Reflections on the Australian Retirement Income System Some Facts, Some Fiction

1
Reflections on the Australian Retirement Income
SystemSome Facts, Some Fiction the Future

• Dr David Knox
• PricewaterhouseCoopers Actuarial

2
The Australian 3 pillar system the facts

• It has 3 pillars
• The age pension, the SGC and voluntary super

• It is world recognised as a workable combination
  of private and public sectors

• It has expanded superannuation coverage
• It has generated broader interest in retirement
  savings

• It is complex
• Taxation at three stages
• Significant regulation

3
The Australian 3 pillar system the fiction

• The 3 pillars are well integrated
• They operate almost independently
• The link between the age pension and super is, at
  best, poor and, at worst, detrimental
• It does not encourage the use of out human and
  financial capital efficiently

• There are 2 additional pillars
• Employment needs to be encouraged not
  discouraged
• Bequests hard to predict (!) but increasingly
  significant for retirees

4
?Superannuation assets have grown
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Why Have Super Assets Grown?

• The SGC has helped but

• The SGC is not the major cause!

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Super The new facts

• Its economic importance will continue to grow
• But, demand/supply will change as the baby
  boomers retire

• Super is not just linked to employment
• The trend is to individualism

• It is increasingly member driven not employer
  driven
• There are growing balances
• 19 of household wealth (home is 44)
• It is becoming a commodity

• It is much more portable
• We are moving to an individualised DC environment

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Super How much is enough?

• SGC at 9 from 1 July 2002
• 15 lost in contributions tax for all
• Surcharge for higher incomes
• Insurance and Admin costs
• Net contribution of 6-7.5

• The objective of the SGC is not clearly known
• I do not know!
• Basic Income - replace the age pension
• Adequate income at what level?
• Replacement income at 60-70 of previous income

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How much is enough?

• 9 may be enough for some members
• But under what assumptions
• Full time, 40 years, current earning rates,
  current longevity
• The future is not that scenario!

• Some of the issues
• Longevity
• What is retirement?
• Employment pre and post retirement
• Consumerism and ownership

9
We are living longer!
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Mortality improvements from age 65

• Difficult to estimate but based on experience
  (25 or 100 years)
• Life expectancy at 65
• Males (Base in 1996) 16.1 years
• Now aged 55 16.9-18.2
• Now aged 40 17.6-20.4
• Females (Base in 1996) 19.8 years
• Now aged 55 20.8-21.8
• Now aged 40 21.8-23.5

• Increase in the pension age
• The male pension age has not changed in a
  century!

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Uncertainty do we wish to fund it?

• The biggest risks facing retirees are longevity
  and inflation
• We are looking at a possible 30-40 year period

• Is it sensible for everyone to provide for this
  uncertainty?
• If so, there will be over provision
• It will probably be conservatively invested

• There are better options for the individual and
  the community
• For example
• An insured annuity from say age 85
• A universal pension from age 90
• Very limited cost

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What is retirement?

• The labour force is changing
• Retirement is no longer what it was!
• Was it a 20th century phenomena?
• What is it in the 21st century?

• Must encourage retirees to participate
• Use of human capital
• Provides the 4th pillar of retirement income
• Encourages active ageing

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The Super consumer the car analogy

• The car is chosen by the individual
• One size does not fit all
• The requirements change during our life
• Some features are important for some individuals

• As we drive, we have some control
• Accelerate, brake etc
• This reflects our risk profile

• We do not fully understand the engine but
• It is serviced regularly by a qualified person

• There are some rules for the social good
• Some speed limits, road worthiness, environmental
  issues etc

• There is a road we know where it is going!
• The Government contributes to some of the
  infrastructure

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The ideal future

• The goal is retirement income
• It can be adjusted to suit the individuals
  circumstances
• Eg changing contribution rates
• Not linked to employment

• Contributions from 3 sources
• The SG is a base higher than 9
• Tax supported contributions, up to a lifetime
  limit (flexibility)
• Additional contributions

• Some longevity insurance or pooling
• Private or public sector

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Some economic issues

• Export opportunities for Australia
• Pension reform is worldwide

• Investment markets will be affected by the baby
  boomers
• Supply and demand
• Investment allocation

• A safety net for super members?
• Moral hazard issues what about banks and
  insurance?

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Finally

• Our retirement income policies and structures are
  important
• Economically
• Socially
• Politically
• Internationally
• Lets try and develop them for the benefit of
  individuals, the community and the Australian
  economy