The conventional wisdom is that Australians don’t save enough for retirement. But this belief, encouraged by the financial services industry fear factory, is mistaken. The vast majority of retirees today and in future are likely to be financially comfortable.
Most retirees today feel more comfortable financially than younger Australians who are still working. Retirees today are less likely than working-age Australians to suffer financial stress such as being unable to pay a bill on time. Across the income distribution, people typically have enough money to sustain the same, or a higher, living standard in retirement as when working. Most own their own homes. And most retirees are more likely to be able to afford optional extras such as annual holidays. Australians tend to spend less after they retire, and even less into old age. While their medical costs increase, these are largely borne by the taxpayer. Many retirees are net savers, and current retirees often leave a legacy almost as large as their nest egg on the day they retired.
The retirees of tomorrow are likely to be even better off due to a combination of compulsory super contributions, non-super savings, and the Age Pension. Our modelling shows that, even after allowing for inflation, the average worker today can expect a retirement income of at least 91 per cent of their pre-retirement income – well above the 70 per cent benchmark used in this report and endorsed by the OECD. Many low-income Australians will get a rise in pay when they retire, because the Age Pension and the income they get from compulsory retirement savings will be higher than what they earnt before retirement.
But our retirement incomes system doesn’t work for everyone. Senior Australians who rent in the private market are more likely to suffer financial stress than homeowners, or renters in public housing. And this problem will get worse: on current trends home ownership for over-65s will decline from 76 per today to 57 per cent by 2056. Consequently the real policy priority should be to boost the maximum rate of Commonwealth Rent Assistance by 40 per cent, or roughly $1,400 a year for singles.
Even if governments did want to boost retirement incomes more generally, the current policy of increasing compulsory super contributions to 12 per cent is the worst way to get there: it will cost workers and governments more today, reduce the pensions of current retirees, and do less for future retirement incomes, than the alternatives. Reducing superannuation fees would increase retirement incomes and budget revenues more than the planned increase to the Super Guarantee.
Loosening the Age Pension assets test could boost retirement incomes for around 20 per cent of retirees today, rising to more than 70 per cent of retirees in future. It would also deal with anomalies in the system: some people who save $100 while working increase their total retirement income by less than $100 in real terms. And more of the value of owner-occupied housing should be included in the Age Pension assets test.
Given that retirement incomes are broadly adequate both today and in the future, there is room to reduce tax breaks so that the budgetary cost of the retirement system is more sustainable. Reducing super tax breaks could save the budget more than $4 billion a year. Reducing age-based tax breaks could save another $1 billion a year. Australia’s population is ageing. Unless governments have the courage to make these reforms, future budgets will not be able to fund aged care and health at the same level as today, which is the real threat to adequate retirement incomes in future.