The Australian retirement income system has been largely a success story. It ranks among the best in the world. It provides reasonable and improving retirement outcomes and remains sustainable despite population ageing, which in Australia is taking place at a slower pace than average.
This first brief in a three-part series provides an overview. It describes the demographic context and structure of the system, how retirement resources compare across benchmarks, countries, and generations. Brief 2 focuses on the public, poverty-alleviation element of Australia’s retirement income, primarily the Age Pension. Brief 3 looks at private, income replacement provision, particularly superannuation.
Incomes are improving against budget standards but some groups lag: About 63% of older Australians could afford a lifestyle that is deemed to be above a modest level, according to a set of commonly used budget standards. The analysis also shows that: (1) standards of living have improved over the last decade; (2) couples are consistently better off than singles; and (3) homeowners are significantly better off than renters.
Replacement rates from the mandatory system are reasonable: The Superannuation Guarantee and the Age Pension are projected to deliver well for most workers. Someone on a minimum wage could expect 100% of their net working-age income, the median earner could expect about 67%, and 90th percentile earner about 27%.
Australian system compares well internationally: The Australian retirement income system is among the most sustainable and provides a more progressive level of replacement rates than seen in other countries. In 2017, the system scored highly. But weaknesses identified included a lack of requirement or incentive to take benefits as income streams and incomplete provision of information to members.
Older Australians have higher incomes than in the past: The median person aged 65+ in 2016 had 60% of the household income of the median person aged 15-64 (adjusted for household size). Income over the lifecycle tends to peak around age 50 and declines thereafter. The greatest declines were for cohorts where the household head ended the decade in their late-60s (an 18% drop in adjusted median income). This is driven by lower labour income, partly offset by super and Age Pension income. Despite such declines, older people today have much higher real incomes (about 45%) than those of similar age ten years ago. Younger age groups saw smaller gains relative to those who came before them but greater gains relative to themselves ten years earlier.
Other resources across generations: The median person aged 65+ in 2016 had 180% of the household wealth of the median person aged 15-64 (adjusted for household size). Most older people were in the bottom half of the income distribution and top half of the wealth distribution, with much of this wealth held in the home. Over the lifecycle, net wealth peaks by age 69 at a median of about $630,000 (adjusted for household size). Super is now the second largest asset class after the family home, the fastest growing component of wealth for those aged 65-74 compared to the same age group ten years earlier. Older Australians benefit from living rent-free in their own homes (worth over $10,000 per year, on average). And public transfers in-kind are also of value (mostly health-related and worth over $25,000 among the oldest households, on average). While private consumption drops (mostly on food, clothing and transport) as households reach retirement, on average they continue to save.
How different resources fund consumption by age: Comparisons of income and consumption by age show that the lifecycle surplus turns into a deficit at age 58, and that health and aged care expenditure increase most significantly in retirement. Age and Service Pensions cover less than half of consumption at older ages. Total consumption by age (both private and public) has grown for all generations over their lives.
Centre of Excellence in Population Ageing Research (CEPAR), UNSW 2018