AUSTRALIA has the most sustainable retirement framework of all Western countries.
But our retirement regime is complex and forever changing, and we will need a much higher level of superannuation savings before we can adequately meet the retirement needs of our ageing population.
Here are six key features of retirement policy in this country, and what they mean for individual Australians.
1. The taxpayer-funded age pension still provides core funding for retirement. Our age pension differs from its counterpart in most other western countries, being both modest (27.7 per cent of average wages for a couple) and means-tested (against both the income and the assets of the recipient).
Despite any promises future governments might foolishly offer, the age pension in Australia will remain frugal and targeted, and Australians seeking a comfortable retirement lifestyle need to save for it, mainly through superannuation.
2. We differ from other western countries in another way: compulsory contributions into superannuation. Australian employers have to pay a minimum 9 per cent of wages into the superannuation accounts of individual employees. The government proposes increasing this to 12 per cent.
Compulsory workplace contributions into superannuation and means testing the age pension mean Australia will cope better than other western countries with ageing populations. But the real benefits will come in the distant future, when people retiring from the paid workforce have several decades of compulsory contributions behind them.
As David Cox of Challenger pointed out recently, Australian governments for the next 30 or 40 years will have their work cut out providing an adequate safety net and managing the interface between the safety net and private provision.
3. Superannuation enjoys various tax benefits. Contributions are deductible (within limits) against taxable income; earnings on investments in superannuation funds are taxed at concessional rates; and superannuation monies drawn down in retirement are lightly (or zero) taxed.
But new limits on annual contributions into superannuation will preclude people adding as much to their super as they might have liked during their 50s and 60s (when the grown-up kids have left home for the third and last time and there's some money to invest in super). And uncertainties about future tax changes make it hard for people to plan ahead.
4. These days, most of us have a "defined contributions" form of superannuation. The amount of money we'll be able to draw on in retirement is defined by the contributions paid into our superannuation over the years plus the accumulated earnings on those funds. In earlier times, defined-benefit schemes were available to the small proportion of the workforce offered superannuation, with the employer paying a pension to former employees (usually at a comfortable level related to the former employee's salary and adjusted for inflation) for the rest of their lives. The employer held most of the responsibility and risk of funding future retirements.
Now individuals have a much greater responsibility and should, as a minimum, track how their superannuation balances are building up and decide on what investment strategy (growth, balanced or conservative) best suits them at their stage of life.
5. In planning our own retirement, we need to allow for the prospect of living to a very old age. For example, a couple aged 65 years today has more than a one in five chance of one of them living to 95. Most Australians who reach very old age will be dependent on government-provided aged care. But future governments will find it hard to fund aged care at the standard of comfort many people expect.
Many Australians will need to draw on some of the value of the family home if they're to have quality care when they're old (and especially when they're very old).
6. Since the early 1990s inflation has been reasonably modest. But global inflation could pick up again in the next decade or so, especially if governments in major countries maintain their low interest rates and big budget deficits for an extended time.
The growing army of self-funded retirees that are a feature of Australia's retirement policy will be highly vulnerable to any future inflation.
It's a good idea for Australians to hold superannuation investments that provide a reasonable measure of inflation-protection.
Don Stammer chairs Praemium Limited and the advisory council of FIIG Securities Limited, and is an adviser to the Third Link Growth Fund. The views expressed are his alone.
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