Superannuation savings are losing the race with life expectancy, meaning most Australians will outlive their superannuation by about 11 years, the World Economic Forum has reported.
While superannuation savings are growing, the WEF says that lifespans are growing faster, at the astounding rate of one year every five years.
That means lifespans are outgrowing retirement savings by 5 per cent annually across eight countries, Australia, Canada, China, the Netherlands, India, Japan, the UK and US, the report finds.
Australia meets the average of 5 per cent along with the US and Canada. Japan, the Netherlands and the UK have a lesser gap, and India and China have a larger gap.
The chart shows that Australia is actually doing quite well in comparison with similar countries, having average retirement savings that will last 9.7 years.
Only the US, which has a mixed subsidised public and private retirement savings system, has achieved that.
However, that is not enough to pad out a whole retirement, and the WEF estimates Australian men will outlive their savings by 9.9 years, while for longer-living women the figure is 12.6 years.
Australia’s strong position in retirement savings seems to be driven by our preference for equity investments that offer higher returns, but with bigger risks.
Australian superannuation accounts average 80 per cent exposure to growth assets and stay there into retirement, allowing for balances to build even when contributions stop.
The US and the Netherlands both push growth exposure up to 90 per cent during work years, but drop that exposure right back in the run-up to retirement.
Australia’s persistence with growth assets is part of the reason it has built up the equal-largest pot of capital at retirement, despite our compulsory superannuation system being relatively new and having started off at low contribution levels.
Conversely, Japan’s pension system invests exclusively in low-return bonds and as a result it has only an average of 4.5 years in retirement savings per head. And Japanese people will outlive their savings by 17.5 years.
Reality not as bad as it looks
WEF’s figures assume that people will retire on an income equivalent to 70 per cent of their pre-retirement wage.
However, Ross Clare, research chief with the Association of Superannuation Funds of Australia (ASFA), says many people actually take less than that in retirement, which means their savings last longer that WEF estimates.
The green barrel on the above chart shows that most Australians retire on between about 4.8 and 6.8 times their final wage, with the median being about 5.8 times.
That means they are likely to extend their savings beyond the estimate made by WEF in the first chart.
“Because we have a means-tested age pension system which interacts with superannuation, most Australians actually die with some money in super,” said Phil Gallagher, retirement income specialist with Industry Super Australia (ISA). However, that may not be a large amount.
Time to act
The report’s co-author Han Yik says the size of the gap in retirement savings “needs action”.
“Policy makers and governments alike need to do more to help savers allocate their pensions and investment more efficiently,” Mr Yik said.
Unless more is done, many people may need to postpone their retirement and continue working.
“You either spend less or you make more,” he said.
With the move to contribution-based retirement systems such as Australia’s “all the risks that government and employers used to have, we’ve shifted that onto the workers”.
The New Daily is owned by Industry Super Holdings