Treasury’s Retirement Income Review has reignited the debate about retirement adequacy after finding most Australians will enjoy comfortable retirements even if the superannuation guarantee stays at 9.5 per cent.

The latest group to come out against holding the SG at 9.5 per cent is actuarial consultancy Rice Warner.

“Our view remains that a phased move to 12 per cent will be beneficial,” the group said in a report released this week.

That came after earlier work from the group “concluded that a range of [SGs of] 10 to 15 per cent of wages was needed”.

Problematic assumptions

Rice Warner believes the review’s conclusion on retirement adequacy is based on an inadequate assumption.

Namely, it assumes retirement income should only grow at the rate of the Consumer Price Index rather than wages growth.

That means that over time retirees will see their relative position slip in relation to workers.

“We consider middle-income earners would want to maintain relative economic value – and this would need a higher SG rate [than 9.5 per cent],” Rice Warner said.

This has significant implications for the RIR’s assumptions, which see an adequate retirement as one that yields income of 65 to 75 per cent of pre-retirement, post-tax earnings.

If retirement incomes don’t keep up with wages, then what might be 75 per cent of previous earnings on retirement would slip considerably over 10 to 15 years in relation to workers still doing similar work.

Another way to look at the adequacy of the SG is to draw international comparisons.

The RIR’s observation that “the Australian retirement income system is effective, sound and its costs are broadly sustainable” is verified by the latest Mercer CFA Institute Global Pension Index, which found Australia came in at No.4 in its review of 39 retirement systems.

Although Australia performed well, it was far behind the three countries above it: The Netherlands, Denmark and Israel.

They recorded better performances in payout adequacy, which looks at the overall factors determining the size of a pension balance, and glaringly had contribution rates of 12 per cent of wages or above.

An SG of 9.5 per cent may provide an adequate retirement if the balance was worked hard, but Mercer partner David Knox says it fails to account for the increasing casualisation of the workforce.

“Things have changed after COVID – the old model was that people spent 40 years full time in the workforce,” Dr Knox said.

“Now we see that we need a lot more flexibility in the workforce and moving the SG up to 12 per cent will allow for that.

“If eligibility for the age pension remains limited, then we need to get to 12 per cent. But the rise could be paused for a couple of years given the economic effects of the pandemic.”

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Michael Abrahamsson, principal of Flinders Wealth, said many people had adequate retirements on the current arrangements.

“Over half our clients would have retirement incomes of about 75 per cent of their pre-retirement incomes, another 30 per cent would receive more than that and don’t spend all their income,” he said.

“Another 20 per cent overspend”, meaning they are likely to spend their savings quicker than planned, Mr Abrahamsson added.

Generally, to achieve a replacement rate of 75 per cent, retirement balances would have to look like this.

For those retiring on $50,000, the necessary balance is relatively low because “they would be receiving two-thirds of their income from the age pension,” Mr Abrahamsson said.

At $90,000, they would receive no pension.

Although many people can achieve 75 per cent of their pre-retirement income under current arrangements, they “generally have made extra contributions,” Mr Abrahamsson said.

“They have often made use of the ‘golden window’ after the kids have left home and the mortgage has been paid off. That’s generally in your 50s.

“People then have some spare cash flow and, with careful planning, can make extra contributions.”

Stick with a plan

The key to an adequate retirement is planning and budgeting.

The government mandates people draw down 5 per cent of their super annually between the ages of 65 and 74, with drawdowns rising to 14 per cent at 95.

The figures have been halved for 2020-21 because of the pandemic, but will return to those levels from next July.

However, Mr Abrahamsson says in the early years of retirement especially, drawdowns should be larger.

“We’d say you should look at spending 8 per cent of your super annually while a fund invested in 60 per cent growth assets should grow at 6 per cent a year. That gives you 30 years of retirement to spend your super,” Mr Abrahamsson said.

“The first five years of retirement are likely to be much more expensive than once you get into your mid-70s, when spending usually falls off a cliff.”

Mr Abramsson said: “I’m a big believer in moving the SG to 12 per cent because if it goes into people’s bank accounts, they spend it”.

However, the Grattan Institute’s household finances program director Brendan Coates and independent economist Saul Eslake both see the current 9.5 per cent as adequate.

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