Australians will be able to maintain their working-life living standards in retirement even if the superannuation guarantee (SG) stays at 9.5 per cent of wages.
But only if they use their retirement savings more efficiently.
That’s one of the key messages from Treasury’s long-awaited Retirement Income Review, which the federal government released on Friday morning.
The lengthy document offers no recommendations for government policy but instead provides an evidence base to inform future debate on retirement incomes and superannuation.
It found that while abandoning the move to a 12 per cent SG would lead to lower superannuation balances at all income levels, keeping the rate at 9.5 per cent would boost working-life incomes by 2 per cent and still allow most Australians to maintain their living standards in retirement.
An SG of 9.5 per cent would enable lower- and middle-income Australians to retire on incomes equal to 65-75 per cent of their incomes before retirement (i.e. a ‘replacement rate’ of 65-75 per cent), the report found.
And Australians could have even higher retirement incomes if they used their savings more effectively – with the report finding that accessing home equity could have a “bigger impact on improving retirement income than increasing the superannuation guarantee”.
“Much of the focus on the retirement income system is currently on the superannuation balances people may need in retirement,” the report said.
“Often, the final balance is not spoken of in income terms, and the interaction with the Age Pension in supplementing the retirement income of lower- and middle-income earners is ignored.
An area where there is insufficient attention is how the use of a retiree’s assets can significantly influence retirement outcomes.”
The review said that, in addition to increasing superannuation contributions or other savings, people could boost their retirement incomes by:
- “More effectively drawing on superannuation assets. If drawdown rates increase from currently observed rates to those assumed in the central case in the modelling for the review, replacement rates could rise by 11 percentage points for the median-income earner retiring in 2060. In addition, all income levels would achieve replacement rates within or above 65-75 per cent
- “Achieving better-after-fee returns, in particular implementing the recommendations in the Productivity Commission’s report, Superannuation: Assessing Efficiency and Competitiveness, would reduce fees and improve market returns for many people, resulting in higher retirement outcomes.
- “Accessing the equity in the home.”
Dr Joshua Funder, chief executive of home equity release specialists Household Capital, welcomed the review’s finding that a person’s home is a financial asset “that can be drawn on in retirement”.
He said releasing home equity would be particularly helpful for home owners who are entering retirement today, as they only started to accrue 3 per cent superannuation halfway through their working lives.
“Home ownership is an integral part of Australian wealth creation and it should also be widely available for Australians to voluntarily draw on their wealth to fund their retirement,” Dr Funder said.
“Collectively, Australian retirees own over $1 trillion in home equity; at retirement, median retirees have saved around $200,000 in superannuation and over $700,000 in home equity.”
Super Consumers Australia praised the review for highlighting the need to reduce complexity in the superannuation system and for underscoring the importance of raising financial literacy.
“Retirement planning has become far too complex,” SCA director Xavier O’Halloran said.
“People are left in the dark with no one to trust. We support the review finding that there is more work to do to guide consumers towards better decisions.”
But Treasury’s findings did not convince everyone.
Industry Super Australia disputed the report’s claim that Australians’ working-life incomes would increase by 2 per cent if the SG was kept at 9.5 per cent of wages.
ISA said workers received no pay rise after then prime minister Tony Abbott abandoned an SG increase in 2014 on the premise it would eat into wages growth.
“An ISA analysis of more than 8000 EBAs struck then shows that promise went unfulfilled,” the industry group said.
There was no magic wage rise.”
ISA chief executive Bernie Dean said the community would be disappointed in the government if they abandoned the hike. Not least because politicians receive a high rate of super.
“The two thirds of Australians who support the legislated and long-promised super increase would not take too kindly to politicians, who pocket 15 per cent super on top of their generous salary, using this review to snatch away their retirement savings,” he said.
“This report’s findings must be used to support sensible reforms that will grow members’ savings, not cherrypicked to support pre-conceived policy ideas that will leave people and the nation worse off.”
Meanwhile, the Australian Services Union (ASU), Australian Nursing and Midwifery Federation (ANMF) and the Shop, Distributive and Allied Employees Association (SDA) said they were concerned that the government had shown no intention of closing the gender super gap.
The review’s focus on improving financial literacy and encouraging home equity release was misguided, they said, and its dismissal of paying the SG during paid parental leave contradicted credible research.
“The review also declares that paying the SGC during paid parental leave would make little difference to retirement,” as Julia Fox, chair of the ACTU Women’s Committee and SDA assistant secretary.
“This is clearly absurd given the findings of the well documented Motherhood Gap Research, which clearly show that motherhood is the most significant driver of diverging accumulation pathways.”
The New Daily is owned by Industry Super Holdings