WE’VE BEEN called the lucky country. For a while we aspired to be the smart country. Are we now at risk of becoming the country that never retires?
Within 40 years, the percentage of Australians over 65 will double, but do we accept the need to be more self-reliant in old age? The evidence suggests not.
We should not be carried away by the so-called nation of investors statistics released by the Australian Stock Exchange, showing that 7.6 million Australians now own shares, representing 53.7 per cent of adults compared with 40.3 per cent a year or two ago.
While the increasing number of Australians owning shares is good news, many shareholdings are small, under $5,000, and could potentially be used for short-term consumption rather than being kept for the longer term.
There has been improvement, but we have a long way to go, especially if we consider those shareholders who only own shares in one or two companies, picked up in the spate of floats during the last few years.
The need for improvement becomes even more pressing given that 74 per cent of adults believe their current levels of savings will not be enough to support them in retirement. But what are they doing about it? With only six per cent of people (according to surveys) likely to save additional income through the GST-related tax cuts, it seems most will use the money to reduce debt, or spend it.
It appears we will not prepare for retirement without some form of compulsory savings, such as the superannuation guarantee.
Maybe the super guarantee should be increased above 9 per cent, as flagged recently by the Opposition, and a compulsory personal contribution introduced. Alternatively, instead of reducing taxes further, as the government has hinted, should this tax saving be put into superannuation, or at least give people the choice, with an incentive to choose retirement savings?
Current savings levels are around one per cent of household incomes, compared with 11 per cent during the 1970s. What would our national savings levels be without compulsory super? It is almost too frightening to think about.
Today’s average retired couple over 65 live on about $480 per week ($25,000 per annum), according to the Australian Bureau of Statistics. Many of these people lived through tough economic periods, such as depression and wars. Clearly the next generation is unlikely to settle for the same.
This leads us to ask: how much superannuation is enough?
The Reserve Bank believes the 9 per cent contribution will be sufficient, at least for low-income earners, but the superannuation industry argues for a rate of 12 to 15 per cent. However, results from a survey conducted by NSP Buck indicate there is no consensus on the minimum level of compulsory super contributions. Responses are spread between the current levels, higher levels (such as 12 per cent) and even no minimum amount.
Many financial planners suggest 75 per cent of pre-retirement earnings is a good retirement income target. It’s also thought that after 40 years of the superannuation guarantee minimum of 9 per cent, a person would still only be able to live at a “modest but adequate” level if they own their home and do not have any unanticipated outlay.
Given the time frame involved in saving, the rapidly approaching need to deal with the issue of retirement savings and the changes to superannuation, one wonders if Australians are really interested in retirement income?
Superannuation remains at least a confusion for most, and an irritation for some. One measure of disinterest in superannuation is that $3.4 billion is sitting in unclaimed benefits. Most of this is from the younger and more mobile end of the workforce as well as temporary workers.
There is also a small catch 22, because as the growth in compulsory superannuation occurs, some individuals are reducing voluntary savings. The experience in the US is that when a tax-preferred retirement savings vehicle is offered, about one-third of the money comes from other forms of saving.
There is a key role for employers in turning this whole scenario around by taking an innovative approach to employee benefits.
The US trend is to use a mix of the Web and personal communication to educate and empower people to take responsibility for their own future. They offer ‘wrap’ approaches to benefits, including investments, cash accounts, credit cards, health cover, loans, financial planning and insurance. The employee has Web access to the lot, plus investor education and personal financial planning.
The new emphasis on an individual choice approach to employee benefits helps to build a culture of responsibility and learning. If I am in charge, I better know what I’m doing.
In this way we can move away from a mythical reliance on future governments, and reduce the risk of never being able to retire.
But how do we get a genuine, bipartisan, national approach? Not so long ago, the Treasurer, Peter Costello, flagged his intention to investigate retirement incomes. And more recently, Opposition Leader, Kim Beazley, has mused on ways to boost voluntary savings. Now that choice of fund is out of the way, perhaps these two leaders could move to drive the policy development.
Any genuine national debate and inquiry on retirement incomes should spend time on the twin issues of compulsion and education. The size of the problem facing our society justifies a certain level of compulsion, while our preferment to encourage people to save makes us lean towards education as well.
It will take a special kind of leadership to lift the debate from short-term tax issues to the long-term retirement incomes needs of Australia. Any takers?
Christopher Butler is NSP Buck deputy chief executive, superannuation and employee benefits consultants.
