The Grattan Institute has stood by its position that the superannuation guarantee (SG) should remain at 9.5 per cent, saying that the “fear factory” of media predicting insufficient retirement income were basing their forecasts off modelling that had a “fundamental problem”.
Grattan’s chief executive, John Daley, told delegates at the Actuaries Institutes’ Summit yesterday that the ASFA Retirement Standard’s was flawed in that it was based on the top 20 per cent of earners’ pre-retirement income, painting an unnecessarily grim picture of the retirement prospects of the remaining 80 per cent of workers.
He also criticised the standard for indexing to wage inflation, arguing that “it just bears no resemblance to reality” and that retirement income modelling should instead track the CPI.
“People typically spend less and less money in real terms as they grow older, but by inflating at wages, it [the Standard] looks like they’re spending significantly more later,” Daley said. Less holidays and activities and increased time in healthcare were reasons why spending decreased.
These assumptions meant that the ASFA Retirement Standard actually improved the financial situation of most people in retirement compared to when they work, Daley believed. Industry consensus tended to be that the benchmark for sufficient retirement income should be at 70 per cent of pre-retirement levels.
As such, the current 9.5 per cent SG rate met the needs of most retirees already, Daley said, reinforcing Grattan’s controversial stance that increases weren’t necessary.
He also repeated the Institute’s position that an increase to 12 per cent would only substantially benefit higher income earners, with total superannuation balances for low income earners predicted to change only a little according to its modelling, and middle-income earners seeing almost no difference.
David Knox, a senior actuary at Mercer and retirement income expert, took issue with the underlying presumptions made in Grattan’s modelling, however. It presumed both that people worked through to 67 years old and then lived to 92. It also had a bias toward both single retirees and homeowners, when Knox said that more than 70 per cent of people had a partner when they retired, and trends of declining home ownership were expected to continue.
“I can guarantee that the assumptions in that model won’t bear out,” Knox said at the Summit. “Cameos are certainly useful but they only tell part of the story,” with individual circumstances, investment returns, longevity, inflation, and possible changes to tax and means test legislation all also having a bearing on retirement income outcomes.
He also questioned Grattan’s reliance on retirees’ average income in their last five years before retirement as the basis for its modelling, saying that many people begin to wind down in these years.
The two agreed on some key retirement income platforms however, such as the assets taper test of $3 a fortnight per $1,000 being too tough. They also agreed that renters in the private market needed more help in retirement, and that the aforementioned benchmark to sustain liveable standards for retirees was 70 per cent.