefits-payments/pension-rates">indexed to wage growth</a> which would be lower if employers diverted a steadily increasing proportion of their employee budget to super.</p>
<p>It means the most fervent opponents of a lift in compulsory super contributions from 9.5% to 12% ought be those people presently on the age pension.</p>
<p>The government ought to oppose it as well. Diverting more of what would have been wages to more lightly taxed super will strain its budget. Scrapping the proposed increase would <a href="https://insidestory.org.au/not-so-super/">save</a> it an impressive A$2 billion a year.</p>
<h2>We can find better ways to help retirees</h2>
<p>Even if governments did feel it necessary to boost retirement incomes, lifting compulsory super contributions would be one of the worst ways to do it. </p>
<p>Loosening the age pension assets test taper could boost retirement incomes of around 20% of retirees, climbing to more than 70% over time. It would cost the Budget just A$750 million a year – less than half the cost to it of the proposed increase in compulsory super.</p>
<p>The real priority - by far the biggest bang for the buck in alleviating poverty in retirement - should be boosting Commonwealth rent assistance by 40%, providing an extra $1,410 a year for retired singles and $1,330 for retired couples.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/renters-beware-how-the-pension-and-super-could-leave-you-behind-105840">Renters Beware: how the pension and super could leave you behind</a>
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<p>Senior Australians who rent privately are much more likely to <a href="https://theconversation.com/three-charts-on-poorer-australians-bearing-the-brunt-of-rising-housing-costs-87003">suffer financial stress</a> than homeowners. And renting will become more widespread as younger generations on low incomes find themselves less able to afford homes.</p>
<p>Australians have been told for decades that they’re not saving enough for retirement. Such claims are inconsistent with the facts. Most of today’s workers <a href="https://insidestory.org.au/the-reassuring-truth-about-retirement-incomes/.">can already expect a comfortable retirement</a>. Forcing them and future workers to save more money for retirement that they’ll never spend is simply a recipe for larger bequests.</p><img src="https://counter.theconversation.com/content/106237/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Grattan Institute began with contributions to its endowment of $15 million from each of the Federal and Victorian Governments, $4 million from BHP Billiton, and $1 million from NAB. In order to safeguard its independence, Grattan Institute’s board controls this endowment. The funds are invested and contribute to funding Grattan Institute's activities. Grattan Institute also receives funding from corporates, foundations, and individuals to support its general activities as disclosed on its website. </span></em></p><p class="fine-print"><em><span>John Daley and Jonathan Nolan do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Compelling Australians to put even more into super runs the risk of giving them a better standard of living in retirement than they had while working.Brendan Coates, Fellow, Grattan InstituteJohn Daley, Chief Executive Officer, Grattan InstituteJonathan Nolan, Associate, Grattan InstituteLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1058402018-11-04T19:17:28Z2018-11-04T19:17:28ZRenters Beware: how the pension and super could leave you behind<figure><img src="https://images.theconversation.com/files/243634/original/file-20181102-83632-ws4yw1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Super and the pension treat most retirees well, but not renters.</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>How we fund retirement in an ageing century ought to worry all of us. </p>
<p>But one group of us should be much more worried than the rest.</p>
<p>In a new set of <a href="http://cepar.edu.au/resources-videos/research-briefs">research briefs</a> published by the Centre of Excellence of Population Ageing Research, we report that most people do well out of our retirement income system and that the living standard of retirees has improved over the past decade. </p>
<p>In international comparisons, our system <a href="https://www.mercer.com.au/our-thinking/mmgpi.html">ranks highly</a>, for good reason.</p>
<h2>Most retirees do well</h2>
<p>About 60% of older Australians can afford a lifestyle better than that deemed to be “modest” by widely used standards. </p>
<p>Households headed by baby boomers reaching retirement age between 2006 and 2016 did so with incomes 45% higher than those who retired a decade earlier. </p>
<p>Typical boomer households aged in their late 60s earn almost as much as they did when they were still working - only 20% less, that is, with about 80% of their working income maintained.</p>
<p>And their needs are lower. Lower spending in retirement is common because older households need to pay less for transport, less for working clothes, and have more time to cook. </p>
<p>Many continue to save while in retirement.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/please-not-another-super-scheme-mr-keating-its-what-the-pension-is-for-105666">Please, not another super scheme, Mr Keating. It's what the pension is for</a>
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<p>And they tend to spend less over time, rather than more over time as <a href="https://www.superannuation.asn.au/resources/retirement-standard">benchmarks publicised by the superannuation industry</a> assume. </p>
<p>When we included the value of living rent-free for the 80% or more of retirees who own their own home (about A$10,000 per year on average), we found older Australians live in no more poverty than working age Australians. </p>
<h2>But not renters</h2>
<p>The living standards of those who rent in retirement are very different. Only about 15% of older renters can afford a lifestyle better than “modest”. </p>
<p>Single renters are particularly badly off. </p>
<p>Among all older people only about 10% fall below the poverty line set at half the median income.</p>
<p>Among older Australians who rent, 40% fall below.</p>
<p>Among older Australians who rent alone, it’s more than 60%.</p>
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<p>If that relative poverty measure seems too abstract, an absolute dollar figure might help.</p>
<p>Alarming research aired on the ABC in September found that, on average, aged care homes were spending <a href="https://www.abc.net.au/news/2018-09-17/food-in-aged-care/10212880">$6.08 per day on food</a> per resident.</p>
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<p>Our research finds that among pensioners who rent alone, one quarter spend <a href="http://cepar.edu.au/sites/default/files/retirement-income-in-australia-part2.pdf">even less than that</a> per day.</p>
<h2>And it’s getting worse</h2>
<p>The pension has always favoured home owners.</p>
<p>On the one hand it is insufficient for renters and on the other it doesn’t cut pension payments to the owners of very valuable homes, because the value of any home - no matter how big - is excluded from the pension means test. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/lets-talk-about-the-family-home-and-its-exemption-from-the-pension-means-test-61736">Let's talk about the family home ... and its exemption from the pension means test</a>
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<p>Rental assistance, introduced to complement the pension in the 1980s, was meant to alleviate this, and to some extent it does. </p>
<p>But it climbs only in line with the consumer price index every six months, which usually fails to keep pace with rents.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/life-as-an-older-renter-and-what-it-tells-us-about-the-urgent-need-for-tenancy-reform-103842">Life as an older renter, and what it tells us about the urgent need for tenancy reform</a>
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<p>Sydney rents have doubled over the past two decades. The consumer price index has climbed 68%.</p>
<p>As a result, rental assistance is less effective in reducing financial stress than it was when it was introduced, and is set to become even less effective if rents continue to climb more quickly than the price index.</p>
<h2>And more of us look set to rent</h2>
<p>Households headed by Australians aged 35 to 44 are now 10 percentage points less likely to own their own home than were households headed by people of the same age a generation earlier.</p>
<p>They might be merely postponing buying homes until they are older as more of what would have been their income is sequestered into super and they enter the workforce and retire later.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/explainer-whats-really-keeping-young-and-first-home-buyers-out-of-the-housing-market-45716">Explainer: what's really keeping young and first home buyers out of the housing market</a>
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<p>If so, they might end up owning and paying off homes by retirement at the same rate as boomer households did before them. </p>
<p>If not, more and more of them could end up in poverty in retirement.</p><img src="https://counter.theconversation.com/content/105840/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Rafal Chomik works for the ARC Centre of Excellence in Population Ageing Research which receives funding from the Australian Research Council. He doesn't own a home.</span></em></p>If you rent, you are highly likely to live in poverty in retirement. If you own your own home the pension and super will probably be enough for you.Rafal Chomik, Senior Research Fellow, ARC Centre of Excellence in Population Ageing Research (CEPAR), UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/938502018-04-03T22:56:04Z2018-04-03T22:56:04ZWant a richer pension? Divest of fossil fuels<figure><img src="https://images.theconversation.com/files/214765/original/file-20180413-47416-1moyodf.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Suncor's plant in the oilsands in Fort McMurray Alta. Divesting in fossil fuels can not only help combat climate change, but can also increase investors’ returns, according to a new analysis. </span> <span class="attribution"><span class="source">THE CANADIAN PRESS/Jason Franson</span></span></figcaption></figure><p>After several years without an increase in greenhouse gas emissions, <a href="https://www.nature.com/news/world-s-carbon-emissions-set-to-spike-by-2-in-2017-1.22995">the world experienced a spike in 2017</a> even though many governments had promised to cut their emissions. </p>
<p>Some NGOs, including <a href="https://350.org/">350.org</a> and <a href="https://www.divestinvest.org/">DivestInvest</a>, promote divestment from the fossil fuel sector as a way to reduce carbon emissions. Furthermore, some investors like Quebec’s <a href="https://www.theglobeandmail.com/report-on-business/caisse-targets-climate-change-with-new-investment-plan/article36642583/">Caisse Depot</a> and <a href="https://cop23.unfccc.int/news/new-york-city-to-divest-pension-funds-of-fossil-fuels">The New York City Pension Funds</a> have announced that they plan to reduce their fossil fuel investments or divest totally from the sector.</p>
<p>This movement is also part of private and <a href="https://ec.europa.eu/clima/news/sustainable-finance-commissions-action-plan-greener-and-cleaner-economy_en">governmental efforts to connect the financial sector with climate finance</a> by both divesting from fossil fuels and reinvesting in a low-carbon economy.</p>
<p><a href="https://doi.org/10.1177/1086026617744278">Though the divestment movement’s outreach goes beyond direct financial impacts</a>, questions remain about the financial and carbon-related consequences of divestment. </p>
<h2>Pensions in danger?</h2>
<p>Without knowing the answers to these questions, institutional investors, such as pension funds, are at risk with regard to fiduciary duty. Some beneficiaries will rightfully ask whether they’ll lose parts of their pension if their pension fund divests from fossil fuels.</p>
<p>What’s more, it’s still unclear what types of investment strategies are able to significantly reduce the <a href="https://www.carbonfootprint.com/">carbon footprint</a> of financial portfolios. </p>
<p>Finally, it’s important to understand the consequences of divestment in a fossil fuel-heavy market like Canada. Many argue that divestment in a small and concentrated market increases financial risks.</p>
<p>In a <a href="https://uwspace.uwaterloo.ca/handle/10012/13043">recent study at the University of Waterloo</a>, we analyzed what happens if different divestment strategies are applied to the Canadian stock index <a href="https://www.tsx.com">TSX 260</a>. Other studies addressing the U.S. market have had similar results.</p>
<p>We simulated six different divestment strategies presented in the table below, and assessed the financial and carbon-related consequences. The strategies in the table are ranked from low to high by the number of stock divested.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/212273/original/file-20180327-109190-fhr81h.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/212273/original/file-20180327-109190-fhr81h.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=318&fit=crop&dpr=1 600w, https://images.theconversation.com/files/212273/original/file-20180327-109190-fhr81h.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=318&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/212273/original/file-20180327-109190-fhr81h.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=318&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/212273/original/file-20180327-109190-fhr81h.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=400&fit=crop&dpr=1 754w, https://images.theconversation.com/files/212273/original/file-20180327-109190-fhr81h.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=400&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/212273/original/file-20180327-109190-fhr81h.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=400&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption"></span>
<span class="attribution"><span class="source">Author provided</span></span>
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<p>In our simulation, we took the divested funds and distributed them into the remaining sectors. We then used a <a href="https://en.wikipedia.org/wiki/Carhart_four-factor_model">commonly used stock-market model</a> that predicts whether prices for individual stocks are likely to move up or down. Our simulation showed that after divestment, the value of the portfolio continued to grow, and performed better than the TSX 260.</p>
<p>The following graph compares the financial returns of the different divestment strategies and the original benchmark TSX 260. The black line represents the TSX 260. The other lines show the financial performance of the different investment strategies. The divestment portfolios out-perform the Canadian benchmark with regard to risk-adjusted financial returns.</p>
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<img alt="" src="https://images.theconversation.com/files/212270/original/file-20180327-109204-1txt1xz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/212270/original/file-20180327-109204-1txt1xz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=329&fit=crop&dpr=1 600w, https://images.theconversation.com/files/212270/original/file-20180327-109204-1txt1xz.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=329&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/212270/original/file-20180327-109204-1txt1xz.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=329&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/212270/original/file-20180327-109204-1txt1xz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=413&fit=crop&dpr=1 754w, https://images.theconversation.com/files/212270/original/file-20180327-109204-1txt1xz.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=413&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/212270/original/file-20180327-109204-1txt1xz.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=413&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Risk-adjusted returns of the divestment portfolios and the benchmark TSX 260 (black line)</span>
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</figure>
<p>After demonstrating that divestment portfolios out-perform the Canadian benchmark financially, we present the effect of divestment on the actual carbon footprint of the various divestment strategies. </p>
<p>The carbon footprint consists of the carbon equivalent emissions (CO₂e) of the invested firms per millions of dollars in sales. For instance, if an investor invests money in a high carbon-emitting industry, such as fossil fuels, the carbon footprint of the portfolio is also high. Investing in low-emitting industries results in a portfolio with a low carbon footprint.</p>
<p>The carbon footprint chart below shows the CO₂e emissions of the different divestment strategies, and the benchmark. It demonstrates that excluding all fossil fuel-related industries, including utilities, creates the biggest reduction of the carbon footprint at 77 per cent.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/212271/original/file-20180327-109207-14io7os.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/212271/original/file-20180327-109207-14io7os.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=369&fit=crop&dpr=1 600w, https://images.theconversation.com/files/212271/original/file-20180327-109207-14io7os.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=369&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/212271/original/file-20180327-109207-14io7os.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=369&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/212271/original/file-20180327-109207-14io7os.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=463&fit=crop&dpr=1 754w, https://images.theconversation.com/files/212271/original/file-20180327-109207-14io7os.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=463&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/212271/original/file-20180327-109207-14io7os.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=463&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">CO₂e footprint of the benchmark TSX 260 and different divestment strategies.</span>
</figcaption>
</figure>
<p>Though this study addressed the Canadian market, similar studies exist for the U.S. market that suggest similar results. <a href="https://doi.org/10.1016/j.ecolecon.2017.11.036">One analysis used data</a> on all listed and delisted U.S. common stocks between 1927 and 2017 found a moderate outperformance of divested portfolios compared to conventional benchmarks. </p>
<p><a href="https://doi.org/10.1016/j.gfj.2017.10.004">Another 2017 study</a> using a range of measures based on S&P 500 industry sectors found that portfolios that divest from fossil fuels and utilities and invest in clean energy perform better than those with fossil fuels and utilities.</p>
<p>The results of our study suggest the following: Divestment increases risk-adjusted financial returns even in a fossil fuel-heavy financial market such as Canada. </p>
<p>And so the <a href="https://www.riacanada.ca">socially responsible investment</a> strategy that is mainly ethically driven also happens to be beneficial from a financial point of view. </p>
<p>Therefore, it can also be applied by investors that are bound to <a href="http://www.thecanadianencyclopedia.ca/en/article/law-of-fiduciary-obligation/">fiduciary duty</a>. Pensioners don’t need to fear their pension income will be reduced if their pension fund managers opt to divest from the fossil fuel sector.</p>
<p>In addition, divestment helps to reduce the carbon footprint of investment portfolios. This reduction <a href="http://www.corporateknights.com/reports/2016-eco-fund-rating/digging-into-the-eco-fund-ratings-14530788/">lessens the exposure to carbon- related financial risks</a>, such as the risk of being exposed to costly carbon-related regulations, taxes or mandatory cap-and-trade markets.</p>
<p>Furthermore, divestment strategies create portfolios that attract ethical investors. These types of investors want to reduce their participation in the fossil-fuel industry because of climate change concerns.</p>
<p>Though divestment should not be the only way for investors to <a href="https://www.investmentexecutive.com/inside-track_/dustyn-lanz/making-sense-of-the-debate-on-fossil-fuel-divestment/">address climate change</a>, it seems effective in reducing financial risks, in helping people to invest ethically — and even to increase financial returns.</p><img src="https://counter.theconversation.com/content/93850/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Olaf Weber receives funding from Social Science and Humanities Research Council (SSHRC). </span></em></p><p class="fine-print"><em><span>Chelsie Hunt receives funding from Social Science and Humanities Research Council (SSHRC)</span></em></p>A recent study suggests that divesting in fossil fuels not only allows investors to address their climate change concerns, it also reduces financial risks and increases financial returns.Olaf Weber, Professor of Sustainable Finance and Banking, University of WaterlooChelsie Hunt, Project Manager, Monitoring and Impact Measurement, University of WaterlooLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/808952017-07-30T20:11:00Z2017-07-30T20:11:00ZDownsizing cost trap awaits retirees – five reasons to be wary<figure><img src="https://images.theconversation.com/files/179733/original/file-20170726-30108-h6wbsw.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Add up all the neglected costs of downsizing and retirees have good reason to be wary of making the move.</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/worried-senior-couple-checking-their-bills-388566784?src=AAHgc3E3V_gFUzd07Jphfg-1-0">wavebreakmedia from www.shutterstock.com</a></span></figcaption></figure><p>It’s time to debunk the myth of zero housing costs in retirement if we want to understand why retirees resist downsizing. Retirees have at least five reasons to be wary of the costs of downsizing.</p>
<p>Retirees living in middle-ring suburbs face frequent calls to downsize into apartments to free up larger allotments in these suburbs for redevelopment. Retirees who fail to downsize into smaller units and apartments are viewed as being a greedy, baby-boomer elite, stealing financial security from younger generations. </p>
<p>It also makes sense to policymakers for retirees to move into less spacious accommodation and make way for high-density housing. Housing think-tank AHURI <a href="http://www.ahuri.edu.au/__data/assets/pdf_file/0021/14079/AHURI_Final_Report_No_286_Australian-demographic-trends-and-implications-for-housing-assistance-programs.pdf">fosters this view</a>. Yet seniors remain resistant to moving, in part because of the ongoing costs they would face. </p>
<hr>
<p><strong>Further reading:</strong> <a href="https://theconversation.com/lack-of-housing-choice-frustrates-would-be-downsizers-60512">Lack of housing choice frustrates would-be downsizers</a></p>
<hr>
<p>The concept of zero housing costs in retirement is based on a 1940s view of a well-maintained, single dwelling on a single allotment of land where the mortgage has been paid off. This concept is incompatible with medium- and high-density housing and refusing to acknowledge ongoing housing costs may cause significant poverty for retirees. </p>
<h2>Reason 1 – upfront moving costs are high</h2>
<p>When a house is sold the owner receives the sale funds minus the real estate and legal fees. When the same person then buys a different property to live in, they pay legal fees plus stamp duty. </p>
<p>For cities such as Melbourne and Sydney, these costs are likely to exceed A$70,000. </p>
<p>These high transfer costs may mean it is not cost-effective <a href="https://theconversation.com/why-older-australians-dont-downsize-and-the-limits-to-what-the-government-can-do-about-it-76931">for the person to move</a>. </p>
<h2>Reason 2 – levies are high</h2>
<p>Because apartment owners pay body corporate levies, people often assume this is just the same as periodic payment of rates, water, insurance and other costs. It is not. </p>
<p>Fees remissions for low-income retirees for rates, power, insurance and water are difficult to apply within a body corporate environment. As a consequence, these are usually not applied to owners of apartments.</p>
<p>The costs of maintaining essential services, such as mandatory fire-alarm testing, yearly engineering certification, lift and air-conditioning inspections, significantly increase ownership costs. </p>
<p>When additional services are supplied, such as swimming pools, gyms and rooftop gardens, these also require periodic inspections. Garbage collection, cleaning, gardening, concierge and strata management services also <a href="https://eprints.utas.edu.au/cgi/users/home?screen=EPrint%3A%3AView&eprintid=23322">must be paid</a>. </p>
<p>Owners of standard suburban homes choose whether they want these services, with those on fixed incomes going without them. </p>
<p>Annual levies for apartment buildings vary, but expect to pay between $10,000 and $15,000. They <a href="https://www.strata.community/understandingstrata/faqs">may be more than this</a>.</p>
<h2>Reason 3 – costs of maintenance</h2>
<figure class="align-right ">
<img alt="" src="https://images.theconversation.com/files/179734/original/file-20170726-30125-d2g2s8.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/179734/original/file-20170726-30125-d2g2s8.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=628&fit=crop&dpr=1 600w, https://images.theconversation.com/files/179734/original/file-20170726-30125-d2g2s8.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=628&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/179734/original/file-20170726-30125-d2g2s8.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=628&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/179734/original/file-20170726-30125-d2g2s8.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=790&fit=crop&dpr=1 754w, https://images.theconversation.com/files/179734/original/file-20170726-30125-d2g2s8.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=790&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/179734/original/file-20170726-30125-d2g2s8.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=790&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Lift maintenance is one of many costs that suburban home owners needn’t worry about.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/man-hitting-elevator-653680081?src=LJc4V1Yb8nrTn7HULDVsyw-1-72">shutterstock</a></span>
</figcaption>
</figure>
<p>Apartments are often sold as a maintenance-free solution for older people. The maintenance is not free. It needs to be paid for. </p>
<p>Maintenance costs are higher in an apartment than a standard suburban home because there are more items and services to be maintained and fixed. Lifts and air conditioning need periodic servicing and fixing. This is in addition to the mandatory inspections listed above.</p>
<h2>Reason 4 – loss of financial security</h2>
<p>It is a mistaken belief that the maintenance costs that form part of the body corporate fee include periodic property upgrades. This relates to items that are owned collectively with other apartment owners. </p>
<p>Major servicing at the ten-year mark and usually each five-to-seven years after that include painting, floor-covering replacement, and lift and air-conditioning repair or replacement. </p>
<p>Major upgrades may also include garden redesign or other external building enhancement including <a href="https://eprints.utas.edu.au/cgi/users/home?screen=EPrint%3A%3AView&eprintid=23315">environmental upgrades</a>. All owners share these upgrade costs. </p>
<p>Costs of upgrading the inside of an apartment (a bathroom disability upgrade, for example) are additional again. </p>
<p>Once the body corporate committee members pledge funds towards an upgrade, all owners are required to raise their share of the funds, whether they can afford it or not. Communal choice outweighs an individual owner’s need to delay upgrade costs. </p>
<p>Owners who buy apartments that are part of a body corporate effectively lose control of their future financial decisions.</p>
<h2>Reason 5 – loss of security of tenure</h2>
<p>Loss of security of tenure is usually associated with renters. However, the recent introduction of <a href="http://www.lpi.nsw.gov.au/__data/assets/pdf_file/0009/25965/Termination_of_a_strata_scheme_by_RG.pdf">termination legislation</a> in New South Wales gives other owners the right to vote to terminate a strata title scheme. When this occurs, all owners, including reluctant owners of apartments within that scheme, are compelled to sell.</p>
<p>There are valid reasons why termination legislation is desirable, as many older apartment complexes are reaching the end of their useful life. </p>
<p>Even so, as termination legislation is rolled out across the states, owner- occupiers effectively lose control of how long they will own a property for. They no longer have security of tenure, which means retirees may face an uncertain housing future in their old age.</p>
<hr>
<p><strong>Further reading:</strong> <a href="https://theconversation.com/when-developers-come-knocking-why-strata-law-shake-up-wont-deliver-cheaper-housing-50971">Why strata law shake-up won’t deliver cheaper housing</a></p>
<hr>
<h2>Downsizing raises poverty risks</h2>
<p>Because current data sets do not adequately take account of ongoing costs associated with apartment living, the effect of downsizing on individual households is masked. </p>
<p>Downsizing retirees into the apartment sector creates ongoing financial stress for older people. Creating <a href="https://theconversation.com/it-will-take-more-than-piecemeal-reforms-to-convince-older-australians-to-downsize-51043">tax incentives to move</a> does not tackle these ongoing costs.</p>
<p>Centrelink payments for of <a href="https://www.humanservices.gov.au/customer/services/centrelink/age-pension">$404 per week</a> are well below <a href="http://acoss.wpengine.com/poverty-2/">the poverty line</a>. Yet we expect retirees to willingly downsize and to be able to cede most of their Centrelink payments to cover high body corporate costs. </p>
<p>Requiring retirees to downsize for the greater urban good will shift poverty onto retirees who could barely manage in their previously owned standard suburban home. </p>
<p>Failing to understand the effect of high ongoing costs associated with apartment living and reinforcing the myth of zero housing costs in retirement will continue to lead to poor policy outcomes.</p><img src="https://counter.theconversation.com/content/80895/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Erika Altmann does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Retirees are often urged to downsize to free up suburban properties for the next generation and for higher-density development. What’s being ignored is the costs of moving into a unit or apartment.Erika Altmann, Property and Housing Management Researcher, University of TasmaniaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/752142017-04-18T19:43:52Z2017-04-18T19:43:52ZSocial impact investment can help retirees get the housing and care they need<figure><img src="https://images.theconversation.com/files/164406/original/image-20170407-29407-1jr4xkx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Governments alone cannot bridge the gaps and support affordable housing for seniors.</span> <span class="attribution"><span class="source">shutterstock</span></span></figcaption></figure><p>A <a href="http://www.aist.asn.au/media/20734/AIST_Housing%20affordability%20and%20retirement%20incomes_FINAL%2021032017.pdf">recent report</a> raised concerns about the erosion of retirement income by ongoing rental or mortgage payments. </p>
<p>The report by the Australian Institute of Superannuation Trustees is timely, given the Australian aged pension system is predicated on an assumption of outright home-ownership. Yet <a href="https://theconversation.com/why-secure-and-affordable-housing-is-an-increasing-worry-for-age-pensioners-69350">increasing numbers of people</a> are still paying mortgages after retirement, use superannuation to pay off mortgage debt, or do not own a home and must rent.</p>
<p>Any significant decline in home ownership or equity in a home also has impacts on higher care needs. This is because older people will not have an asset to sell to fund the bonds required to enter aged care accommodation. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/164592/original/image-20170410-29396-121sqzu.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/164592/original/image-20170410-29396-121sqzu.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/164592/original/image-20170410-29396-121sqzu.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=330&fit=crop&dpr=1 600w, https://images.theconversation.com/files/164592/original/image-20170410-29396-121sqzu.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=330&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/164592/original/image-20170410-29396-121sqzu.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=330&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/164592/original/image-20170410-29396-121sqzu.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=415&fit=crop&dpr=1 754w, https://images.theconversation.com/files/164592/original/image-20170410-29396-121sqzu.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=415&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/164592/original/image-20170410-29396-121sqzu.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=415&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><span class="license">Author provided</span></span>
</figcaption>
</figure>
<p>These developments – and the <a href="https://theconversation.com/suitable-affordable-housing-is-key-to-our-population-ageing-well-38644">increasing housing insecurity</a> for older people – potentially <a href="http://cappa.percapita.org.au/wp-content/uploads/2015/11/Getting-the-Measure_Final.pdf">undermine the sustainability</a> of Australia’s retirement system and, in turn, public finances.</p>
<h2>Addressing the problem</h2>
<p>Social impact investment strategies could fund more affordable housing and aged care for seniors. </p>
<p>Social impact investments are:</p>
<blockquote>
<p>… investments made into organisations, projects or funds with the intention of generating measurable social and environmental outcomes, alongside a financial return. </p>
</blockquote>
<p><a href="https://theconversation.com/explainer-the-rise-of-social-impact-investing-73357">Impact investment in Australia</a> may take a <a href="https://theconversation.com/impact-investing-grabbing-a-piece-of-the-650-billion-market-24837">variety of different forms</a>. It can be organised through direct equity investment, acquisition of units in a mutual fund, debt, venture capital, social impact bonds or other fixed income mechanisms, which might combine blended social impact and financial return. </p>
<p>The sources of investment are equally diverse. These may include philanthropists, funds, businesses, government, private investors, or a combination of two or more.</p>
<p>In Australia, social impact investing is a relatively recent phenomenon although it is developing rapidly in a <a href="http://www.socialventures.com.au/">variety</a> of <a href="https://impactinvestingaustralia.com/">areas</a>. Impact investing in Australia will be <a href="https://theconversation.com/explainer-the-rise-of-social-impact-investing-73357">worth $A33 billion</a> by 2022 and extends to a diverse range of investments.</p>
<p>In relation to housing support, examples include the <a href="http://www.socialventures.com.au/work/aspire-sib/">Aspire Social Impact Bond</a>, which targets people experiencing long-term homelessness, and <a href="http://www.homegroundrealestate.com.au/">Homeground</a>, a not-for-profit real estate service. </p>
<p>In relation to housing developments, projects such as the innovative <a href="http://www.sheltersa.asn.au/capitalasset/">CapitalAsset</a> partnerships instigated by ShelterSA. The project aims to collaborate with developers, landowners and investors to build affordable housing developments through a property unit trust.</p>
<p>Housing is likely to be a focus area of social impact investment partnerships between Social Ventures Australia and <a href="http://www.socialventures.com.au/news/hesta-partners-with-social-ventures-australia-to-launch-one-of-the-countrys-biggest-impact-investment-fund/#sthash.KJWcX4qx.dpufMacquarie">organisations such as HESTA and Macquarie</a>.</p>
<p>Financing is the key to increasing stocks of affordable housing. It seems the federal government is <a href="https://theconversation.com/sensible-reform-to-finance-affordable-housing-deserves-cross-party-support-72059">likely to institute</a> a <a href="http://www.ahuri.edu.au/policy/ahuri-briefs/bond-aggregator-model">bond aggregator model</a> involving <a href="http://www.socialventures.com.au/sva-quarterly/new-model-financing-affordable-housing/">institutional investors and affordable housing providers</a>.</p>
<p>Retirement housing issues have not been a focus for social impact investing in Australia or elsewhere. However, it is suggested this form of investing could tackle the problems outlined in the Australian Institute of Superannuation Trustees report in three ways.</p>
<h2>(Almost) home owners</h2>
<p>For those who must maintain a mortgage into retirement, or who want to avoid using most of their superannuation funds to pay off the mortgage, thought could be given to offering lower-cost loans or products akin to reverse mortgages at lower than commercial rates. </p>
<p>Alternatively, under a shared equity arrangement – where reduced payments are made until the sale of the property or the death of the owner/s – the property could be sold and the sale price shared by the older person to put towards care or the estate and the lender. </p>
<p>Social impact investment lenders could finance this in the same way as banks do but at reduced rates. There would still be a healthy return, and older people could live better in retirement with reduced payments but secure in the knowledge they do not have to leave or lose their home.</p>
<p>Regarding the older people who rent, again social impact investing could focus on ensuring that any housing projects developed have a certain percentage of the accommodation available for older people. </p>
<p>Models proposed for social impact investing in affordable housing could be applied to ensure this accommodation is suitable for older people.</p>
<h2>Wrap-around services</h2>
<p>In both cases, the financing models could be supported by social impact investing provided for support services.</p>
<p>For example, <a href="https://www.kingsfund.org.uk/blog/2013/04/new-beginning-care-older-people-hospital">wrap-around services</a>, such as those provided in the <a href="http://www.cornwalllive.com/hospital-admissions-cut-award-winning-newquay/story-20105977-detail/story.html">Newquay project</a> in Britain, aim to keep older people in their homes and out of hospitals and aged care.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/164408/original/image-20170407-29403-1g26iw4.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/164408/original/image-20170407-29403-1g26iw4.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=406&fit=crop&dpr=1 600w, https://images.theconversation.com/files/164408/original/image-20170407-29403-1g26iw4.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=406&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/164408/original/image-20170407-29403-1g26iw4.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=406&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/164408/original/image-20170407-29403-1g26iw4.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=511&fit=crop&dpr=1 754w, https://images.theconversation.com/files/164408/original/image-20170407-29403-1g26iw4.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=511&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/164408/original/image-20170407-29403-1g26iw4.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=511&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">If housing costs are a problem for people in retirement, that’s also going to hamper their ability to pay for care.</span>
<span class="attribution"><span class="source">shutterstock</span></span>
</figcaption>
</figure>
<h2>Ripe for repair</h2>
<p>Social impact investing could mobilise private capital to work with not-for-profits to attract investment funds. <a href="http://gracemutual.org.au/aged-care/">Grace Mutual</a> has mooted such a project in Australia.</p>
<p>Furthermore, social impact investments could work in areas, such as rural and regional Australia, that are <a href="https://www.treasury.gov.au/%7E/media/Treasury/Consultations%20and%20Reviews/Consultations/2016/CFFR%20Affordable%20Housing%20Working%20Group/Submissions/PDF/Impact_Investing_Australia.ashx">traditionally left to government</a> because of low population and problems with profitability and economies of scale. </p>
<p>Sabina Lim <a href="https://globalvoices.org.au/journal/sabina-oecd-research-paper">recently suggested</a> the services gap in health and aged care is ripe for social impact investing in Australia. </p>
<h2>It’s time to bridge the gaps</h2>
<p>Governments alone cannot bridge the gaps and support affordable housing for seniors.</p>
<p>Although government will certainly continue to play a significant role, impact investment should be encouraged as a way to resolve financing and development issues in meeting seniors’ needs for accommodation and care. </p>
<p>Such involvement can be fostered through partnerships between government, NGOs and private investors, together with taxation and other financial incentives. Legal, policy and planning impediments to financing and investment in seniors housing also need to be removed. </p>
<p>Importantly, we need other players in the market who are prepared to invest in affordable housing and aged care for Australians in retirement.</p><img src="https://counter.theconversation.com/content/75214/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Eileen Webb receives funding from: Queensland Government (Department of Communities), Review of the prevalence and characteristics of elder abuse in Queensland - With Dr Barbara Blundell, Dr Joe Clare, Dr Mike Clare and Dr Emily Moir; 2017 - 2018 AHURI Older Australians and the housing aspirations gap - With Dr Amity James and Professor Steven Rowley; 2017 Bankwest Curtin Economics Centre Grant Strategies to enhance tenure security for WA's older renters - With Dr Amity James and Associate Professor Helen Hodgson; 2016 - 2017 AHURI Can social impact investment make a difference to housing and homelessness outcomes? Supporting vulnerable households to achieve their housing goals: the role of impact investment - Project C -With Professor Gill North and Professor Richard Heaney
Eileen is a Foundation member of the Australian Research Network on Law and Ageing (ARNLA) and a member of the Western Australian Ministerial Committee on Consumer Law; ShelterWA Board; ShelterWA Advisory Committee on Homelessness; and TenancyWA Boarders and Lodgers Working Group.
</span></em></p><p class="fine-print"><em><span>Richard Heaney owns shares in the major banks (CBA, ANZ, Westpac, NAB) as well as some smaller financial institutions (AMP, IAG and Suncorp). He has received funding from the Australian Research Council in the past. The present research is funded by an AHURI grant. </span></em></p><p class="fine-print"><em><span>Gill North does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Any significant decline in home ownership or equity in a home impacts higher care needs: older people will not have an asset to sell to fund the bonds required to enter aged care accommodation.Eileen O'Brien, Associate Professor, Curtin Law School, Curtin UniversityGill North, Professorial Research Fellow, Deakin UniversityRichard Heaney, retired, The University of Western AustraliaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/761592017-04-13T05:23:55Z2017-04-13T05:23:55ZHere’s how superannuation is already financing homes<figure><img src="https://images.theconversation.com/files/165180/original/image-20170413-25859-lt9wjz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">At least ten cents in every dollar of superannuation assets is indirectly financing house purchases via commercial bank debt.</span> <span class="attribution"><span class="source">AAP/Lukas Coch</span></span></figcaption></figure><p>The federal government is split on whether first home buyers in Australia should be allowed to use part of their superannuation for home deposits. But what the more strident critics miss is that Australia’s superannuation system already channels a significant proportion of retirement savings into housing. </p>
<p>It does this not via the traditional route of people buying a house outright, but rather through an indirect channel, by transforming the household’s compulsorily acquired superannuation equity into mortgages from commercial banks and other financial intermediaries. </p>
<p><a href="http://www.abs.gov.au/AUSSTATS/abs@.nsf/Latestproducts/5232.0Main%20Features1Dec%202016?opendocument&tabname=Summary&prodno=5232.0&issue=Dec%202016&num=&view">Statistics from the ABS</a> (December 2016) show that for every A$1 of assets managed by the superannuation sector, approximately 27 cents is directly financing Australia’s banking sector. This is via superannuation holdings of bank deposits (14c in the dollar), bank equity (7c in the dollar), and other bank liabilities (6c in the dollar).</p>
<p>What do banks do with this 27c? The ABS reports that 38% of bank financial assets are long-term loans to households. We have cross-inspected this data <a href="http://www.apra.gov.au/adi/Publications/Pages/monthly-banking-statistics.aspx">with figures from the Australian Prudential and Regulation Authority (APRA)</a> and found that nearly all of these loans are mortgages. </p>
<p>This suggests that at least 10c of every A$1 of superannuation assets is indirectly financing house purchases via commercial bank debt. </p>
<p>But this also excludes other indirect financing of banks by superannuation. For example, the portfolios of non-money market mutual funds and other private non-financial corporations are also heavily weighted towards funding banks (24% and 36% of their assets, respectively), and superannuation funds allocate 6% and 24% of their funds to these agents respectively. This potentially adds a further 4c in every A$1 of superannuation assets that ultimately results in debt financing of housing.</p>
<h2>Why using super for housing might be good idea</h2>
<p>One of the merits of allowing households to use their superannuation to supplement their housing deposits would be to reduce unnecessary and expensive financial middlemen. Under the present system, the money from superannuation that finds its way into housing finance does so by passing through chains of two or more intermediaries. This means that it incurs management expenses at each step. </p>
<p>The first link in the chain is the superannuation sector <a href="http://www.apra.gov.au/Super/Publications/Pages/superannuation-fund-level-publications.aspx">(with an average expense ratio of 0.7%)</a>. Next is one or more financial intermediaries, like banks. A plausible estimate of the banking sector’s expense ratio, by our calculations, is 1% to 2.3% of bank assets. </p>
<p>Total expenses through the intermediation chain could therefore be as high as 1.7% to 3%. These expenses might be lower under a housing equity super access scheme.<br>
Another potential benefit relates to the accumulation of debt and its consequences for financial stability. </p>
<p>Most of the money people put away into superannuation, because its compulsory, would have otherwise been used for other types of saving. If you look at <a href="http://www.abs.gov.au/AUSSTATS/abs@.nsf/Latestproducts/5232.0Main%20Features2Dec%202016?opendocument&tabname=Summary&prodno=5232.0&issue=Dec%202016&num=&view">the assets in a household’s balance sheet</a>, it is clear that housing equity (representing 65% of non-superannuation assets) is the household’s preferred savings vehicle. </p>
<p>It is possible that growth in compulsory superannuation has contributed to growth in household debt in two ways. First, by frustrating people’s ability to finance home ownership through their deposit. Second, by increasing the supply of mortgage finance, as superannuation savings are recycled through the financial system, <a href="http://www.copsmodels.com/elecpapr/g-266.htm">and converted to mortgages by the banks</a>. </p>
<h2>The risks with the plan</h2>
<p>One concern about letting people divert money into buying a house is that their income in retirement could suffer as a result. To mitigate the risk of this happening, any policy on this would need to record and track the values of super funds’ home equity stakes (just as super funds presently track values for the traditional assets they hold). </p>
<p>But retirement income is determined by total net assets, not superannuation assets alone. In this context, home ownership provides retirees an important stream of stable tax-free, inflation-protected, income. This is recognised by the Association of Superannuation Funds of Australia <a href="https://www.superannuation.asn.au/resources/retirement-standard">benchmarks for “modest” and “comfortable” retirement income</a>. </p>
<p>These assume that retirees own their home outright. So the decline in home ownership is a significant threat to <a href="http://www.aist.asn.au/media/20734/AIST_Housing%20affordability%20and%20retirement%20incomes_FINAL%2021032017.pdf">the adequacy of Australia’s retirement income system</a>.</p>
<p>A second risk is that the policy could further raise house prices, reducing affordability and exposing retirement savings to a house price collapse. In the present house price environment, this is a real risk, which would need to be monitored. But the policy’s two main merits (reducing intermediation costs and improving financial stability by reducing gross debt) are long-run benefits that will continue to hold beyond our current point in the house price cycle. </p>
<p>APRA also already monitors risks associated with housing credit growth, and has the tools, and the willingness to use them, should the policy promote undesired house price growth. </p>
<p>There are reasons to expect that a policy allowing first home buyers access to super will not lead to net growth in housing finance. Superannuation funds are already required by <a href="http://www.apra.gov.au/Super/Documents/Prudential-Practice-Guide-SPG-530-Investment-Governance.pdf">APRA</a> to understand their underlying asset exposure risks. So super funds might try to maintain their total exposure to property risk under this policy, for example by reducing their exposure to the banks.</p><img src="https://counter.theconversation.com/content/76159/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>James Giesecke received funding from the CSIRO-Monash Superannuation Research Cluster. </span></em></p><p class="fine-print"><em><span>Jason Nassios received funding from CSIRO-Monash Superannuation Research Cluster. </span></em></p>What critics of the plan to use superannuation for housing miss is that Australia’s super system already channels a significant proportion of retirement savings into housing.James Giesecke, Professor, Centre of Policy Studies and the Impact Project, Victoria UniversityJason Nassios, Research Fellow, Centre of Policy Studies, Victoria UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/662092016-10-02T19:14:09Z2016-10-02T19:14:09ZThe superannuation myth: why it’s a mistake to increase contributions to 12% of earnings<figure><img src="https://images.theconversation.com/files/139689/original/image-20160929-27017-a56uve.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Super accounts for only a small proportion of the wealth of most Australians.</span> <span class="attribution"><span class="source">Image sourced from Shutterstock.com</span></span></figcaption></figure><p>So much of the national conversation about superannuation simply assumes that “savings for retirement” is synonymous with “superannuation savings”. This is a big mistake. </p>
<p>This mistake partly explains why we got into such a mess with excessively generous tax breaks for super. It also underlies misguided plans to increase superannuation contributions to 12% of earnings. </p>
<h2>Super doesn’t equal retirement savings</h2>
<p>Any sensible conversation about superannuation policy must start by recognising how households save for retirement, and why.</p>
<p>It’s become conventional wisdom that people will retire on their superannuation savings, perhaps topped up by the Age Pension. Even <a href="https://www.moneysmart.gov.au/tools-and-resources/calculators-and-apps/retirement-planner">ASIC’s retirement savings calculator</a> – which enables people to estimate their future retirement income – presumes that superannuation and the Age Pension alone will fund retirement. The assumption that superannuation accounts for the bulk of households’ retirement savings has <a href="http://www.industrysuperaustralia.com/publications/reports/nearly-half-of-australians-will-not-have-a-comfortable-retirement/">underpinned claims</a> that most Australians aren’t saving enough for their retirement. </p>
<p>Yet the stark reality is that superannuation savings account for only a small portion – about 15% – of the wealth of most households. Even without counting the family home, the average Australian saves as much outside as inside the super system. For older households close to retirement, assets other than super are often even larger than the value of their homes.</p>
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<p>Super’s modest contribution to retirement savings is true for households of most levels of wealth and income, as confirmed by <a href="http://grattan.edu.au/news/how-households-save-for-retirement/">new analysis</a> for the Grattan Institute of both ABS data and the Melbourne Institute’s HILDA survey. </p>
<p>It is true that many of those with little wealth report a larger share of savings in superannuation than in other assets, but only because their total savings are small. For such low-wealth households, the Age Pension will always be their main source of retirement income.</p>
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<h2>Even younger households save a lot outside of super</h2>
<p>When confronted with facts about the modest contribution of super to retirement savings, super’s cheerleaders point out that the system is immature. <a href="http://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/pubs/BN/0910/ChronSuperannuation">Compulsory super</a> only began in 1992, with compulsory contributions of 3% of wages, rising to 9% by 2002 and 9.5% since 2014-15. It will be another two decades before typical retirees will have contributed at least 9% of their wages to super for their entire working lives. So surely super will account for a larger share of household savings in future? </p>
<p>While we might expect younger households to save more in super, and less outside, that’s simply not true. Their assets outside are typically as large as their assets inside superannuation, even without counting home ownership. This is so even for households in the 25-34 and 35-44 age groups who have had high levels of compulsory super for most of their working lives. </p>
<h2>Non-super savings will remain large</h2>
<p>The enduring importance of non-super savings should come as no surprise. While compulsory superannuation forces people to save more via superannuation, there’s little evidence that non-super savings have fallen very much in response. </p>
<p>A recent Reserve Bank of Australia study found that each extra dollar of compulsory superannuation savings was accompanied by an offsetting fall in non-super savings of only <a href="http://www.rba.gov.au/publications/rdp/2007/pdf/rdp2007-08.pdf">between 10 and 30 cents</a>. As a result, compulsory super has added a lot to private savings in Australia – an <a href="http://www.treasury.gov.au/PublicationsAndMedia/Publications/2011/Economic-Roundup-Issue-3/Report/Compulsory-superannuation-and-national-saving">estimated 1.5% of GDP a year</a> over the past two decades. </p>
<p>There is little reason to expect this pattern of non-super saving to change radically. Households hold a material portion of their wealth outside of super so that they have an option to use it before turning 60, and because they are nervous that government may change the superannuation rules before they retire.</p>
<p>Other asset classes, such as <a href="https://grattan.edu.au/report/hot-property/">negatively geared property</a>, are taxed lightly and so will likely remain an attractive vehicle for accumulating wealth. Whatever the motivation, most households heading towards retirement have substantial non-super, non-home assets to draw on.</p>
<p>Super as a proportion of total assets is somewhat higher for 55-64-year-olds when compared to younger households. This is partly because households aged over 55 <a href="https://grattan.edu.au/report/super-tax-targeting/">contribute more voluntarily</a>. They transfer assets they have already accumulated into super to attract a lower tax rate, knowing that if necessary they can withdraw immediately, or within a year or two. While this asset shuffling reduces their tax bills, it adds little to genuine retirement savings. </p>
<h2>One implication: super tax breaks should be more limited</h2>
<p>Acknowledging super’s more modest contribution to retirement savings has big implications for retirement incomes policy. </p>
<p>Since most Australians will rely upon a range of assets and income sources to support their retirement, we shouldn’t expect superannuation alone to provide an “adequate” or even a “comfortable” retirement, as <a href="http://www.afr.com/personal-finance/superannuation-and-smsfs/super-industry-wants-provision-for-comfortable-lifestyle-written-into-law-20160920-grkh62.html">the super industry demands</a>. </p>
<p>A number of <a href="http://www.industrysuperaustralia.com/publications/reports/nearly-half-of-australians-will-not-have-a-comfortable-retirement/">prominent studies</a> claim we face a retirement savings crisis, but they <a href="https://ricewarner.com/wp-content/uploads/2015/12/Retirement-Savings-Gap-as-at-30-June-2014.pdf">ignore non-super savings</a>. This leads them to advocate ever-more-generous tax breaks so that super alone is enough to provide an adequate retirement income, even though the reality of retirement incomes will be different for most households. </p>
<p>The government plans to legislate that the purpose of superannuation is to provide income to supplement or substitute the Age Pension. This implies that <a href="http://grattan.edu.au/news/if-we-cant-legislate-superannuation-changes-lets-forget-about-reform/">super tax breaks</a> should cut out at the point that people no longer qualify for even a part Age Pension (a pre-tax income of A$75,000 for a couple). If the earnings on non-super savings are ignored, then this leads to super tax breaks for a lot of people unlikely to qualify for an Age Pension. </p>
<p>The next round of reforms to super tax breaks will <a href="http://grattan.edu.au/report/a-better-super-system-assessing-the-2016-tax-reforms/">need to do better on this score</a>. </p>
<h2>Another implication: no need to increase the Super Guarantee to 12%</h2>
<p>Ignoring non-super savings may also lead policymakers to force people to save too much through superannuation. A common aim of retirement income policy is to support lifetime consumption smoothing: maintaining a more consistent standard of living across people’s lives. Compulsory saving via the Superannuation Guarantee forces people to save while they are working so they have more to spend in retirement. </p>
<p>But there is no magic pudding when it comes to superannuation. Higher compulsory super contributions are ultimately funded by lower wages, which means <a href="https://www.cis.org.au/app/uploads/2016/08/32-3-potter-michael.pdf">lower living standards for workers</a> today. </p>
<p>In fact current levels of compulsory super contributions and Age Pension are likely to provide a reasonable retirement for most Australians. </p>
<p>If we project forward the retirement income for a median income earner working for 40 years, and account for just compulsory super contributions – in other words, we ignore any voluntary superannuation contributions and savings outside of super – we find that today’s 9.5% Superannuation Guarantee and the Age Pension would provide the average worker with a retirement income equal to 79% of their pre-retirement wage (also known as a replacement rate). </p>
<p>About two-thirds of income earners can expect a retirement income of at least 70% of their pre-retirement income – the replacement rate for the median earner used by the <a href="http://www.mercer.com.au/insights/focus/melbourne-mercer-global-pension-index.html">Mercer Global Pension Index</a> and endorsed by the OECD. </p>
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<p>Once non-super savings are taken into account, many workers are likely to have a higher standard of living when they retire in 40 years’ time than during their working life. This is before we consider that people have much lower spending needs in retirement, particularly in the later stages of life <a href="http://www.cepar.edu.au/media/154967/age_pensioner_profiles_a_longitudinal_study_of_income__assets_and_decumulation.pdf">when government covers much of their largest costs</a> of health and age care. </p>
<p>This modelling of the future shouldn’t be a surprise. It matches what is already happening today. The non-housing expenditure of retirement-age households today, many of whom did not retire with any super, is typically more than 70% of that of working-age households today. </p>
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<img alt="" src="https://images.theconversation.com/files/139698/original/image-20160929-27037-1npkr59.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/139698/original/image-20160929-27037-1npkr59.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=450&fit=crop&dpr=1 600w, https://images.theconversation.com/files/139698/original/image-20160929-27037-1npkr59.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=450&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/139698/original/image-20160929-27037-1npkr59.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=450&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/139698/original/image-20160929-27037-1npkr59.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=566&fit=crop&dpr=1 754w, https://images.theconversation.com/files/139698/original/image-20160929-27037-1npkr59.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=566&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/139698/original/image-20160929-27037-1npkr59.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=566&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<p>Current levels of retirement spending appear to be sustainable. Most households in retirement only <a href="https://www.finsia.com/docs/default-source/jassa-current-issue/JASSA-2016-issue-2/superannnuation-drawdown-behaviour.pdf?sfvrsn=0">draw down very slowly on their superannuation</a> and their <a href="http://www.cepar.edu.au/media/154967/age_pensioner_profiles_a_longitudinal_study_of_income__assets_and_decumulation.pdf">broader savings</a>. Consequently, most are likely to leave material bequests. </p>
<p>The policy implication is that there is no compelling case to compel households to save 12% of their income through the Super Guarantee as <a href="https://www.ato.gov.au/General/New-legislation/In-detail/Other-topics/Repeal-of-MRRT-and-related-measures/Changes-to-the-super-guarantee/">currently legislated</a>. This would effectively compel most people to save for a higher living standard in retirement than they enjoy during their working lives. </p>
<p>In practice, given typical retiree spending patterns, a 12% Super Guarantee will primarily result in larger bequests. It would be better to leave the Super Guarantee where it is – at 9.5% of wages. This is consistent with the <a href="http://taxreview.treasury.gov.au/content/downloads/final_report_part_1/00_afts_final_report_consolidated.pdf">2009 Henry Tax Review</a>, which found that the Super Guarantee of 9% then in force would be enough to give most Australians “a substantial replacement of their income, well above that provided by the Age Pension”. </p>
<h2>Ignore the vested interests</h2>
<p>Powerful vested interests are pushing the idea that super equals retirement savings. Yet such a view is inconsistent with the facts. Super’s importance to retirement savings has been overblown for far too long. </p>
<p>As the debate heats up over <a href="http://www.treasury.gov.au/Policy-Topics/SuperannuationAndRetirement/Superannuation-Reforms">policy for Australia’s A$2 trillion super sector</a>, recognising what households actually save, and why, would be a big step in the right direction.</p><img src="https://counter.theconversation.com/content/66209/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Grattan Institute began with contributions to its endowment of $15 million from each of the Federal and Victorian Governments, $4 million from BHP Billiton, and $1 million from NAB. In order to safeguard its independence, Grattan Institute’s board controls this endowment. The funds are invested and Grattan uses the income to pursue its activities.</span></em></p><p class="fine-print"><em><span>Brendan Coates and Hugh Parsonage do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Current super policy is compelling people to save for a higher living standard in retirement than they enjoy during their working lives.John Daley, Chief Executive Officer, Grattan InstituteBrendan Coates, Fellow, Grattan InstituteHugh Parsonage, Associate, Grattan InstituteLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/587222016-05-04T22:55:26Z2016-05-04T22:55:26ZSuper changes in budget are a step forward in addressing equity<p>Changes to superannuation in last night’s Turnbull-Morrison budget not only generate revenue, but herald a change to retirement income policies and the implementation of a new more clearly defined objective for superannuation.</p>
<p>Budget initiatives are consistent with the <a href="http://fsi.gov.au/">Financial System Inquiry</a> recommendation of a new objective for superannuation: to provide income in retirement and supplement or substitute for the Age Pension. Reframing the objective in this way to substitute for the Age Pension flags a major change to policy and will impact on the way superannuation tax concessions are allocated. </p>
<p>Since the Howard government’s <a href="http://simplersuper.treasury.gov.au/documents/">Simpler Super Reforms in 2007</a>, which abolished the Reasonable Benefit Limits, invited a one-off voluntary contribution of up to A$1 million and removed the tax of super benefits over the age of 60, superannuation has become a preferred savings vehicle for middle to high income earners. As a consequence, the majority of tax concessions now go to this group and the cost is increasing. There is only a marginal fiscal offset in terms of reduced reliance on the Age Pension amongst low income earners.</p>
<h2>Improving sustainability of the retirement system</h2>
<p>With the proportion of Australians over 65 expected to <a href="http://data.worldbank.org/indicator/SP.POP.DPND.OL/countries/1W-AU?display=graph">increase from 14% to 21.5% over the next 20 years</a>, the combined costs of tax concessions and the Age Pension under current policy settings becomes unsustainable. Indeed, under current policy settings this dependence <a href="http://www.ncoa.gov.au/">declines only marginally over the next 20 years</a> (See page 81 of the National Commission of Audit). </p>
<p>Ensuring adequate superannuation savings to substitute for the Age Pension will need a concerted policy push, as around 70% of older Australians are currently receiving the Age Pension with the majority receiving the maximum rate. </p>
<p>This high dependence is partly as a legacy of workers seeing the Age Pension as an entitlement after a life time of paying tax, a result of low superannuation balances to date and the storing the majority of voluntary household savings as wealth in the family home.</p>
<p>Consequently, tax concessions need to be redirected from middle to high income earners to those at the lower end of the income scale. </p>
<h2>Increasing equity between high and low income earners</h2>
<p>Budget night measures which reduce the attractiveness of super for middle and high income earners include:</p>
<ul>
<li><p>Extending Division 293 Tax, which applies a 30% tax on contributions for incomes over $300 000, to those on incomes of more than $250,000. </p></li>
<li><p>Reducing the annual cap on concessional contributions to $25,000 (currently at $30 000 per annum and $35 000 for those over 50 years).</p></li>
<li><p>Introducing a lifetime cap of $500,000 on non-concessional contributions that takes into account all contributions made on or after 1 July 2007. The lifetime cap will replace the existing annual cap on non-concessional contributions (currently $180,000 per annum or $540,000 over 3 years) and come into effect immediately.</p></li>
</ul>
<p>Further, additional assistance for low income and older workers is provided by:</p>
<ul>
<li><p>increasing flexibility for people with superannuation balances of less than $500,000 to be able to carry forward unused concessional caps for five years from July 1 2017, thereby allowing people with circumstances such as broken career patterns to catch up with their super savings.</p></li>
<li><p>removing the need for people aged 65 to 74 to satisfy a work test in order to make super contributions.</p></li>
<li><p>introducing a tax offset of up to $500 for people earning less than $37,000 to offset the tax disadvantage of low income earners who pay more tax on superannuation contributions than on their wages. This replaces the Low Income Earners Contribution (LICS) which is phased out from 30 June 2016.</p></li>
</ul>
<p>Disincentives for higher income earners using superannuation for the purposes of tax minimisation or estate planning were also announced as changes to the Transition to Retirement and by placing a cap on total concessions available to an individual. </p>
<p>Another disincentive is introducing a tax on the earnings of transition to retirement (TTR) pensions. (A 15% tax is applied to earnings in accumulation phase, while earnings in retirement are not taxed. TTR pensions were introduced to encourage those who reached the preservation age to stay in the workforce while working part time, but have been found to be used primarily by full time higher income earners for tax planning purposes).</p>
<p>For the first time since 2007 when the reasonable benefit limits were removed, the Turnbull government has also specified a cap for entitlement to superannuation tax concessions, by introducing a limit to the amount of superannuation benefits which can be drawn tax free. A $1.6 million cap on the amount of superannuation that can be withdrawn tax-free in retirement will be introduced from July 1, 2017.</p>
<p>The latter suggests that the desirable retirement income workers should be striving for is around $80,000 per annum. This is slightly more than the ALP’s recommended level of $75,000 per annum, and significantly under the level proposed by the superannuation representative bodies, ASFA and the SMSF Association, of a balance of $2.5 million which equates to an income of around $125,000 per annum.</p>
<h2>The future for the retirement system</h2>
<p>Other policies required to ensure more older Australians can substitute super savings for the Age Pension would include increasing mandated the Superannuation Guarantee to 12% as currently planned as most low income earners are unable to make voluntary contributions; broadening the coverage of superannuation (20% of retirees reach the preservation age with no superannuation savings); and raising the preservation age closer to Age Pension eligibility, to extend working life and ensure balances are not depleted before retirement.</p>
<p>While this budget has taken one step forward in improving the equity of the system, in the long run the success of the retirement system will depend on ensuring a steady and cohesive approach to policy, and minimising change to build greater trust in the system. </p>
<p>It is evident, however, that in the foreseeable future superannuation policy will need to be further revised to meet the proposed objective, and ensure the fiscal sustainability of the retirement system. </p>
<p>Ultimately, the quality of life for both retirees and future tax-payers will rest on achieving an appropriate fiscal balance between supporting the aspiration of more self-reliant retirees, and the continuation of a strong social safety net for those who need it.</p><img src="https://counter.theconversation.com/content/58722/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Budget superannuation changes redirect concessions to lower income earners where they are most needed.Deborah Ralston, Professor of Finance, Monash UniversityJimmy Feng, Research Fellow, Monash UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/569152016-04-06T20:09:03Z2016-04-06T20:09:03ZNudges, not legislation will drive people to save more for retirement<p>Getting Australian workers to save more in order to become more self-reliant in retirement is a policy idea most people understand. </p>
<p>Over time there is increasing pressure on government funding of the age pension.
In 2013-14, around 70% of Age Pension eligible Australians were receiving the pension, with 60% receiving the full-rate pension. At the same time, age pension <a href="http://www.treasury.gov.au/PublicationsAndMedia/Publications/2015/2015-Intergenerational-Report">costs are projected to increase</a> from 2.9% of GDP in 2014-15 to 3.6% of GDP in 2054-55. This is significant cost to the Australian economy. </p>
<p>The problem is governments can’t easily ensure people save more, and legislating to make it happen is not the right approach. Different incentives to change behaviour may be a better starting point.</p>
<h2>Problems with the forced approach</h2>
<p>One way to force people to save more is by increasing the Superannuation Guarantee. The guarantee was scheduled to increase to 12% of salary in 2022, although this has been delayed by the current Coalition government for a further three years. </p>
<p>While policies and incentives are important to get people to save more, there is a concern that people take advantage of such policies, using the superannuation system as a vehicle for wealth creation. Where do we draw the line between helping average workers save more and deterring people from abusing the system? </p>
<p>Rather than <a href="http://www.treasury.gov.au/ConsultationsandReviews/Consultations/2016/Objective-of-superannuation">more legislation</a>, we could turn to behavioural nudges to help increase household savings. This could potentially help encourage people to save more without resorting to more legislation in an already extremely legislated sector.</p>
<h2>Use plain English and stop tinkering with superannuation</h2>
<p>To start with, the various aspects of superannuation need to be communicated in plain simple English. </p>
<p>Many of us are not clear on what is meant by concessional contributions, salary sacrifice, employer compulsory contributions and the like. As columnist<a href="bit.ly/1RtIHVJ"> Sally Patten argues</a>, someone visiting Australia might be forgiven for thinking they were in a non-English speaking country when asking questions about our super system.</p>
<p>“If you want to encourage someone to do something, make it easy”, was the sage advice of Richard Thaler, one of the founding fathers of behavioural economics. </p>
<p>Instead our superannuation regime seeks to encourage savings within a complicated retirement savings system. Given people are putting away money they may not have access to for decades, less tinkering with superannuation policies would help build greater trust in the system. </p>
<p>Constant uncertainty regarding superannuation taxation, negative gearing, concessional contributions, purchasing a first home with superannuation funds, etc. undermines trust in the system. Why sacrifice today into a system where you have little certainty regarding your entitlements in the future?</p>
<h2>Income is the goal</h2>
<p>If retirement income is the goal of superannuation (which is yet to be defined and enshrined into legislation), then rather than talk about a pot of wealth, let’s talk about incomes.</p>
<p>It is great to send out statements informing people of their superannuation balances; it makes everyone feel good especially if their balances are high enough. But showing the annual income that could be derived from this balance, is likely to be a stronger motivator. </p>
<p>This is not rocket science; it’s easier to compare current income with future income than figure that out from a wealth balance. If my superannuation balance today yields an average return of 6% per year for the next 10 years, my projected income will be A$30,000 per year (with all the assumptions in place). Is my future self happy with a A$30,000 pa income? If the answer is no, then I might take proactive steps to save more, work longer, or take a different investment strategy. A simple image of our future self is enough to motivate savings for many people.</p>
<h2>Keeping up with the Joneses</h2>
<p>Research shows we compare ourselves to our neighbours as a benchmark for social or economic status. As humans, we are preoccupied with our position relative to others around us. In today’s world, this may come in the form of houses, cars and material possessions. Psychologists refer to these items as “wealth signals” and these are hard to avoid. </p>
<p>Knowing we are outperforming another person positively affects reward related brain areas, according to <a href="https://ideas.repec.org/a/eee/pubeco/v95y2011i3p279-285.html">research by German economists.</a> </p>
<p>Humans get some form of gratification by keeping up with the herd or doing better. This may not necessarily be in line with traditional economics models where one’s satisfaction or preferences are unaffected by others people’s preferences. </p>
<p>While our human instinct to keep up with others may be flawed in some ways, there are several ways to influence behaviour with this phenomenon. For example, when I receive my energy bill every quarter, I’m told how much energy I have used relative to other homes in my area. This simple benchmark provides a nudge to consume less, if I am using more than the average household of a similar size. I begin to think of ways to reduce consumption. </p>
<p>On the other hand, it’s always a good feeling to know I’m spending less than the average household of similar size; a smart user, saving the planet. If only my superannuation statement gave me an idea of where I stood relative to the “average” person in my industry, my postcode or age group, I bet I wouldn’t need legislation to make a decision to save more to keep up.</p>
<hr>
<p><em>Osei will be on hand for an Author Q&A between 2 and 3pm AEST on Thursday, April 7, 2016. Post your questions in the comments section below.</em></p><img src="https://counter.theconversation.com/content/56915/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Osei K. Wiafe does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Legislating a definition of super overlooks the real motivators behind people saving for retirement.Osei K. Wiafe, Research Fellow, Griffith Centre for Personal Finance and Superannuation (GCPFS), Griffith UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/537982016-02-03T11:10:21Z2016-02-03T11:10:21ZWhy are so many Americans struggling to save for retirement?<figure><img src="https://images.theconversation.com/files/110064/original/image-20160202-6966-gtt9k.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Most Americans will be pinching pennies after they retire. </span> <span class="attribution"><span class="source">Retirement pennies via www.shutterstock.com</span></span></figcaption></figure><p>This week <a href="http://www.wsj.com/articles/hillary-clinton-beats-bernie-sanders-by-slim-margin-in-iowa-1454438068">marked</a> the beginning of the presidential primary season, and economic fears such as jobs and wages have taken center stage on the campaign trail. </p>
<p>Yet one of voters’ biggest economic problems has thus far received short shrift from the candidates: Americans’ growing inability to save for retirement. </p>
<p>A handful of Republican and Democratic candidates <a href="http://crr.bc.edu/newsroom/featured-work/2016-presidential-candidates-views-on-social-security/">have laid out proposals for Social Security reform</a>, but none have adequately addressed the substantial and growing deficit in total retirement savings.</p>
<p>The retirement crisis is real, as I’ve also been documenting for the past 15 years and most recently in my new book, <a href="http://www.palgrave.com/us/book/9781137395627">Retirement on the Rocks</a>. More than half of us won’t have enough savings when we retire to maintain our current standard of living and will have to make substantial spending cuts once we stop working. </p>
<p>How did we get here, what are the consequences and how can we fix the problem? </p>
<h2>An inability to save</h2>
<p>The share of households with working-age adults that could expect to have to make substantial and potentially harmful cuts to their spending in retirement has <a href="http://crr.bc.edu/briefs/nrri-update-shows-half-still-falling-short/">spiked</a> in recent decades, rising from 31 percent in 1983 to 52 percent in 2013, according to the National Retirement Risk Index at the Center for Retirement Research. </p>
<p>Some groups are particularly likely to have <a href="http://research.upjohn.org/up_press/214/">insufficient retirement savings</a>. Communities of color, single women and those with less education, for example, tend to be less prepared for retirement than white households, single men and those with more education. </p>
<p>For example, 60 percent of African Americans and Latinos near retirement in 2010 <a href="http://www.cornellpress.cornell.edu/book/?GCOI=80140100291230">were deemed likely to struggle economically</a> when they stopped working, compared with only 45 percent of whites. </p>
<h2>Why aren’t we saving enough?</h2>
<p>This crisis is a result of the extended period of economic uncertainty we’ve lived through for the past 30 years.</p>
<p>Wages have become <a href="https://global.oup.com/academic/product/the-great-risk-shift-9780195335347?cc=de&lang=en&">more volatile</a>, while the <a href="http://www.brookings.edu/about/projects/bpea/papers/2011/unemployment-insurance-and-job-search-in-the-great-depression-rothstein">duration of unemployment</a> and underemployment has also gone up. As a result, people have less discretionary cash, requiring them to set aside more for emergencies – and less for retirement. </p>
<p>But that’s only part of the economic uncertainty story. </p>
<p>Even when people do manage to sock away money for their later years, these savings have become less stable. The stock and housing markets have been <a href="http://www.brookings.edu/%7E/media/Projects/BPEA/Spring-2005/2005a_bpea_baker.PDF">going through cycles of boom and bust</a> with increasing frequency in recent decades, destroying wealth and adding a layer of confusion and uncertainty to people’s decisions about their futures. </p>
<p>Record-low interest rates since the financial crisis are making matters worse. </p>
<h2>Five policy shortcomings</h2>
<p>At a time of such growing volatility in the labor, financial and housing markets, logic suggests that people should reduce their exposure to risky assets. </p>
<p>Yet when it comes to retirement savings, exactly the opposite has happened. This is due to five clearly identifiable policy shortcomings, which have led to greater economic risk exposure at a time of ever-rising risks.</p>
<ol>
<li><p>Social Security benefits <a href="https://www.socialsecurity.gov/OACT/ProgData/nra.html">have decreased in value</a> as the age at which people can receive full benefits has increased. At the same time, the <a href="http://www.pentegra.com/announcements/IssueBrief-_who_killed_the_private_sector_db_plans.pdf">decline</a> of defined benefit (DB) pension plans has further eroded people’s retirement security. In their stead, people have saved more and more with retirement savings accounts, <a href="https://www.ici.org/pdf/per12-02.pdf">such as 401(k) plans</a> and Individual Retirement Accounts (IRAs). These individualized accounts <a href="http://www.palgrave.com/us/book/9781137395627">offer fewer protections</a> against labor and financial market swings than is the case for Social Security and DB pensions. </p></li>
<li><p>Congress <a href="https://www.americanprogress.org/issues/economy/report/2015/10/30/124315/the-inefficiencies-of-existing-retirement-savings-incentives/">has increasingly made</a> private employers the primary gatekeepers controlling access to good retirement plans, giving them additional tax benefits for doing so. However, since the 1980s, companies <a href="https://www.ebri.org/pdf/briefspdf/EBRI_IB_405_Oct14.RetPart.pdf">have reduced contributions</a> to their employees’ retirement savings accounts and increasingly ended such benefits entirely. In 2012, the last year for which data are available, <a href="http://www.palgrave.com/us/book/9781137395627">employers contributed</a> an average of US$1,765 (in 2013 dollars) to workers’ 401(k) plans, down from $1,947 in 1988.</p></li>
<li><p>Existing savings incentives such as tax breaks are fairly inefficient. The largest incentives are offered to high-income employees working for an employer that offers retirement benefits – the people who arguably least need the help in saving more. At the same time, <a href="https://www.americanprogress.org/issues/economy/report/2015/10/30/124315/the-inefficiencies-of-existing-retirement-savings-incentives/">the smallest incentives</a> go to lower-income employees, especially those who work for an employer that doesn’t offer retirement benefits. A high-income earner who expects to pay lower taxes in retirement than during working years <a href="https://cdn.americanprogress.org/wp-content/uploads/2015/10/29075443/ExistingRetirementIncentives-brief.pdf">will reap about twice</a> as much as a low-income earner for the same contribution to an IRA or 401(k) plan.</p></li>
<li><p>Savings incentives in the U.S. tax code are unnecessarily complex. A dozen <a href="http://www.hamiltonproject.org/papers/modernize_retirement_savings">savings incentives</a> exist, in addition to specific incentives for <a href="https://www.americanprogress.org/issues/economy/report/2013/07/19/70058/the-universal-savings-credit/">housing, health care and education</a>. This complexity often confuses people and keeps them from saving enough or from saving at all. The share of households without any tax-advantaged savings <a href="http://www.palgrave.com/us/book/9781137395627">increased from 18.9 percent in 2001 to 23.5 percent in 2013</a>, despite the more widespread efforts to get people to save more.</p></li>
<li><p>And finally, while policymakers focused their efforts largely – and ineffectively – on getting people to save more, efforts to actually protect those savings from <a href="http://www.brookings.edu/%7E/media/Projects/BPEA/Spring-2005/2005a_bpea_baker.PDF">increasingly volatile market swings</a> fell on the back burner. As a result, people <a href="https://www.americanprogress.org/wp-content/uploads/2013/03/WellerMiddleClass.pdf">invested ever larger shares</a> of their savings in stocks and houses, just as the odds those assets would lose value went up. As <a href="https://www.americanprogress.org/wp-content/uploads/2013/03/WellerMiddleClass.pdf">people borrowed record amounts</a>, they exacerbated the risk associated with a market downturn even further.</p></li>
</ol>
<h2>The consequences</h2>
<p>Exact data on how people handle insufficient retirement savings are hard to come by. It seems clear, though, that there are a number of strategies people use to “<a href="https://www.americanprogress.org/issues/economy/report/2014/08/06/95222/keep-calm-and-muddle-through/">muddle through retirement</a>.” </p>
<p>Some people will live with economic hardships, from not being able to pay for their utilities to simply living in poverty. Others will rely on help from local governments, charities and family members, and some will even move in with their adult children. Others will simply delay retirement and keep working, even as physical and mental difficulties develop. </p>
<p>As a result, many people will struggle economically and possibly suffer from worse health than otherwise would be the case, government budgets and charities will be strained and economic growth could slow. </p>
<p>The <a href="https://www.americanprogress.org/issues/economy/report/2015/01/26/105394/the-reality-of-the-retirement-crisis/">bottom line</a> is that the retirement crisis is large, becoming more severe and potentially harming the economy.</p>
<h2>Addressing the shortcomings</h2>
<p>The good news, though, is that policy can tackle the retirement crisis in doable steps by addressing the five identifiable shortcomings described above. After all, the retirement crisis is in large part a result of inattentive and wrongheaded policies.</p>
<ol>
<li><p>Congress could update Social Security, especially for vulnerable populations, which would increase households’ protections from labor and financial market risks. For instance, policymakers could create a <a href="https://www.ssa.gov/oact/solvency/provisions/charts/chart_run277.html">meaningful minimum benefit</a> that would ensure nobody who paid into Social Security for 30 years would receive a benefit less than 125 percent of the federal poverty line – currently $11,354 per year for an adult 65 or older. Other updates could include <a href="https://www.ssa.gov/oact/solvency/provisions/charts/chart_run275.html">improvements to the survivorship benefit</a> and a <a href="https://www.ssa.gov/oact/solvency/provisions/charts/chart_run249.html">new benefit</a> for beneficiaries who reach age 85. </p></li>
<li><p>Congress and state legislatures could create low-cost retirement savings options that are not dependent on employers choosing to offer a retirement benefit. The exact details of such an alternative to employer-provided retirement benefits could vary from state to state, especially since the federal government is <a href="http://www.dol.gov/opa/media/press/ebsa/EBSA20152218.htm">currently in the process of developing guidelines</a> for states to establish retirement savings for private sector workers. </p></li>
<li><p><a href="https://www.americanprogress.org/issues/economy/report/2013/07/19/70058/the-universal-savings-credit/">Congress</a> and <a href="https://www.americanprogress.org/issues/economy/report/2015/11/18/125712/laying-the-groundwork-for-more-efficient-retirement-savings-incentives/">state legislatures</a> could redesign savings incentives that would offer more help to lower-income savers than is currently the case. This could include a <a href="https://www.americanprogress.org/issues/economy/report/2013/07/19/70058/the-universal-savings-credit/">refundable tax credit</a>, rather than a deduction from taxable income that disproportionately benefits higher-income earners. </p></li>
<li><p>Simplification of savings incentives should be part of a policy effort to make tax incentives for savings more effective. This would mean <a href="https://www.americanprogress.org/issues/economy/report/2015/11/18/125712/laying-the-groundwork-for-more-efficient-retirement-savings-incentives/">streamlining existing incentives</a> and making them easier to use. </p></li>
<li><p>Finally, Congress and state legislatures should make protections against market swings an integral part of savings policies. This could <a href="https://www.umb.edu/editor_uploads/images/centers_institutes/institute_gerontology/wellerFeb2011.pdf">include</a> automatic risk management of retirement savings accounts and incentives to diversify savings – not putting all eggs in one basket.</p></li>
<li><p>Finally, Congress and state legislatures should make risk protections an integral part of savings policies. This would <a href="https://www.umb.edu/editor_uploads/images/centers_institutes/institute_gerontology/wellerFeb2011.pdf">include</a> comprehensive, concise and comparable risk disclosure in retirement savings accounts, and new incentives to balance risks between savings in financial assets, such as stocks and bonds, and savings in nonfinancial assets, such as housing.</p></li>
</ol>
<h2>Restoring a dignified retirement</h2>
<p>The retirement crisis in the United States is real and getting worse. It will have severe effects on Americans, the government and the economy unless policymakers respond to this challenge. </p>
<p>The bad news is that past policy decisions have substantially contributed to this crisis. The good news is that policies can change, if the political will exists.</p><img src="https://counter.theconversation.com/content/53798/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Christian Weller has received funding from AARP for his research on risk exposure and retirement savings. He is a senior fellow with the Center for American Progress, a research associate at the Economic Policy Institute and a member of the Academic Advisory Board of the National Institute on Retirement Security. </span></em></p>The presidential candidates are largely ignoring one of the biggest economic issues facing Americans: more than half are struggling to save enough for retirement.Christian Weller, Professor of Public Policy and Public Affairs, UMass BostonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/498792015-10-28T03:59:13Z2015-10-28T03:59:13ZWhat ‘fair’ superannuation would look like<figure><img src="https://images.theconversation.com/files/99913/original/image-20151027-4991-14ccxjk.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Retirees with higher incomes gain significant benefit from Australia's super tax concessions.</span> <span class="attribution"><span class="source">Image sourced from Shutterstock.com</span></span></figcaption></figure><p>Australia is engaged in an ongoing debate about the fairness of the superannuation system. Those on the highest incomes are seen as extracting the greatest and an unfair advantage from tax benefits currently available. This problem of perception is inevitable in a system where contributions are made out of our pre-tax income.</p>
<p>To try to lessen the concern, the basic approach people have taken is to argue for restrictions on how much can be put into the system each year (on a pre-tax basis). There are also proponents of the view that there should be lifetime limits rather than annual limits. In a sense all these proposals are trying to make taxation of the savings system more progressive, basically driven by a desire for greater fairness. They all make the system more complicated.</p>
<p>Deloitte Access Economics is the most recent contributor. Its <a href="http://www.macrobusiness.com.au/2015/10/deloitte-offers-fair-super-reform-blueprint/">recommendation</a> is a little different. It proposes we use the progressivity of the income tax system as our anchor point. This actually seems like a good starting point. The progressive income tax system is designed so that people with higher incomes make a greater contribution to funding society’s needs. It meets the basic requirement of being accepted as fair.</p>
<p>What is interesting with the Deloitte proposal however is that it suggests we all should have an equal discount off our marginal tax rates for our superannuation contributions.</p>
<p>While this too seems fair, it is not clear why we need to have any discount at all.</p>
<p>The common rationale is that we all need an incentive to compensate us because our savings are locked away for a long time. This is rather like a compensation for being compelled to do something. It is a bit odd though because the government compels us to do lots of things without any incentive payments. There is no incentive payment for driving on the left, or for paying one’s taxes. There is no obvious reason for the government to provide incentives for compulsory payments into superannuation. If you have compulsion you do not need incentives. It complicates the system unnecessarily.</p>
<p>A more subtle explanation for the incentive would be that savings should always be lightly taxed (as argued in the Henry review). This is to provide equity between savers and consumers – if I consume all my income today, but you save and then pay tax on your savings, you are paying higher taxes than I am. While this makes sense for voluntary savings, it is not relevant in the context of compulsory savings.</p>
<p>In <a href="http://www.ceda.com.au/research-and-policy/research/2015/09/01/retirement">a paper Stephen King and I wrote</a> for CEDA we argued the sensible and fair approach is to require all payments to compulsory superannuation be made out of people’s after-tax income and there should be no discount at all. The progressive income tax system solves the fairness problem. Eliminating the incentives gets rid of an unnecessary complication and simplifies the system significantly.</p>
<p>The administrative savings would be substantial. Everybody simply pays x% of their after tax income into a compulsory superannuation fund. Get rid of all the limits and caps: get rid of the administrative complexity for once and for all. Compliance would be easy to monitor through the tax system.</p>
<p>People would probably save outside the compulsory system and these would be treated just as outside savings are now: no news rules would be required.</p>
<p>Once the savings are in the compulsory sector they would not need to be taxed further. Again this would simplify the system and reduce administrative complexity.</p>
<p>These changes would bring compulsory superannuation into a similar tax regime as people’s primary residence. In both cases assets are built up over one’s life, based on after-tax contributions, and not subsequently taxed. This might have other advantages of bringing the two systems into closer alignment since housing and superannuation are the two basic forms in which most Australian’s save.</p>
<p>Logic and fairness suggest superannuation and primary residences should both be included in assessing a retiree’s right to access government support in later life. This is an important issue but separate from the issue of providing fairness in the accumulation phase.</p><img src="https://counter.theconversation.com/content/49879/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Rodney Maddock is a Non-Executive Director of CEDA</span></em></p>The government compels us to do lots of things without any incentive payment, so why should super be any different?Rodney Maddock, Vice Chancellor's Fellow at Victoria University and Adjunct Professor of Economics, Monash UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/443562015-07-08T20:05:50Z2015-07-08T20:05:50ZIt’s your super, so why shouldn’t you be allowed access?<figure><img src="https://images.theconversation.com/files/87765/original/image-20150708-31577-rsck90.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Only 7% of lump sums taken from super are used for a holiday.</span> <span class="attribution"><span class="source">spinster cardigan/Flickr</span>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span></figcaption></figure><p>The latest Productivity Commission report, <a href="http://www.pc.gov.au/research/completed/superannuation-post-retirement">Superannuation for Post-Retirement</a>, highlights two aspects of post-retirement income policy that have recently attracted considerable attention: the age at which people should be able to access their superannuation, and whether lump sum withdrawals should be restricted.</p>
<h2>Preserving superannuation</h2>
<p>The preservation age, which is the age at which a person who retires can access their superannuation, is set by superannuation regulations, and is currently between age 55 for a person born before 1 July 1960, and age 60 for a person born after 1 July 1964. Anyone who reaches the age of 65 can access their super without retiring. </p>
<p>The preservation age has always been lower than the age at which a person becomes eligible for the age pension. In 1997, when the current preservation age was set, a person became eligible for the pension at age 60 (for women) or age 65. Therefore there was a five year gap during which a retiree could draw on their superannuation to support themselves before becoming eligible for the pension. However, superannuation balances were much lower at that time: <a href="http://www.ausstats.abs.gov.au/Ausstats/subscriber.nsf/0/C0A01711EAD911BFCA256BCD007D7F10/$File/41020_2002.pdf">in 2000 </a> the mean superannuation balance for a male over the preservation age was A$44,700, and for a female was A$19,800. With lower balances, there was less incentive to retire early.</p>
<p>The gap of five years between preservation and pension age has now extended to seven years. From 2017 the pension age will be 67 for both men and women, and as superannuation balances have increased, in recent years there has been concern that retirees will retire earlier, living off accumulated superannuation until they reach age pension age. This could reduce workforce participation among people in this age group, which would impact on productivity in the National Accounts; and would also increase the cost of the age pension as superannuation savings are exhausted before pension age. </p>
<p>The Productivity Commission found that there could be a fiscal saving of about A$7 billion by 2055 if the preservation age and the pension age were to be synchronised. Most of this would be from additional tax paid by higher income households.</p>
<h2>The losers</h2>
<p>However, there are other factors in the report that could equally be used to argue against the proposition. </p>
<p>Firstly, the increase in workforce participation would be relatively small, about 2%, and most of this would be from workers who are already more likely to continue to work beyond the age pension age: those with higher wealth who are more likely to be in managerial or professional positions. </p>
<p>Secondly, the impact of deferring the preservation age is likely be felt most severely by workers who take involuntary retirement, about half of all Australians between the age of 45 and 70. If these retirees are unable to access the superannuation they have accumulated, they will be forced onto other forms of government benefits that are generally lower and more restrictive than the age pension. </p>
<p>Overall, a change to the preservation age is likely to have a regressive effect on retirement incomes. High-income earners would work longer, save more and access higher incomes when they do retire. Lower-skilled workers, who are more likely to face involuntary retirement, would have lower superannuation balances and would be unable to use those balances to supplement income from other benefits while waiting for the age pension.</p>
<h2>Transition to retirement</h2>
<p>There is, however, a case to change the current transition to retirement pension arrangements. </p>
<p>Under the current rules a person who has reached preservation age can access some of their superannuation without formally retiring if they enter into a transition to retirement scheme. Although this was conceived as a good way to allow people to reduce their working hours in the lead up to formal retirement, in practice it has become a way for high-income earners to maximise superannuation concessions without reducing their working hours. The Productivity Commission has joined other <a href="http://www.acoss.org.au/wp-content/uploads/2015/06/Reform_of_taxation_of_super_contributions_ACOSS.pdf">critics</a> of this arrangement that seems to be used primarily as a tax-saving measure. </p>
<h2>The lump sum myth</h2>
<p>The second issue addressed in the report is the myth of the lump sum. It is frequently <a href="http://www.smh.com.au/it-pro/pensioners-angered-by-claims-of-cruises-and-luxuries-splurge-20140515-zrd5w.html">said</a> that Australians take a lump sums from their superannuation to fritter away on lifestyle assets such as holidays. However, this is not supported by the evidence of how people access and use their super. </p>
<p>There is a clear preference for people with lower superannuation balances to withdraw significant lump sums when they retire (see chart below). </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/87761/original/image-20150708-31601-1erjjg2.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/87761/original/image-20150708-31601-1erjjg2.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=391&fit=crop&dpr=1 600w, https://images.theconversation.com/files/87761/original/image-20150708-31601-1erjjg2.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=391&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/87761/original/image-20150708-31601-1erjjg2.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=391&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/87761/original/image-20150708-31601-1erjjg2.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=492&fit=crop&dpr=1 754w, https://images.theconversation.com/files/87761/original/image-20150708-31601-1erjjg2.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=492&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/87761/original/image-20150708-31601-1erjjg2.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=492&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="http://www.pc.gov.au/research/completed/superannuation-post-retirement/super-post-retirement-volume1.pdf">Commission estimates based on ABS (Survey of Income and Housing, 2011-12, Cat. no. 6553.0, basic CURF).</a></span>
</figcaption>
</figure>
<p>Because lump sums are generally less than A$20,000, taking the lump sum does not have any impact on eligibility for the age pension. Members with higher balances are increasingly likely to convert their balance to an income stream, which is now tax free. </p>
<p>Where a lump sum is taken it is generally used to pay down debt, including mortgages, or to purchase durable goods like cars at the start of retirement. About half of the lump sums taken from superannuation are used in this way. About another third are converted to a different form of financial asset: an annuity is purchased or the money is invested or rolled over to another form of deposit. </p>
<p>All of these uses of the lump sum preserve the wellbeing of a person in retirement. Only 7% of lump sums taken are used for a holiday.</p>
<p>The Productivity Commission has conducted analysis, as opposed to a report with recommendations. It does note that any such decisions are a matter for the government to decide. In this instance, perhaps the current government mantra of no change to superannuation can be justified.</p><img src="https://counter.theconversation.com/content/44356/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Helen Hodgson was a Member of the WA Legislative Council between 1997 and 2001. She is not currently a member of any political party.</span></em></p>Despite the government windfall on offer, changing the age at which people can access their super is likely to unfairly hit retirees with lower super balances.Helen Hodgson, Associate Professor, Curtin Law School. Curtin Business School, Curtin UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/441842015-07-08T20:05:35Z2015-07-08T20:05:35ZLiving longer means it’s time Australians embraced annuities<figure><img src="https://images.theconversation.com/files/87265/original/image-20150703-30213-mbv9rw.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Retirees don't always succeed in ensuring their retirement income lasts the distance.</span> <span class="attribution"><span class="source">Image sourced from Shutterstock.com</span></span></figcaption></figure><p>Few people are likely to be interested in buying an expensive financial product which offers little return, particularly when that return is based on their life expectancy. But annuities, which provide a series of regular payments until the death of the annuitant in return for a lump sum investment, deserve closer attention. </p>
<p>Despite the benefits of annuitisation, there is considerable evidence of <a href="http://www.limra.com/Secure_Retirement_Institute/News_Center/Retirement_Industry_Report/Annuities_-_Solving_the_Annuity_Aversion_Puzzle.aspx">annuity aversion</a> among individuals. This has led to what economists call the “annuity puzzle”. It’s like this: let’s agree there are some benefits, we won’t buy it anyway.</p>
<h2>The good…</h2>
<p>Life annuities provide longevity insurance, which is another way of saying they guarantee the annuitant an income until death. Managing longevity risk is an integral part of any retirement system. The recent <a href="http://fsi.gov.au">Financial System Inquiry</a> (FSI) regards longevity protection as a “major weakness” of Australia’s retirement income system. </p>
<p>The most popular retirement product, Account-Based Pensions (ABPs), provides flexibility and liquidity but leaves individuals with longevity, inflation and investment risks. The FSI recommends that superannuation trustees pre-select a comprehensive income product for retirement (CIPR) that has minimum features determined by the government. This product will help members receive a regular income and manage longevity risk. This is the main job of annuities.</p>
<p>One important feature of annuities is the return of capital (ROC). Investors are guaranteed up to 100% return of capital in the first 15 years of annuity purchase. If the investor dies in this period and does not have a joint owner or nominated person to receive payments when they die, a lump sum payment is made to her estate.</p>
<h2>The Bad…</h2>
<p>The idea of losing liquidity by locking up capital in annuities does not make the product very appealing. Also, the lower rate of return compared to investing directly in financial markets or alternative financial products is a reason why Australians shun annuities.</p>
<p>Annuitising is also seen as an irreversible choice in most cases and therefore investors are careful when to commit to it. This decision is delayed further when individuals have bequest or capital preservation needs, making full annuitisation an unlikely choice for most retirees. Today’s annuity with ROC to some extent caters for some of these concerns, but some of these drawbacks continue to loom large in the minds of investors.</p>
<h2>An alternative</h2>
<p>Let’s consider deferred annuities instead. A deferred annuity is a financial security for which the annuitant makes a premium payment to the insurer. In return, the insurer agrees to make regular income payments to the insured for a period of time. However, unlike regular annuities, the first payment is deferred until an agreed future date, i.e. the deferred annuity does not make any payments until after the deferred period is passed. </p>
<p>They are cheaper compared to regular annuities, yet provide the necessary longevity insurance. Deferred Life Annuities (DLAs) continue payments until the death of the annuitant. DLAs have been acknowledged in <a href="http://www.asx.com.au/asxpdf/20141028/pdf/42t7k89h51ntbj.pdf">14 submissions to the Financial System Inquiry</a> and received widespread support from industry bodies and associations encouraging its uptake. Legislative barriers, however, prevent the development of such a product in Australia. </p>
<p>The major risk to the annuitant purchasing deferred annuities is that she may not survive the deferred period, forfeiting her annuity premium. The Return on Capital concept could be employed to help overcome this. There is also a degree of counter-party risk involved since the life company might become insolvent before retirees’ income payouts begin.</p>
<p>What if we didn’t need life insurance companies to provide this longevity insurance? Could the big superannuation funds provide the income retirees need? They certainly could, by taking some lessons from the deferred annuities concept to build a Group Self-Deferred Annuity (GSDA). A certain percentage or amount of retiree’s wealth (depending on size of balance at retirement) goes to the superannuation fund’s “deferred investment pool” at retirement. This serves as premium for the deferred annuity. The retiree still holds liquidity and controls remaining wealth and has opportunity for higher consumption even before the annuity payments begin. Remaining wealth may be subject to account based pension regulations ensuring minimum drawdowns.</p>
<p>According to such a structure, the annuity begins to pay out at age 80 or 85 years and the retiree’s income level will be a function of the premium invested, investment performance and mortality assumptions. With this approach, superannuation funds would be able to provide the much needed longevity insurance without resorting to complex products outside of superannuation. The “deferred investment pool” would undoubtedly require meticulous management as it would serve retirees beyond the deferred age. </p>
<p>If the retiree died before reaching the income payment stage, a discounted amount of her premium may be returned to her estate. The upside to surviving the deferral period is that the retiree may receive high mortality credits; additional return above the risk-free rate of return on the annuity income. Mortality credits stem from the redistribution of pooled wealth among surviving participants from retirees who die in the payment period. </p>
<p>While we seek to have a comprehensive income product in retirement, there are several starting points. A Group Self-Deferred Annuity is one option.</p><img src="https://counter.theconversation.com/content/44184/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Osei K. Wiafe does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Annuities in their current form are largely unpopular, but with a bit of tweaking they could provide the retirement income fix Australia needs.Osei K. Wiafe, Research Fellow, Griffith Centre for Personal Finance and Superannuation (GCPFS), Griffith UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/428762015-06-08T20:11:07Z2015-06-08T20:11:07ZSuper fees vary wildly, and it will hurt your retirement income<figure><img src="https://images.theconversation.com/files/84036/original/image-20150605-14148-inlgyt.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Australians would be left with more to retire on if inefficiencies in the super sector were reduced.</span> <span class="attribution"><span class="source">Alex Proimos/Flickr</span>, <a class="license" href="http://creativecommons.org/licenses/by-nc/4.0/">CC BY-NC</a></span></figcaption></figure><p>In the six months since the <a href="http://fsi.gov.au">Financial System Inquiry</a> found Australia’s A$16 billion superannuation industry needed to improve efficiency, there’s been little willingness by the sector to admit to it. </p>
<p>Some industry leaders continue to argue that funds compete vigorously, so the outcome must be close to efficient, with little more than a few loose ends to be tied up.</p>
<p>A panel at the recent sustainable retirement incomes forum heard a more nuanced view. At least one panelist acknowledged that there were too many funds and too many accounts. (These add <a href="http://grattan.edu.au/report/super-savings/">more than half a billion dollars a year</a> to costs).</p>
<p>The view persists, however, that competition generates acceptable outcomes for most superannuation consumers. For example, University of Melbourne Professor Emeritus Bob Officer <a href="http://www.cifr.edu.au/assets/document/Bob%20Officer%20Speech%20notes.pdf">argues</a> it doesn’t matter if most consumers do not understand what drives superannuation outcomes. The few customers who are clued in, he argues, drive sellers of comparable products to set comparable fees for everyone.</p>
<p>This <a href="http://www.investopedia.com/terms/l/law-one-price.asp">“law of one price”</a> can be observed, with <a href="http://academiccommons.columbia.edu/download/fedora_content/download/ac:160589/CONTENT/4508023.pdf">limitations</a>, in markets where traders buy and sell to exploit price differences between markets. </p>
<h2>Those in the know</h2>
<p>But the law of one price is “more honour’d in the breach than in the observance” in superannuation. Superannuation products that are materially identical sell across a two- or three-fold price range. </p>
<p>Unlike in a commodity market, sophisticated superannuation customers can’t profit from buying and selling mispriced products. If the most canny employers and account holders find or negotiate a great deal, the less attentive ones can be revealed as such and can end up paying more.</p>
<p>The problem is most acute in the so-called “choice” part of the market where customers buy superannuation through financial advisers, bank branches, or direct. Superficially different products sell over a broad range of fees. Even identical products are sold for very different fees - for example, across the ‘platforms’ used by financial advisers. There are tens of billions of dollars in ‘legacy’ or ‘closed’ products that are priced at double or triple the ‘going rate’. </p>
<p>There may be unmeasured product variation, but funds that rate highly for member services are less expensive than others. </p>
<p>The MySuper part of the market - all 10 or so million people and $400-plus billion dollars – is not much better. </p>
<p>Some get good deals. The bulk of the MySuper market is served by industry funds. For the most part, their fees are closer to what is achievable. But even here, smaller funds are usually materially <a href="http://grattan.edu.au/report/super-savings/">more expensive</a> (the figure below shows administration expenses and fees only), and even the larger funds are not as lean as they should be.</p>
<p>*<em>Administration expenses and fees per account
*</em></p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/84030/original/image-20150605-3381-1hz0vjx.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/84030/original/image-20150605-3381-1hz0vjx.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=388&fit=crop&dpr=1 600w, https://images.theconversation.com/files/84030/original/image-20150605-3381-1hz0vjx.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=388&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/84030/original/image-20150605-3381-1hz0vjx.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=388&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/84030/original/image-20150605-3381-1hz0vjx.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=488&fit=crop&dpr=1 754w, https://images.theconversation.com/files/84030/original/image-20150605-3381-1hz0vjx.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=488&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/84030/original/image-20150605-3381-1hz0vjx.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=488&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Lean funds administer accounts for $100 today.</span>
<span class="attribution"><span class="source">Grattan analysis of APRA (2014i), APRA (2014m).</span></span>
</figcaption>
</figure>
<p>Public sector funds are typically better value (and have performed best as a group), though they are unavailable to the broader market. </p>
<p>Corporate funds operated for large firms by providers who also sell retail products prove the point. One large corporate obtains a 50% discount on an identical retail product, far more than would be accounted for by its low cost to serve. Even some small employers have discounts exceeding 35% compared to what others pay. </p>
<p>None of this is consistent with the
<a href="http://homepages.econ.ed.ac.uk/%7Ehopkinse/price-d.pdf">“law of one price”</a>.</p>
<p>This problem is not specific to Australia. One <a href="http://www.law.yale.edu/documents/pdf/cbl/CurtisAyres_401kFees%281%29.pdf">recent US study</a> purports to show that the biggest cause of variation in outcomes across the employer-sponsored 401(k) retirement plans is fee variations. Even <a href="http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1456079">larger variations</a> are found in the US in mutual funds, which are selected <a href="http://marriottschool.net/emp/boyer/financeseminar/s07_08/Carlin.pdf">by individuals</a>.</p>
<h2>High average costs</h2>
<p>Because price-insensitive customers are so profitable, and because scale is so important to viability, funds incur excess costs in seeking to win and retain customers. </p>
<p>As a result, average costs have fallen only slowly even as the system has grown, and they remain far in excess of what is feasible. Default fees can and should be below 0.7% per year with no change to service or investment performance, not today’s 1 per cent or the 0.9+% <a href="http://grattan.edu.au/report/super-savings/">they will be</a> once current reforms are bedded down. </p>
<h2>Available solutions</h2>
<p>What does this mean for policymakers? The Murray inquiry and the government are rightly concerned about efficiency in the sector. But government needs to be realistic about how competition relates to efficiency. For example, moving to cut the link between industrial awards and defaults, as is Coalition policy, appears unlikely to be a game-changer for efficiency: it will put pressure on some inefficient industry funds, but it will also result in funds incurring higher selling, marketing, and member and employer engagement costs. The net result could even be an increase, not a decrease in average MySuper fees.</p>
<p>One option, then, is to strengthen the quality filter on superannuation products. APRA has already <a href="http://www.apra.gov.au/Speeches/Pages/The-super-system---what-is-on-APRA's-watch-list.aspx">signalled</a> that funds will have to demonstrate their MySuper members are not disadvantaged.</p>
<p>The Financial System Inquiry recommended that government design and run a tender to select default funds, unless the industry is shown to be much more efficient within a few years. There is no reason to wait. Where such tenders are run in Australia today, they apply effective competitive pressure: expenses have been low and net performance has been strong. </p>
<p>Beyond this, inducing funds to merge, helping account holders consolidate their super into a single account, and improving the comparability of superannuation products will be helpful. </p>
<p>Finally, in designing any retirement income default product, government should absorb lessons from the inefficiency in the accumulation phase. </p>
<p>Super fund executives may be right when they argue they are furiously competing, but that does not mean the industry is delivering efficient outcomes. Policymakers need to focus on the quality of competition, not its intensity.</p><img src="https://counter.theconversation.com/content/42876/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jim Minifie does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The superannuation sector argues it is competitive, but that doesn’t mean it’s efficient.Jim Minifie, Productivity Growth Program Director, Grattan InstituteLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/425442015-06-02T20:04:15Z2015-06-02T20:04:15ZWhy pensioners are cruising their way around budget changes<p>Age pensioners have always gone on cruises. But since the <a href="http://www.budget.gov.au/2015-16/content/bp2/html/bp2_expense-20.htm">budget</a>, we have seen stories emerge of age pensioners changing their behaviour in response to the proposed <a href="http://www.abc.net.au/news/2015-05-07/budget-government-to-outline-changes-to-age-pension/6450946">rebalancing of the age pension asset tests</a>. </p>
<p>Sydney housewife Noelene has <a href="http://www.afr.com/personal-finance/superannuation-and-smsfs/budget-drives-sydney-pensioner-to-spend-25000-on-alaskan-holiday-20150528-gh93jx">bought a holiday cruise to Alaska</a>. Seemingly contradicting sensible living strategies for many older people, financial advisers are now proposing part-pensioners <a href="http://www.propertyobserver.com.au/finding/residential-investment/42675-offloading-assets-and-home-upsizing-the-maze-to-keep-your-part-pension-in-2017.html">upsize and buy a more expensive house</a>.</p>
<p>It’s surprising behaviour, especially in light of <a href="http://www.cepar.edu.au/media/154967/age_pensioner_profiles_a_longitudinal_study_of_income__assets_and_decumulation.pdf">new research from CePAR</a> using government data that demonstrates many age pensioners actually live very frugally. Many pensioners live below even the <a href="http://www.superannuation.asn.au/media-release-6-march-2015">“modest” retirement standard</a> proposed by ASFA ($23,469 for a single and $33,766 for a couple, who own their own home). Indeed, many pensioners are cautious and keep a cushion of assets, whether because of concern about risk, to pay for age care when frail, or to leave a bequest to children or grandchildren. </p>
<h2>What’s changed</h2>
<p>Why would age pensioners choose to spend big now? Well, it’s a rational response by part-pensioners to the proposed budget asset tests. If the anecdotal behaviour is writ large, a lot of the potential revenue gains (estimated at A$2.4 billion over 5 years) from the asset test changes may disappear.</p>
<p>Apart from the home, the financial and other assets of age pensioners are tested above a limit, so as to target the pension. The age pension is also subject to an income test. At the moment pensioners are assessed under both the income test and the asset test: whichever test gives the lower pension rate is applied. This allows considerable scope for sophisticated pension planning.</p>
<p>The 2015 budget includes changes to the age pension asset tests which deliver benefits at the low end but which are quite draconian for those who have accumulated some assets. </p>
<p>For homeowners, the asset free areas are to rise from $202,000 to $250,000 for single home owners and from $286,500 to $375,000 for couple home owners, but the asset test taper rate will double, from <a href="http://guides.dss.gov.au/guide-social-security-law/4/2/3">$1.50 per fortnight</a> ($38 a year) per $1,000 to $3 per fortnight ($78 per year) per $1,000. </p>
<p>Pensioners who do not own their own home – and who are much less well off than those who own a home – will benefit from an increase in their threshold to $200,000 more than homeowner pensioners. </p>
<p>On a superficial view, these seem like reasonable changes. But they may have significant behavioural effects and there could be a better way to achieve the government’s policy goals. </p>
<h2>Savings taxed: how the government is changing behaviour</h2>
<p>The age pension can be thought of as a universal payment combined with an in-built income tax (the income test, which has a 50% tax rate up to the cut out point) and an in-built wealth tax (the asset test). </p>
<p>The effect of the change in policy is to reduce the asset cut-out point where the age pension ceases. Under current asset taper rules, the effective wealth tax rate in the asset test is 3.9% above the threshold. The budget proposal of a taper of $3 per fortnight per $1,000 implies a wealth tax rate of 7.8% ($78 per year per $1,000) above the new thresholds. With real returns of around 5% on many investments currently, the wealth tax effectively confiscates the whole of the real return above the thresholds. </p>
<p>A home-owner couple will see their pension cease at assets of $823,000 compared to over $1.1 million currently. But this home-owner couple with $823,000 in savings would not necessarily have a higher living standard than a home-owner couple with $375,000 in savings; indeed, it could well be lower.</p>
<p>Overall, under the proposed new system, income from savings would be very heavily taxed. Assuming a return to savings of 5%, the effective marginal tax rate could be as much as 160% (the wealth tax rate of 7.8% divided by a 5% return). This creates a disincentive to save. For the conservative investor the situation is even worse, as products like term deposits offer rates only slightly higher than inflation.</p>
<h2>An alternative approach: deeming an income return</h2>
<p>The <a href="http://taxreview.treasury.gov.au/content/FinalReport.aspx?doc=html/publications/papers/Final_Report_Part_1/chapter_12.htm">Henry Tax Review</a> and the Shepherd <a href="http://www.ncoa.gov.au/report/phase-one/part-b/7-1-age-pension.html">National Committee of Audit</a> both recommended that the separate age pension asset test should be replaced by a comprehensive means test that deems income from assets. </p>
<p>A deeming approach disregards actual income from an asset. Only deemed income is included, based on a sensible choice of rate of return, such as the return on bank interest. At 1.75% and 3.25% rates, this is quite a conservative rate of return.</p>
<p>In fact, we already deem income returns in the current pension system, for assets including bank accounts, term deposits, shares, managed funds, loans to family members and superannuation funds (if you are age pension age).</p>
<p>Widening the deeming rules would return us to the “merged means test” which operated in Australia up to the 1970s. Under the test, all assets apart from the home were deemed to yield 10% per annum and actual income from assets was disregarded. The assumed yield on an annuity purchased at age 65 was 10%. Currently an indexed annuity at that age would yield around a third of that in real terms, and even a “growth” investment strategy will yield only 5% to 6%, so a deeming rate around 6% could be justified. </p>
<p>Deeming rates can be set to achieve the sort of budget savings sought by the government with fewer issues for fairness and perverse incentives. A deeming rate of, say, 6% combines with a pension taper of 50% to give an effective marginal wealth tax rate of 3%. This is much less than the effective 7.8% wealth tax rate in the budget measure.</p>
<p>Deeming allows a pensioner to have either modest income or modest assets but not both. It does not unfairly advantage those who maximise their entitlements by planning under both income and asset tests, as the current system allows. A wider deemed base could save as much at a lower effective wealth tax rate than that proposed by the government.</p>
<h2>The bigger picture</h2>
<p>Australia has highly generous tax concessions for retirement saving, but quite harsh treatment on the pension side. Why incentivise savings through super tax breaks and then penalise savers under the means test? </p>
<p>Home owner retirees are much better off than those who do not own their home and the age pension means test does not touch the top cohort of superannuation savers who receive a hugely disproportionate share of superannuation tax breaks. In contrast to most middle income savers who eventually need some level of age pension with its implicit wealth tax, the top cohort who don’t need the age pension are never subject to any wealth or bequests tax.</p><img src="https://counter.theconversation.com/content/42544/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Miranda Stewart has received funding from the Australian Research Council, Academy of Social Sciences of Australia and Australian Treasury.</span></em></p><p class="fine-print"><em><span>David Ingles does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The government’s inconsistent approach to pensioners who save is distorting behaviour, but there is a solution.David Ingles, Senior Research Fellow, Tax and Transfer Policy Institute, Crawford School of Public Policy, Australian National UniversityMiranda Stewart, Professor and Director, Tax and Transfer Policy Institute, Crawford School of Public Policy, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/381652015-03-12T19:15:16Z2015-03-12T19:15:16ZWe need to talk about super, not just first home buyers<figure><img src="https://images.theconversation.com/files/74588/original/image-20150312-13485-1y9cyc4.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Allowing people to raid their superannuation early is likely to have significant unintended consequences.</span> <span class="attribution"><span class="source">Image sourced from shutterstock.com</span></span></figcaption></figure><p>Home ownership is an important protection against poverty in retirement, and it has been <a href="https://theconversation.com/hockey-shouted-down-in-conversation-about-access-to-super-for-houses-38606">suggested</a> superannuation should be accessible to fund a deposit to help people enter the property market. </p>
<p>Proponents of such a scheme point to the Canadian and New Zealand models, which allow withdrawals to purchase property. These comparisons need to be made carefully. </p>
<p>The <a href="http://www.cra-arc.gc.ca/E/pub/tg/t4040/t4040-14e.pdf">Canadian</a> retirement income model does not require mandatory superannuation, and HSBC <a href="http://www.hsbc.com/about-hsbc/structure-and-network/retail-banking-and-wealth-management/retirement?countryReports=%7BB4ED1EB8-33AF-4663-83D3-6B6FA9A55323%7D">reports</a> that currently about half of Canadians do not contribute to a Registered Retirement Savings Plan. In the case of New Zealand, the NZ Kiwisaver is a relatively new retirement savings plan, and the default rate of contributions is 3% compared to 9.5% in Australia.</p>
<p>There are two reasons why withdrawing superannuation for a home deposit can be counterproductive.</p>
<p>Firstly, the property market is unregulated and the current housing boom is a direct result of competition for a scarce resource. If first home buyers are allowed to withdraw from superannuation funds, the effect would be to increase competition, thus driving prices up further. This was the <a href="http://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Economics/Affordable_housing_2013/Submissions">effect</a> of the first home stamp duty subsidies that were available over the last decade.</p>
<p>Secondly, accessing superannuation balances would negate the effect of compounding returns over the years to retirement. The <a href="http://www.superannuation.asn.au/policy/reports">average balance</a> of an Australian aged 30 to 34 years in 2011-12 was A$27,772. The Canadian model allows a person and their partner to each withdraw C$25,000 from their superannuation, repaying it over 15 years. If adopted here, this would effectively wipe out the superannuation balance of each of them and would still be less than 10% of the <a href="http://www.abs.gov.au/AUSSTATS/abs@.nsf/ProductsbyCatalogue/A50B6B8CF85F0474CA25722900179E3F?OpenDocument">median house price</a> in the major Australian cities. Repayments would need to be in addition to mandatory contributions, and after mandatory contributions, HECS repayments and mortgage repayment, this could result in financial distress for borrowers. </p>
<p>Capital growth could give some protection from lower superannuation balances, but in the context of the family home, the gain would not be realised until the owner(s) downsized, as the usual pattern of home ownership is to sell and repurchase in the same market. </p>
<p>Despite widespread discussion about the proposal, government representatives have said they have <a href="http://www.skynews.com.au/news/politics/national/2015/03/11/no-plans-to-change-super--frydenberg-says.html">“no plans”</a> to change the rules on accessing super.</p>
<h2>Lack of reform</h2>
<p>The superannuation system is linked to both taxation and the pension system, but since 2007 it has been effectively quarantined from reform. </p>
<p>Contributions and investment earnings in a complying, taxed, superannuation fund are taxed at 15%. Withdrawals are also taxed at reduced rates, and since 2007 have been tax exempt for persons over the age of 60.</p>
<p>Conceptually superannuation is a form of long-term savings that displaces other forms of savings and, according to the ABS is the major financial investment held by most Australians. Our superannuation system is mandatory for employees, so employees earning more than A$450 per month have no choice as to whether they will save through superannuation. </p>
<p>The legal requirement is placed on the employer, but the economic reality is that superannuation is imposed on employees: it is reflected in the take-home pay of employees, notwithstanding the 1987 trade-off between award wages and superannuation. </p>
<p>In the case of a high income earner, the 15% tax rate on superannuation encourages savings into superannuation. However, low income earners who pay income tax rates less than 15% find that most of their savings are locked up in superannuation without any tax concessions. This affects their ability to save for a deposit on a house, or to have funds available in an emergency. </p>
<h2>Superannuation and tax incentives</h2>
<p>The <a href="http://taxreview.treasury.gov.au/content/Content.aspx?doc=html/pubs_reports.htm">Henry Review </a>considered the problem of investment bias, although the government excluded tax exempt payments to persons over 60 from the terms of reference. It identified a clear incentive for a high income earner to put money into superannuation, displacing other investment, and a disincentive for low income earners. </p>
<p>Contribution caps limit the amount that can be contributed in superannuation that can subsequently be withdrawn tax free. However they are much higher than the SGC rate giving room for a high income earner to divert savings into superannuation: at the current mandated SGC level of 9.5%, a person would have to earn over A$300,000 pa to breach the non-concessional cap. A member can also contribute up to A$180,000 pa of non-concessional (tax paid) contributions. The tax benefit is that income earned by the superannuation fund on that investment is also taxed at 15% instead of the member’s marginal tax rate. In a self managed superannuation fund the member can then direct the investment strategy personally while taking advantage of the tax shelter. </p>
<p>Since 2013 contributions by very high income earners have been <a href="http://www5.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s293.1.html">taxed at 30%</a>, but the threshold of A$300,000 (including superannuation) ensures this only applies to a minority of taxpayers. </p>
<h2>Balancing super and the pension</h2>
<p>The balance between superannuation and the Age Pension is critical to funding retirement income. The mandatory superannuation system was proposed as a means of supplementing, not replacing the pension, and the <a href="http://www.treasury.gov.au/%7E/media/Treasury/Publications%20and%20Media/Publication">2015 Intergenerational Report</a> predicts that by 2055 spending on the Age Pension will be at similar levels to now, but higher numbers of pensioners will be receiving a part pension. In 2011-2012 the <a href="http://www.superannuation.asn.au/policy/reports">average superannuation balance at retirement</a> was A$197,000 for males and A$105,000 for women. Although it is increasing most retirees will at some stage need some support from the Age Pension. </p>
<p>Retirees can game the system by taking substantial tax exempt lump sums remaining eligible for higher rates of pension. When a superannuation fund goes into pension phase, the member is required to withdraw a minimum amount, based on the age of the retiree, but there is no cap. The Murray Report echoed the Henry Review when it again <a href="http://fsi.gov.au/publications/final-report/chapter-2/retirement-phase/">recommended</a> the development of more comprehensive income based retirement products.</p>
<p>While superannuation balances generally are low, lump sum withdrawals can be ascribed to paying down debt and transition to retirement costs, and there is a <a href="http://fsi.gov.au/publications/interim-report/">growing concern</a> that people approaching retirement take on additional debt in the expectation that they will be able to pay it off when they receive their superannuation. </p>
<p>The tax exempt status of superannuation pensions is a more pressing concern. When the member retires and a superannuation fund goes into pension phase both the income of the fund and the amount paid to the recipient are exempt from income tax. In the 2014 year this cost the budget bottom line <a href="http://www.treasury.gov.au/%7E/media/Treasury/Publications%20and%20Media/Publications/2015/Tax%20Expenditures%20Statement%202014/Downloads/PDF/TES_2014_Chapter_1.ashx">A$16.3b</a> in foregone revenue and was the 3rd highest tax expenditure. It is difficult to see how this tax expenditure can be maintained indefinitely.</p>
<h2>Where to from here?</h2>
<p>The fiscal risk inherent in the superannuation system is clear, as highlighted in the <a href="http://www.treasury.gov.au/%7E/media/Treasury/Publications%20and%20Media/Publications/2015/2015%20Intergenerational%20Report/Downloads/PDF/2015_IGR.ashx">Intergenerational Report</a> and the <a href="http://fsi.gov.au/publications/final-report/">Murray Report</a>. </p>
<p>The options for reform include <a href="http://fsi.gov.au/publications/final-report/chapter-2/super-tax/">equalising tax rates across the accumulation and pension phase of superannuation</a>; <a href="http://www.superannuation.asn.au/policy/reports">imposing tax on superannuation accounts with a high balance</a>; <a href="http://taxreview.treasury.gov.au/content/FinalReport.aspx?doc=html/publications/papers/Final_Report_Part_1/chapter_12.htm">taxing contributions by applying a rebate to the member’s marginal rate of tax</a>; <a href="http://www.superannuation.asn.au/policy/reports">lifetime caps on non-concessional contributions to superannuation funds</a>;<a href="http://fsi.gov.au/publications/final-report/chapter-2/retirement-phase/">and making a regular income stream more attractive than lump sums</a>.</p>
<p>The political issue is that governments are not willing to propose reforms that will impact on the current generation of retirees, and continue to quarantine the retirement system from serious review. Until we can openly talk about the lack of sustainability in the retirement income system, we will continue to impose a fiscal burden on future generations.</p><img src="https://counter.theconversation.com/content/38165/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Helen Hodgson was a member of the WA Legislative Council from 1997 to 2001. She is not currently affiliated with any political party.
Helen Hodgson is an affiliate member of the Self Managed Super Fund Association.</span></em></p>Australia’s retirement income system is unsustainable, and there seems little political appetite to tackle the big issues.Helen Hodgson, Associate Professor, Curtin Law School. Curtin Business School, Curtin UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/329902014-11-14T10:32:18Z2014-11-14T10:32:18ZHow mathematics could help us save social security<figure><img src="https://images.theconversation.com/files/63490/original/pnzzywm2-1414976575.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Social security is on a collision course with insolvency. A little bit of math could keep it safe. </span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>The US Social Security system has been heading toward insolvency for decades, with the program now <a href="http://www.cbo.gov/sites/default/files/44972-SocialSecurity.pdf">projected</a> to run a 25% deficit by a little after 2030, according to the Congressional Budget Office. Despite the best efforts of commission after commission, we are no closer to arriving at a solution to the problem. That’s because every proposal is accompanied by significant drawbacks and faces considerable political hurdles.</p>
<p>For problems of this complexity, the Analytic Hierarchy Process (AHP) provides a good way to find a solution and is among a few other mathematical approaches that can help us make better choices. Other approaches have been developed but are not as widely used. I developed the AHP in the 1970s as a structured method for helping people deal with complex decisions based on mathematics and human psychology. It provides a <a href="http://www.isahp.org/about/">rational framework</a> for structuring the problem, representing and quantifying its elements, relating those elements to overall goals and evaluating alternative courses of action.</p>
<p>During the past 30 years, the AHP method has been applied by me and thousands of others around the world to a broad spectrum of political and economic quandaries. Poland has used it to determine if and when to adopt the euro for its currency. China has used the AHP to decide on the suitability of locations for dams and bridges and whether or not to build them. The National Cancer Institute has used it to prioritize cancer antigens for investment. British Airways has used it to decide on the best entertainment equipment to put in its fleet. And the US government itself has used it in the past in determining, among other things, how to deal with copyright violations in China and whether or not to bomb Iran.</p>
<p>The ideal solution to the Social Security system should ensure that the program survives indefinitely and does not need further significant modifications after the initial fix. Participants should be able to rely on a predictable level of benefits that are adequate to support them in their retirement. Lastly, the program needs to be perceived as fair.</p>
<p>The AHP – and similar methods - is intended to improve decision-making outcomes for problems with many stakeholders, a scarcity of resources, limited data and finite time within which to make a decision – in short, all of the factors that make Social Security reform such an intractable problem. I reviewed 14 alternative solutions, which I narrowed to a list of five deemed the most practical and likely to succeed. A more thorough analysis is required to select the best solution among these alternatives.</p>
<p><strong>Raise the payroll tax ceiling.</strong> This plan proposes raising the level of income subject to the 12.4% Social Security withholding tax, split equally between the employer and employee. Currently, any income above $117,000 is not subject to the tax. The cap regularly increases with inflation and will rise to $118,500 in 2015. To increase it sufficiently to help bridge the funding gap, that cap could be lifted in a one-time, large adjustment move or over a series of years. A more draconian approach would be to remove the cap entirely for good.</p>
<p><strong>Raise the retirement age.</strong> The normal retirement age, currently about 65 but set to gradually climb to 67 by 2027, has been lifted in the past; a further increase is considered a viable option in the current environment. The life expectancy of Americans continues to climb and is now about 78 years. This increased longevity means the number of people collecting benefits is rising faster than the number paying into the system. As the ratio increases, it places increasing strain on the financial resources of the system. With all other factors held constant, the system will either need to increase revenue or decrease payouts.</p>
<p><strong>Privatize the system.</strong> Although there are numerous possible scenarios, a proposal by former President George W Bush was to let certain participants elect to have a third of their payroll tax or 4% of their wages diverted to a private investment account. The program would be voluntary and phased in over a number of years. Lower and higher percentages have also been proposed, but the political viability of this option is poor since the system’s revenues would decline along with the diverted payroll taxes. Some have estimated it would divert US$2 trillion out of the system over 10 years, though there are some proposals that would soften the transition cost.</p>
<p><strong>Reduce the benefits.</strong> This alternative can encompass a broad array of tactics. Among the choices are a simple one-time cut in benefits, a temporary freeze in benefit levels or a reduction in future cost of living adjustments. This would curb costs while leaving the withholding ceiling untouched.</p>
<p><strong>Keep the status quo – do nothing.</strong> This envisions Social Security is left as it is, with no modifications, whether by choice or political gridlock. Proponents of doing nothing believe that the current system does not require fixing and that some external influences will arise to correct the current deficit, such as an increase in the number of employed or a stronger economy that would yield greater tax revenue. History might suggest this as an alternative, no matter how ill-advised.</p>
<p>How do we plug the growing gap in our Social Security system? What is the most optimal solution? Policy makers have been asking these questions for decades, and although I don’t have the answer, I know that applying a formula such as the Analytic Hierarchy Process to the problem could move us closer to the solution. It could be used by the government as other countries have to grapple with these difficult decisions and come to a rational solution. Unfortunately, the politicians don’t seem interested at the moment</p><img src="https://counter.theconversation.com/content/32990/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The author’s sons own a company called Decision Lens that uses AHP and other methods to help governments and others make better critical decisions. The author does not have a financial state in the company.</span></em></p>The US Social Security system has been heading toward insolvency for decades, with the program now projected to run a 25% deficit by a little after 2030, according to the Congressional Budget Office. Despite…Thomas Saaty, Distinguished University Professor, University of PittsburghLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/312422014-09-14T20:20:11Z2014-09-14T20:20:11ZPutting a real cost on delaying the super guarantee rise<figure><img src="https://images.theconversation.com/files/58773/original/724d3q9k-1410414838.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Delaying the super guarantee increase will have widespread repercussions.</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>The Abbott government’s deal with the Palmer United Party to freeze the minimum superannuation contribution rate at 9.5% until 2021 will not only cost retirees, it will also see future governments forced to bear the brunt of an increased reliance on the Age Pension.</p>
<p>There has been considerable <a href="https://theconversation.com/keating-accuses-government-of-attacking-super-out-of-prejudice-31246">discussion</a> of the impacts of the deal on both the wages of workers and their retirement savings. However, asserted effects have been either speculative (in the case of wages) or limited to a few hypothetical examples (in the case of retirement savings).</p>
<p>In work undertaken as part of a collaboration between researchers at The University of Melbourne and professional services firm Towers Watson, we have combined nationally representative household survey data derived from the <a href="http://www.melbourneinstitute.com/hilda/">HILDA Survey</a> with an adaptation of the <a href="https://www.moneysmart.gov.au/tools-and-resources/calculators-and-apps/retirement-planner">ASIC Moneysmart retirement planner</a> to project Australians’ retirement savings and living standards in retirement. In doing so, we are able to model the effects of the delay in the super guarantee increases on the entire Australian population.</p>
<h2>Retiring with less</h2>
<p>Our projections show the delay has a relatively small, but nonetheless negative, overall effect on the future adequacy of the retirement savings of Australians. </p>
<p>On average, in today’s dollars, superannuation balances at age 65 are projected to be A$8,598 lower for single people and A$20,790 lower for couples. These numbers translate into a decrease in annual retirement income of about 1.1%. As a result, an additional 1% of the population aged 25 to 64 are projected to have a living standard lower than the Association of Superannuation Funds in Australia (ASFA) Retirement Standard for a comfortable lifestyle (currently A$58,128 per year for couples and A$42,433 for singles). </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/58855/original/pygg62k6-1410499773.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/58855/original/pygg62k6-1410499773.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/58855/original/pygg62k6-1410499773.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=458&fit=crop&dpr=1 600w, https://images.theconversation.com/files/58855/original/pygg62k6-1410499773.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=458&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/58855/original/pygg62k6-1410499773.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=458&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/58855/original/pygg62k6-1410499773.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=576&fit=crop&dpr=1 754w, https://images.theconversation.com/files/58855/original/pygg62k6-1410499773.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=576&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/58855/original/pygg62k6-1410499773.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=576&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<p>Adverse effects are generally largest for people currently under the age of 40. The effects also tend to be larger in absolute terms for middle-to-high-income individuals, reflecting the fact that, even absent the policy change, low-income people are projected to largely rely on the Age Pension. Overall, singles tend to be affected more than couples.</p>
<p>Prior to the Palmer deal, the guarantee was scheduled to increase to 10% on 1 July 2015 and reach 12% on 1 July 2019 (although some delay in the guarantee increases had already been announced in this year’s budget). The new policy therefore represents a six-year deferral of the increases. </p>
<p>While the base impact of the changes is not large, it should be viewed within the broader context that 75% of single people currently aged 25-64, and 46% of couples currently aged 25-64, were already projected to fail to achieve a comfortable living standard in retirement. </p>
<p>The negative effects of the delay in the increase in the super guarantee rate will be magnified once the Age Pension age is raised to 70 and the pension is indexed to prices rather than wages, as proposed by the Abbott government as part of the last budget. In this environment, accumulating a sufficient level of private savings prior to retirement will become crucial for retirees.</p>
<p>Of course, individuals are free to make their own additional provisions for retirement — including voluntary superannuation contributions. Our projections assume individuals do not respond to the guarantee delay by increasing their voluntary contributions, or otherwise increasing their saving — yet rational, forward-looking individuals would be expected to do just that (which would in fact mean that the super guarantee itself is redundant).</p>
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<p>But the overwhelming evidence, both in Australia and in other developed countries, is that people consistently fail to save enough for retirement and, moreover, that mandatory retirement saving, such as is achieved by the super guarantee, has few adverse effects on voluntary saving. As a consequence, mandatory retirement savings accounts are quite effective at increasing self-reliance in retirement, and more effective than other measures currently known.</p>
<h2>A multi-billion dollar impost on future governments</h2>
<p>Notwithstanding the proposed changes to the Age Pension, the deferral of the super guarantee increases will also increase demands on the Age Pension, as lower private savings are likely to translate into higher dependence on the pension. </p>
<p>Our projections show an increase in the mean proportion of retirement income drawn from the Age Pension of 0.6 percentage points, which is likely to translate to many billions of dollars in increased pension payments over future years. </p>
<p>The super guarantee deferral will, however, improve the short-term net fiscal position, largely because a reduced fraction of personal income will be taxed at the concessional rate applied to superannuation contributions. The deferral therefore represents an improvement in the fiscal position over the period covered by the forward estimates at the expense of the longer-term fiscal position. While it is very difficult to quantify the magnitudes of these effects, there can be little doubt that they are sizeable.</p>
<h2>How much is required?</h2>
<p>So how much do you need to retire comfortably, and what superannuation contribution rate is required to achieve that? According to the <a href="https://www.moneysmart.gov.au/tools-and-resources/calculators-and-apps/retirement-planner">Moneysmart retirement planner</a>, a home-owner couple retiring today aged 65, and expected to live to 86, requires approximately A$570,000 in superannuation (and other savings) to achieve the ASFA comfortable living standard for the duration of their retirement. A single person requires approximately A$480,000. </p>
<p>Importantly, however, the Age Pension makes a substantial contribution to retirement income at these superannuation balances, so the minimum required balance is sensitive to future Age Pension policy settings.</p>
<p>For people not yet retired, the contribution rate needed to achieve a given superannuation balance will depend on the level of earnings, the length of working life, and the returns achieved by the fund manager (net of fees). This — in conjunction with uncertainty about future pension policy — means there is no single “golden number” for the super guarantee rate. What is clear, however, is that less than half the population is likely to achieve the ASFA comfortable standard under current policy settings. So, for most Australians, saving less is probably not a good idea.</p>
<p><em>John Burnett and Nicholas Wilkinson from Towers Watson contributed to this article.</em></p><img src="https://counter.theconversation.com/content/31242/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The Abbott government’s deal with the Palmer United Party to freeze the minimum superannuation contribution rate at 9.5% until 2021 will not only cost retirees, it will also see future governments forced…Roger Wilkins, Principal Research Fellow and Deputy Director (Research), HILDA Survey, Melbourne Institute of Applied Economic and Social Research, The University of MelbourneCarsten Murawski, Senior Lecturer in the Department of Finance and co-head of the Decision Neuroscience Lab, The University of MelbourneLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/249572014-03-30T19:47:24Z2014-03-30T19:47:24ZThe majority of Australians are not saving enough for retirement<figure><img src="https://images.theconversation.com/files/44998/original/vzmkqvk9-1395983629.jpg?ixlib=rb-1.1.0&rect=35%2C57%2C4597%2C3136&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Retirement incomes will leave many short, especially single people.</span> <span class="attribution"><span class="source">Image sourced from www.shutterstock.com</span></span></figcaption></figure><p>Only 53% of couples and 22% of single people are on track to achieve a comfortable level of retirement income, according to an in-depth study of the adequacy of retirement savings.</p>
<p>The outcome of a collaboration between researchers at the University of Melbourne and Towers Watson, the <a href="http://www.melbourneinstitute.com/downloads/working_paper_series/wp2014n05.pdf">study</a> has found a significant number of Australians are not likely to achieve adequate retirement incomes, even when all sources of savings are considered.</p>
<p>The research sought to address the considerable uncertainty among policy makers and the broader community about the extent and nature of retirement savings deficiencies in Australia. To do so, we developed a set of metrics indicating the adequacy of retirement savings and applied those metrics to a large representative sample of the Australian population.</p>
<p>The clear finding is that most Australians are still not on track towards reaching a comfortable income during retirement, and will continue to draw a large part of retirement income from the age pension. The implication is that, despite superannuation reforms dating back over 20 years, the problem of inadequate retirement savings remains a significant public policy issue for Australia.</p>
<p>An important innovation of our study is that the metrics we developed take into account not only superannuation holdings (and projected growth in superannuation holdings through investment returns and future contributions) and the projected age pension entitlement, but also a variety of other household assets that could be used to fund retirement, including various financial assets and property. </p>
<p>Using this information, we are able to forecast a person’s expected income throughout retirement. We then compare this income to a “target” income, which is provided by the <a href="http://www.superannuation.asn.au/resources/retirement-standard">Association of Superannuation Funds in Australia (ASFA) Retirement Standard</a> for a “comfortable” lifestyle. The ASFA standard for a comfortable lifestyle is a widely used benchmark, and specifies a minimum income of A$57,665 for couples and $42,158 for single people.</p>
<p>The ASFA benchmarks are very close to both current average income levels of retirees in Australia and the income levels that pre-retirement Australians on average believe they will need for a satisfactory lifestyle in retirement. While this concordance may seem reassuring, our findings for the projected retirement incomes of pre-retirement Australians were not.</p>
<p>We projected retirement income levels for a large, representative sample of Australians aged 40 to 64 – drawn from the nationally representative <a href="http://www.melbourneinstitute.com/hilda/">Household, Income and Labour Dynamics in Australia (HILDA) Survey</a> – and compared our projections to the income required to sustain a comfortable lifestyle.</p>
<p>Based on our calculations, only 53% of couples and 22% of singles are on track to achieve a comfortable level of retirement income.</p>
<p>Our study also shows the relative importance of different sources of retirement income. If we ignore all sources of retirement income other than superannuation, only 15% of couples and 5% of singles are projected to achieve the target. Indeed, applying the <a href="http://www.oecd-ilibrary.org/sites/factbook-2010-en/11/02/02/index.html?itemId=/content/chapter/factbook-2010-89-en">OECD poverty benchmark</a> of half median income, most retirees would be living in poverty.</p>
<p>Factoring in the age pension improves projected retirement incomes for many people, but still only 32% of couples and 11% of singles are on track to have a comfortable retirement income.</p>
<p>Our calculations have several implications. First, they show that, for most people, superannuation is not sufficient to fund a comfortable retirement, even if they have contributed to superannuation for most of their working lives.</p>
<p>Second, it is important to take into account all potential sources of retirement income, including non-superannuation assets, when computing the adequacy of retirement savings. Omitting any of these sources will likely lead to substantial under-estimation of adequacy.</p>
<p>Third, single people are particularly under-prepared for retirement, being three times more likely than couples to have severely inadequate projected retirement incomes.</p>
<p>Fourth, there is a gap between expectations about the importance of the different sources of retirement income and the likely reality. <a href="http://www.abs.gov.au/AUSSTATS/abs@.nsf/Lookup/4102.0Main+Features50March%202009">Data from the Australian Bureau of Statistics</a> show that over half of men and two-fifths of women expect superannuation to be the main source of retirement income. However, our projections show that the age pension will provide 61% of the retirement income of single people, and 39% of the retirement income of couples. Moreover, 96% of single people and 89% of couples aged 40 to 64 today are expected to receive at least a partial age pension at some stage during retirement.</p>
<p>Our analyses show that most people need to think ahead to their financial situation in retirement and, if possible, make some changes – the sooner, the better. The first step is to find out whether your savings are likely to be adequate – and you can now do this easily on the <a href="https://www.moneysmart.gov.au/tools-and-resources/calculators-and-tools/retirement-planner">ASIC MoneySmart web site</a>. </p>
<p>The site offers a calculator based on a simplified version of the algorithm we used in our study. It takes less than 10 minutes to enter the required information and obtain an estimate of the adequacy of your retirement savings.</p>
<p>Knowing now whether you need to save more towards your retirement is an essential first step towards a retirement in which you don’t have to fear running out of money.</p>
<p><em>Professor Kevin Davis contributed to this study, which began prior to his appointment as a panel member of the Financial System Inquiry.</em></p><img src="https://counter.theconversation.com/content/24957/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Only 53% of couples and 22% of single people are on track to achieve a comfortable level of retirement income, according to an in-depth study of the adequacy of retirement savings. The outcome of a collaboration…Roger Wilkins, Principal Research Fellow and Deputy Director (Research), HILDA Survey, Melbourne Institute of Applied Economic and Social Research, The University of MelbourneCarsten Murawski, Senior Lecturer in the Department of Finance and co-head of the Decision Neuroscience Lab, The University of MelbourneLicensed as Creative Commons – attribution, no derivatives.