The recent Financial System Inquiry’s interim report deliberately did not comment on the issue of adequacy in superannuation despite a focus on retirement solutions and the impact of fees on member balances.
The avoidance of the topic likely follows from a reluctance to comment on tax and social security, both of which are integral to any discussion on adequacy. However, by omitting retirement adequacy from the review it really is impossible to determine whether the system is meeting the objectives of the government and the needs of the population as a whole.
Rice Warner’s Retirement Savings Gap Report 2013 produced for the Financial Services Council, is one measure of whether the system is likely to produce an adequate retirement outcome for the current population. As it stands the gap was measured as $727 billion at 30 June 2013. (The gap being the difference in likely savings at retirement and savings required to provide 62.5% of pre-retirement income until life expectancy).
The size of the gap is incomprehensibly large – what does it mean for the average person today? $67,000 per person (at 30 June 2013) less than what is required to provide an adequate income until life expectancy.
It is interesting to follow changes in the gap over time and impacts on the gap should government policy shift. Rice Warner last measured the size of the gap in 2011. At the time the gap totalled $836 billion. Interestingly, the fall in the gap over this period was driven by:
- high investment returns over the last two years
- a larger than expected increase to the age pension from the introduction of the Clean Energy Supplement (CES).
Although the reduction in the gap is a positive sign for the average Australian, it is disappointing that a large part of the reduction is driven by increased age pension payments (as opposed to meeting the policy objective of decreasing dependence on the age pension!)
Indeed, the size of the gap would more than double to $1,814 billion if age pension payments are excluded.
There are a number of ways that the everyday Australian can reduce their savings gap:
- make additional contributions
- review their investment options
- consolidate multiple accounts (to reduce fees), or
- delay retirement to access benefits later.
Despite the efforts of individuals, systemic change is only likely to occur if the government considers the size of the savings gap when determining its retirement and taxation policy. Ultimately, the closure of the savings gap is only likely to be achieved if the government is able to put adequacy back on the agenda.
