The Association of Superannuation Funds of Australia (ASFA) retirement standards have been around since 2004, the year John Howard won a fourth term, Jetstar took off and Steve Waugh retired.
Had Waugh been 67 instead of 38, his retirement planning may have been informed by the ASFA standards, which assess the levels of income Australians of that certain age needed to enjoy a “comfortable lifestyle” or a “modest lifestyle” in retirement.
Fast forward to 2022, and the current ASFA comfortable lifestyle standard is $45,239 per annum for a single person and $63,799 per annum for a couple, while the modest lifestyle standard is $28,775 for a single and $41,446 for a couple respectively.
ASFA’s numbers have long been considered gospel for pre-retirees, financial planners, the media and even governments, but just how reasonable and relevant are they?
A question of relevance
Ross Clare, ASFA’s director of research, says the standards are broadly accepted, work well and have retained their relevance over the years.
“The AFSA retirement standards are used in online calculators, by institutions running education seminars, and by financial planners making retirement income projections for individual clients,” Clare said. “People relate more easily to concrete numbers and the standards are well-regarded benchmarks for people to consider when they assess how they are tracking.”
Clare believes ASFA’s record of granular research into how much people say they need in retirement is what has made the ASFA numbers the gold standard.
“We use a bottom-up approach to setting goals for people in and approaching retirement. We look at actual budget items and costings by analysing household expenditure, survey data and focus group data. Of course, the spending pattern we employ will not be the same for everyone, but it’s a good starting point.”
ASFA updates its figures every quarter to reflect changes in prices. Rather than simply making CPI corrections, they conduct detailed analyses and make adjustments to each component in their budgets. And every five or six years, they take a deeper look at the patterns of consumption in the economy.
Time brings change
“What people buy changes over time,” Clare says. “For example, our original budgets didn’t include streaming services or broadband/NBN costs. At one point we didn’t have private health insurance but we introduced it because more than 50 per cent of retirees have it.
“Adjustments are generally minor and reflect changes in the bulk of retirees’ spending habits. Examples of recent tweaks include the frequency of overseas trips and spending on home renovations.”
Clare says ASFA get substantial feedback from retirees, who are very willing to share their lived experiences and discuss the items in the budget that inform the standards.
“They also check my arithmetic,” he adds wryly. “This feedback is valuable and I’m pleased to say we generally receive overwhelming endorsements of our budgets.
“I think that’s why the standard has survived and prospered. People like using it and find it realistic, relevant and useful.”
Point of order… on relevance
Despite its longevity and seemingly broad industry acceptance, a growing chorus of dissenters is calling for a new regime. Indeed, a 2019 Productivity Commission review said the ASFA Standard was “no more than an arbitrary benchmark that should be ignored in policymaking”.
Brendan Coates, the Economic Policy Program director at the Grattan Institute, says the ASFA standard has never been relevant to most Australians and is becoming increasingly less relevant.
“ASFA’s ‘comfortable standard’, which is the one most-often cited, is higher than what most Australians enjoy in retirement, or indeed while they are still working,” Coates says. “The reality is most Australians are already on track for a comfortable retirement and the ‘comfortable standard’ reflects a far higher level of expenditure than what most will need.”
Coates believes the constant reference to the ASFA standard in debates about whether compulsory super needs to increase, and its regular invocation by the media to suggest people aren’t saving enough for their retirements, are actually damaging.
“Setting the standard too high, as ASFA has done, scares people. When they compare their own super balances to the standard and see that it is way lower, it makes them switch off.
“The average Australian is going to rely on some combination of superannuation and the age pension, which will replace more than 70 per cent of their pre-retirement earnings. This is the standard used by the OECD.
“This is why compulsory retirement saving in the form of the superannuation guarantee (SG) should not be increased. And why it’s not a good idea, in most cases, to put more into your super. The SG will boost retirement incomes at the expense of reducing working age incomes because super contributions are ultimately paid for by workers in the form of lower wages.
Are we just boosting inheritances?
“It’s forcing people to over-save. They won’t spend it in their retirement anyway, so all we’re doing is boosting inheritances.
“When the average living standard before retirement is already lower than the ASFA standard, then households can only reach that ‘comfortable’ benchmark in retirement by living less than comfortably before retirement.”
The Grattan Institute made this point and others in its submission to the government’s Retirement Income Review in 2020. The paper, entitled Balancing act: managing the trade-offs in retirement called for the establishment of new retirement income standards. It also made the case for not raising compulsory super above 9.5 per cent of wages.
“When I worked at Treasury, I – like most people – assumed the SG should keep increasing,” Coates says. “But when we did the work, it became clear it didn’t need to rise, and that doing so would probably make people worse-off.
“And the argument that raising the SG will save the government money by reducing spending on pensions doesn’t bear out either. Higher super will cost the federal budget more than it saves for at least the next 50 years. The tax concessions are so generous for the top 20 per cent of earners that this more than outweighs any savings on pension expenditure. This was the conclusion reached by the Retirement Income Review.”
New standard issue
Coates believes there should be specific standards for low-, middle- and high-income earners that better reflect the broader experiences and expenditures of different retirees.
Which is exactly what Super Consumers Australia (SCA) is doing. Describing itself as the ‘people’s advocate in the superannuation sector’, SCA is in the process of developing a new set of standards they say will better reflect the real diversity of retirement needs.
SCA director, Xavier O’Halloran, says the ASFA “comfortable standard” is pitched as aspirational but is out of reach for most Australians.
“It’s important to have standards in policy debates that are reflective of the whole population, and that’s where the ASFA model falls down. And if it is leading the government to continue to increase the SG, then you have to question whether it should be informing public policy.
“We think it is important that an independent consumer group comes up with a more realistic alternative. We are consulting widely with industry experts to make sure we make the right assumptions to build our calculations, and are working to produce a result that will present useful consumer advice, and which is also useful in the policy debate.”
SCA is planning to release its consultation results in February.