Whose Responsibility?

If Old age poverty rate were to still be at its current level of 35.5% by 2050, we would be facing the prospect of over 10% of Australians living in poverty at a time when they should be enjoying their desired retirement lifestyle. Would it be the responsibility of the Superannuation or the Age Pension to avoid this? Will they even work?

In an earlier newsletter article, we looked at the results of a study from October 2013, the Global AgeWatch Index^[1] which ranked Australia 14th out of the 91 countries included in the study, and highlighted that our poor ranking compared to many otherwise comparable countries was largely due to our very poor score for Old age poverty rate.  With 35.5% of Australians aged 60 and above living in poverty, Australia was ranked 90th out of the 91 countries for which this figure is available.
While the report, and Australia’s overall ranking, got a smattering of coverage in mainstream media, the only reports that I’ve been able to locate which even mentioned the issue of the poverty rate amongst older Australians were an article in the Sydney Morning Herald^[2] and a 4 minute piece on Lateline on ABC TV^[3].  Interestingly, a number of special interest publications and websites commented on the study, but again the majority failed to highight the poverty rate amongst present older Australians, commenting instead on the challenges presented by an ageing population.

The Australian Ageing Agenda^[4] website dug a bit deeper, highlighting that “In 2012, 19.6 per cent of the Australian population was over 60. In 2050, this will jump to 28.9 per cent of the population.”  It takes the simplest of calculations to work out that if the Old age poverty rate were to still be at its current level of 35.5% by 2050, we would be facing the prospect of over 10% of Australians living in poverty at a time when they should be enjoying their desired retirement lifestyle.

 

So what are we doing to prevent this appalling statistic from becoming a reality?

Perhaps the single biggest current initiative that will impact on the financial wellbeing of senior Australians in the future is the phased increase of the Superannuation Guarantee from 9% to 12%, which is expected to dramatically increase the amount of superannuation savings available to retiring Australians in the future. There are, however, three issues which mean that this change may not deliver the full outcome that people are expecting.

Firstly, the increase is phased in over 6 years, and so the full impact will only be felt by people joining the workforce from 2020 onwards, doing little to help those Australians approching the end of their working life  ( and a well-earned retirement ) and nothing to help those already retired.  Secondly, the Federal Government has introduced draft legislation to delay the introduction of the planned increased by two years^[5], delaying the benefits even further.

But thirdly, and perhaps most importantly, most commentators agree that even 12% is not enough, and that people would need to be saving at a rate of at least 15% of their income throughout their working lives to accumulate a sufficient level of savings to provide enough passive income for their desired lifestyle.

Let’s look at a quick example.  Imagine that someone is on a salary of $100,000 per annum. This means that at the planned Superannuation Guarantee rate of 12% their employer will be required to pay $12,000 a year into their Superannuation Fund. Assuming that their salary increases by 3% a year and their Super Fund achieves an average annual Return on Investment of 6% (after Tax, fees and charges), then after 40 years they will have around $2,500,000 in their Fund.  Sounds like a lot, doesn’t it?

However, if prices were to grow at 3% a year over those 40 years, the purchasing power of that $2,500,000 would equate to less than $800,000 in today’s dollar terms, and if that amount were used to fund a comfortable lifestyle^[6], it could be expected to run out in about 18 years – probably a lot less than many people might be counting on, and certainly a lot less than would be required based on current figures for life expectancy.

And remember, this is someone who has been used to living a lifestyle based on an Income of $100,000 and is now living off the “comfortable lifestyle” benchmark income of $57,665 – quite a difference!  If they were to seek to draw a higher level of Income from Superannuation, then the money would run out even sooner.

So, if Superannuation is not going to be the complete Retirement Income for many people, what about the Age Pension?  From January 2012, the Age Pension for a couple is around $29,500, a long way short of the $57,665 that ASFA have calculated as being necessary for a comfortable lifestyle.  In fact, the Age Pension amount falls a fair way short of the $33,358 that ASFA have calculated as being required to provide a “modest lifestyle’, described as “…only able to afford fairly basic activities.”  Oh, and by the way, you’re now going to have to wait longer to be eligible for the Age Pension than any previous generation of Australians.

And remember, this is someone who has been used to living a lifestyle based on an Income of $100,000 and is now living off the “comfortable lifestyle” benchmark income of $57,665 – quite a difference!

The inescapable conclusion is that people who want a superior standard of living throughout their lives are going to need to take action for themselves to build a wealth base large enough to provide the level of passive income required to pay for their desired lifestyle in Retirement, and not just rely on compulsory Superannuation or the Age Pension to do the job for them.

The thing that struck me about all the reports and commentary in response to the release of the AgeWatch Index was the overwhelming focus on public policy and government responsibility, and the complete absence of any suggestion that people could be or should be encouraged to start planning for their own finacial security in retirement.  There is one very clear message for all Australians.  If you aspire to a superior lifestyle later in life and you live in Australia, there is only one person you can rely on to provide the money to fund that lifestyle for you . . . yourself!

At Empower Wealth, our goal is to help Australians achieve their desired standard of living later in life by creating a superior financial outcome, and we have developed a suite of proprietary financial modelling tools to help people understand their current and potential future financial position, together with money management strategies to give people more control of their cashflows, get their money working harder for them and ultimately, get a better financial outcome in life.

If you would be interested in seeing how these tools and strategies could be applied to your own personal financial situation, please come and see us for a free one hour consultation.

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[1]  Global Age Watch Index 2013
URL : http://www.helpage.org/global-agewatch/
Accessed 9th October 2013

[2]  “Elderly are healthy by world measure, but wealth an issue”
URL : http://www.smh.com.au/national/elderly-are-healthy-by-world-measure-but-wealth-an-issue-20131001-2uqr1.html
Accessed 11th December 2013

[3]  “More than one in four seniors are struggling”
URL : http://www.abc.net.au/lateline/content/2013/s3861106.htm
Accessed 11th December 2013

[4]  “Room for improvement on global wellbeing ranking”
URL : http://www.australianageingagenda.com.au/2013/10/01/room-for-improvement-on-global-wellbeing-ranking/
Accessed 11th December 2013

[5]   “Govt confirms SG delay, kills LICS”
URL  :  http://www.financialstandard.com.au/news/view/35661215
Accessed 17th February 2014

[6]   “ASFA Retirement Standard”
>URL  :  http://www.superannuation.asn.au/resources/retirement-standard
Accessed 17th February 2014-02-18