In September Deloitte’s released a report titled ‘Dynamics of the Australian Superannuation System, The Next 20 Years: 2013-2033’.  The findings and recommendations reconfirmed many of the trends that have been apparent in Australia’s retirement trends and superannuation system.

The report makes a number of key observations including: – Self Managed Super Funds are the superannuation vehicle of choice for retirees with substantial assets. – 81% of retirees partially rely on the Aged Pension. – There are currently four workers per retiree which will reduce to three by 2033 and the number of retirees over 65 will double to 20% if the population by 2032. – Most nearing retirement are woefully under prepared to support a comfortable lifestyle of $41,197 p.a. from personal savings. – This will place significant pressure on those working as well as government finances.

To address the trends, Deloitte’s suggests: – Individuals make additional super contributions, delay retirement or use their retirement benefit to purchase a lifetime pension. – Governments should encourage people to work longer and contribute more to super as well as encourage immigration.

What the report did not recommend or touch on was the likelihood of increased taxes and reduced benefits as the government’s fiscal challenge heightens.

Below are some key highlights taken from the Deloitte’s ‘Dynamics of the Australian Superannuation System’ report. If you wish to discuss any of the issues raised in this report in more detail, please contact us:

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Retirement adequacy: the big issue

The central role of superannuation is to help Australians maintain an adequate and comfortable standard of living in retirement. We know that as of 2013 most retiring Australians do not have nearly enough super. Currently 81% are still forced to, at least partially, rely on the government aged pension to supplement their income.

And there are forces at work that will make it tougher for the super system to deliver this fundamental objective.

The population is ageing.

The number of Australians over the age of 65 will increase by 75% over the next 20 years (from 3.3 million in 2012 to 5.8 million in 2032), and at a much faster rate than the working population. The implication for government is clear. There will be proportionately fewer working Australians available to fund those in retirement.

Australians are living longer.

They are spending longer in retirement and need a correspondingly larger amount to provide for their retirement – see graph below. Since World War II the average time in retirement has increased by almost 50% due to medical advances. Currently, 15% of the population is aged 65 and over and in 2032 this is expected to increase to around 20%.

Even so, this still understates the financial impact of the issue. As an increasing number of Australians live into advanced old age we see dramatic increases in the cost of aged and palliative care. The is a big issue for government and will be an issue for individuals as services will need to be reduced or taxes rise.

Deloitte Chart 1

The gap between savings and goals

Most Australians are currently retiring on a benefit far less than needed to sustain them in retirement which means they will need to access social security benefits in order to support themselves

Post-retirement assets in the system have not grown as fast as previously anticipated. We attribute this to the economy not being at full strength over the past few years, as well as to some extent the changing nature of work.

Investment Returns – How to fill the gap?

Accepted wisdom suggests that we can address adequacy by increasing superannuation contributions. However recent investment conditions illustrate the need to also invest the contributions appropriately.

Recent low interest rates and super fund returns have placed significant pressure on retirees, forcing many to dip into their retirement savings earlier as annual earnings were not adequate to meet living pressure.

Deloitte is of the view that members should not invest too conservatively in the early to middle years of their working lives, so they can maximise the impact of investment returns compounding over time up to their final retirement date. It is the strategic asset allocation adopted by each superannuation member that has the greatest impact on the member’s final benefit, rather than the choice of managers or investments within each asset sector.

Retirement Planning

So what does all this mean for the individual Australian?

When planning for retirement adequacy a person needs to consider three things: 1. Amount of money at retirement 2. Level of income required in retirement 3. Projected length of time that money will need to last.

According to the most recent mortality tables a 65-year-old male is expected to live to 84 and a female to 87 years.

Deloitte Chart 2 Deloitte Chart 3
Will Australians have enough?

Currently: the average 65 year old does not have nearly sufficient superannuation to fund these amounts. The recently released AMP Retirement Adequacy 2012 shows the following average superannuation balances as at December 2012.

Deloitte Chart 4

Three possible ways to address this longevity risk are: 1. Make additional contributions 2. Delay retirement 3. Use the retirement benefit to purchase a lifetime pension.

We estimate that to afford a comfortable retirement standard covering life expectancy would require retirement benefits (in 2048) of $1,580,000 for a male, and $1,760,000 for a female

Australians can take steps to improve their position through actions such as increasing contributions or delaying retirement. But these options are not available to all and they do not fully eliminate the longevity risk. The aged pension is the safety net that applies when superannuation money runs out and as we have shown in the population growth projections at the start of this section, this will result in increasing pressure on the Federal Budget, assuming the rules/regulations remain the same.

September 2013

‘Dynamics of the Australian Superannuation System The next 20 years: 2013 – 2033…’ is a report released by Deloitte in September 2013. All statistics referenced in this article have been drawn from the content in the Deloitte article (