Australia’s superannuation guarantee (SG) contributions need to rise to 12 per cent to ensure retirement income levels reach OECD averages, according to a superannuation expert.
David Knox, a senior partner with superannuation group Mercer, told the Actuaries Summit in Sydney on Monday, that widely publicised claims from the Grattan Institute that Australians would have more than enough to retire on if the SG stayed at the current level of 9.5 per cent were wrong.
“The Grattan research makes a number of assumptions I would not agree with,” Mr Knox told The New Daily at the conference. The Grattan research was based on people working until 67 – the age they will be able to receive the pension in 2023.
“However most people don’t work till the age of 67. They retire earlier because of illness, injury, just being worn out or having to care for a partner or aged parents,” Mr Knox said.
“They retire at 62 or 63, they can’t get the age pension or disability pension, so they eat into their super.”
International comparisons showed Australia’s pension and retirement system in a positive light in some regards. The Melbourne Mercer Global Pension Index in 2018 listed Australia at No.4 out of 34 countries examined.
However, once the net replacement rate of pre-retirement income is factored in Australia doesn’t look so good, he said. The OECD said Australia’s average net replacement rate was 40.7 per cent, while for the OECD it was 65 per cent.
“For The Netherlands, it’s 100 per cent and there is a 15 per cent superannuation contribution [from employers] as well as a state pension,” Mr Knox said. “Going to 12 per cent will help Australia make up the difference,” Mr Knox said.
However, Grattan CEO John Daley told the conference that Australian expectations for super were too high.
“People talk about people not reaching a comfortable retirement at current contribution levels, but that calculation is based on the ASFA [Association of Superannuation Funds of Australia] standard which describes the top 20 per cent [of income earners]” Mr Daley said.
“The maths on that means that for people to reach that standard, a lot would be better off in retirement than before,” Mr Daley told the conference. That was not the purpose of super, he said.
Grattan’s research showed that most people reaching retirement would achieve 70 per cent of the income they had while they worked.
This was reasonable, as in retirement most people have lower costs, because children have left home and many have paid off their mortgage, he said.
However, for the rising number of people who rented through life, this would not be the case, Mr Daley said.
However, Mr Knox said Australia’s retirement system was not up to the standard of better systems overseas and still required the SG to move to 12 per cent to provide comfortable retirements.
Despite being compulsory, Australia’s super system covers only 75.7 per cent of the population while comparable systems covered 80 to 90 per cent of the population.
The table also shows that contribution rates were higher than Australia’s current 9.5 per cent in most countries.
Where they were lower, in Sweden and Finland, all people have access to a parallel government pension system that is two to three times more generous than Australia’s.
“In terms of net replacement rates for the average income earner, the OECD calculated a net replacement rate of 40.7 per cent for Australia compared with: Chile (38.2 per cent); Denmark (80.2 per cent); Finland (65 per cent); Netherlands (100.6 per cent) and Sweden (54.9 per cent).
“In short, we should do better,” Mr Knox said.
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