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Super, savings are meant to fund retirement, not be bequeathed to others

Many retirees have the option to deplete their financial assets to bolster their standard of living. AAP Image/Lukas Coch

A key budget measure to change the age pension asset test has passed both houses of Parliament, despite concerns about the impact on pensioners raised by the Opposition, National Seniors and Industry Super.

But many such analyses have focused only on the income from investment assets rather than taking full account of retirees’ ability dip into their assets – like superannuation – to bolster their standard of living.

Superannuation – a nest egg or a gift to the next generation?

In one example of a criticism that failed to show the whole picture, a National Seniors’ campaign poster against the cuts said that:

a single woman living off $17,875 from $550,000 in savings will lose her part-pension. Yet, someone with no savings will receive a full pension of $22,365 plus concessions.

Little is made of the fact that the woman losing her pension can use the equity in her home to access a full pension via the Pension Loan Scheme, let alone that -– unlike the full pensioner -– she can spend some of her $550,000 in savings to supplement her standard of living.

Indeed, she is better off than most. Based on 2010 HILDA data, only about a fifth of people aged 65-plus had non-home assets of over $500,000. Renters were even less likely to have such funds.

Similarly, analysis by Industry Super and Rice Warner projected the income levels of future retirees and compared these to what would be needed for a “comfortable’ retirement, as defined by Association of Superannuation Funds of Australia.

They found that, based on income from the age pension, superannuation, and wealth outside of superannuation, almost half of those retiring in 2055 are expected to have an income below the comfortable level and that the asset test changes will exacerbate the outcomes.

Their analysis also shows that as people accumulate more super, the asset test will affect a greater proportion of retirees and start impacting on middle-income Australians. This is unsurprising and exactly what one would expect from a maturing superannuation system. But again, little is said about how retirees have the option to use their financial assets to bolster their standard of living.

The implicit assumption seems to be that financial wealth will be passed on to children rather than be used to compensate for the loss of the pension and fund retirement (or health and care expenditures, since these are largely covered by the state). And this is in addition to passing on the family home.

The under-consumption puzzle

Recent research by the Centre of Excellence in Population Ageing Research confirms that most households receiving the age pension indeed choose not to spend down their financial assets and leave considerable bequests. It is part of a wider literature looking at what is referred to as the "under-consumption puzzle”.

The analysis is based on a sample of administrative data that tracked the assets and incomes of full and part age pensioners in the period between 1999 and 2007.

The results show that on average, younger and wealthier households tend to spend some of their financial wealth, but the majority see the financial assets grow, particularly couples and homeowners. Housing assets are usually preserved until very old ages unless a partner dies or goes into residential care, suggesting an element of downsizing.

Interestingly, the data shows that consumption is low when compared to the Association of Superannuation Funds of Australia benchmarks for a “modest” and “comfortable” retirement, even among the wealthier households in the sample.

One explanation is that pensioners may be self-insuring for investment and expenditure shocks, but the outcome of low spending profiles is that a large proportion of pensioner households leave significant assets as bequests.

Over 10% of single-person households in the sample exhausted 90% of the initial assets over the period, but the median pensioner that passed away during the study period was able to bequeath wealth (mainly financial) equivalent to 90% of the assets recorded at first observation.

Next up: a review of retirement income

The research highlights the extent to which pensioners rely on the age pension while preserving capital for their estate. In a system where the age pension is designed to be needs-based – not rights-based – and in the absence of inheritance tax, a strong asset test seems like an appropriate tax on such a practice.

The behavioural responses will be watched closely. A complete spend-down to gain pension eligibility is unlikely to be good value for money. Some might dip into their capital to compensate for the loss of their pension but the research suggests they will simply spend less. Others may invest in the family home, excluded from the asset test.

But one seldom quoted response is how the asset taper will affect risk. Those far from eligibility may seek out safer investments like annuities because the pension will no longer insure for losses in assets. Those who are on the steeper asset taper may seek riskier investments since the pension acts as a hedge and compensates for losses (at $78 per $1k loss, compared to $39 previously).

Next on the agenda is a review of retirement income – a concession that the Greens extracted from the Government when agreeing to the asset test changes. Once the review does take place, let’s not forget to think about income as well as how people deplete their capital.

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