Adequacy of Superannuation

The most important question with regard to superannuation is whether the current retirement income system (of which superannuation is a part) will produce an adequate retirement income for individuals.

The retirement income system

Australia’s retirement income system is made up of three parts:

• the government-financed age pension
• income generated by superannuation guarantee savings, and
• income generated by additional savings, both inside and outside superannuation.

For the majority of Australians, the superannuation guarantee regime, under which employers are required to contribute 9 per cent of an employee’s wages to a superannuation fund on the employee’s behalf, is the main form of saving for retirement. A smaller proportion of the population can afford to make additional contributions to superannuation and the level of the age pension is fixed at 25 per cent of male total average weekly earnings.

For most Australians, the question is whether the current level of contributions under the superannuation guarantee regime will be enough to produce an adequate retirement income.

What is an ‘adequate’ retirement income?

The overall aim for Australia’s retirement income system is for retirees to have an income greater than they would otherwise receive from the age pension alone. This objective will be met if even a relatively small amount of superannuation benefits have been accumulated by the time a person retires.

The Association of Superannuation Funds of Australia (ASFA) has commissioned research to define an adequate standard of living in retirement known as the ‘modest but adequate’ standard. According to this research, ‘modest but adequate’ represents:

… a standard that affords full opportunity to participate in contemporary Australian society and the basic options it offers. It is seen as lying between the standards of survival and decency and those of luxury as these terms are commonly understood, corresponding in round terms to the median standard of living in the community as a whole.

This has been interpreted to mean ‘better than the Age Pension, but still only able to afford fairly basic activities’.

The above definition has formed the basis of the discussion of this matter since its formulation in 2004. It assumes that retirees own their own homes.

How is ‘adequate’ retirement income measured?

The adequacy of a person’s income in retirement can be measured by:

• setting a fixed dollar amount of income that should fund the required standard of living—this is known as the ‘budgetary approach’, or
• setting a desirable percentage of a person’s pre-retirement income to be received post retirement—this is known as the ‘replacement rate’ approach.

What are the current adequacy standards?

The current budgetary standards for an adequate income in retirement are:

• $18 654 per annum for a single person, and
• $26 145 per annum for a couple.

Generally, a replacement rate of 60 per cent of pre-retirement income for a person on average weekly earnings, and up to 100 per cent for a person who received social security benefits before retirement, is considered an adequate retirement income.

Will most Australians accumulate an adequate superannuation?

A recent paper by a member of the Treasury’s Retirement Income Modelling Group suggests that, currently, the average replacement rate is about 52 per cent. This rate is projected to rise to 60 per cent by 2010 and 70 per cent by 2015. These estimations are based on a person’s expenditure and take into account income from all three parts of the retirement income system (that is, the age pension, superannuation and other savings) and assume some capital drawdown during retirement. Thus, according to these estimates, current arrangements will produce an adequate retirement income for the majority of future retirees. A large international pension consultancy firm supports this view.

However, this position is under strenuous challenge. Recent ASFA research suggests that the average balances of superannuation retirement payouts are still quite low. Though they are projected to continue to increase, they are still not large enough to, on their own, provide an adequate retirement income as defined by the budgetary standard above. ASFA recognises that most future retirees will have to rely on receiving either part or full age pension in retirement to achieve an adequate income. Thus, the current system will not produce an adequate retirement income for the majority of retirees until well into the future.

Library Documents
Leslie Nielson, ‘An adequate superannuation-based retirement income?’, Research Brief, no. 12, Parliamentary Library, Canberra, 2005–06.