Retirement: the risk is all yours

You may have noticed the sharp drop in the share market recently. If you’re working full time, then it’s probably no big deal. You’ll just shrug your shoulders and wait until the market comes back. But if you’re retired and your income depends upon the health of the Australian Stock Exchange, it’s a very big deal. A deal breaker, in fact.

You may have spent 40 or 50 years in the workforce and remember well the promise of the golden years of retirement. So since when did your financial – and therefore emotional – health depend upon external factors over which you have zero control? Are you beginning to feel helpless, confused and fearful about outliving your savings? You are not alone.

Or to phrase this question more specifically, when did the risk of retirement shift from your employer and the Commonwealth Government to individuals such as yourself? When did the promise of an easier life after fulltime work simply vanish into thin air?

The story of retirement in Australia is a long one, with many twists and turns, but there are four discernible epochs that chart the change in the allocation of risk in retirement. These are:

  • the introduction of the Age Pension in 1908, when the state assumed a role in alleviating old-age poverty
  • the rise of the welfare state post World War II, which saw a consolidation of this state responsibility
  • the rise in neo-conservative political ideology in the 1980s, which supported the notion that the (economic) market knows best and that individuals must now assume responsibility for their own financial wellbeing
  • the introduction of mandatory superannuation in Australia in 1992.

The introduction of superannuation was a unique and bold response to the call, led by trade unions, for a fairer system that allowed ordinary working people to have retirement savings as well as the (mainly male) professionals who were the chief beneficiaries of defined benefit company and public service pensions. Yet, as magnificent a reform as super was, leaving the savings for the market to manage and monetise can be seen, in retrospect, to be a huge flaw.

Why?

Currently, despite being described in the early 90s by the World Bank as world’s best practice, our mandatory superannuation system has not worked at all well for ordinary workers for a range of reasons.

Firstly, any system that is based upon a percentage of wages or salary earned is bound to be inequitable to those on lower salaries or with a fragmented work history. So from the outset, those with more will have even more when they retire. And those with less will suffer by comparison.

There has also been little regulatory pressure on the way superannuation is managed, particularly in relation to the fees charged, resulting in fees applied to Australian superannuation savings now ranking the third highest of the 34 Organisation for Economic Co-operation and Development (OECD) countries.

And, lastly, another problem is that successive government policy changes have resulted in a stop–start approach to the percentage of super required to be paid by employers – i.e. the super guarantee charge (SCG) – thus reducing the final nest egg from that planned (at a rate of 15 per cent SGC) to a much lower rate, currently stalled at 9.5 per cent. This amount is simply not enough to fund the expected longevity of today’s retirees.

In fact, instead of the wellbeing of retirees sitting at the centre of retirement income policy, it is fair to say that the financial services industry, which has emerged since the introduction of mandatory superannuation, is the really big winner. Typified by an ongoing lack of transparency and endemic conflict of interests, it really does seem that Dracula remains well and truly in charge of the ‘super’ blood bank.

So where does the Age Pension fit into this situation? Surely it’s still there for those who need it? Well, not entirely. Nearly 70 per cent of Australian retirees are currently receiving a full or part Age Pension. But as recent OECD research confirms, at least one-third of Australian pensioners are living in poverty. The pension is simply inadequate to cover basic household expenses.

Also, last year’s federal budget introduced measures to reduce access to the Age Pension, starting in 2017. So many Australians who did their sums based on current income and assets tests will find they really do need to exist on a much lower income stream than they were led to believe when they first started planning their retirement income.

Had the superannuation system been allowed to mature with regular increases in the SGC, far higher savings would now be in place to support those entering retirement. An example quoted by Industry Funds Super suggests this amount is as high as an additional $108,000 over a working lifetime for a male currently aged 50.

Put simply, our current system is not working for the greater good. And repeated calls for a full review of our retirement income system remain unanswered. So a piecemeal approach to retirement income policy, using ad hoc levers of tax, salary sacrifice and pension rules, delivers little real benefit for those who need it the most and a great deal of uncertainty for those brave souls still attempting to save enough to fund themselves in their later years.

Today’s retirees are facing tough new pressures, including likelihood of dementia, financing their own aged care and housing affordability. So the bonus that they are likely to live 20 years longer than their parents’ generation can begin to feel more like a burden when it comes to funding these extra years.

Our current conservative government is part of a global ‘coalition’ of governments eager to crack down on pension spending, even though the Australian Age Pension is inadequate – the third meanest in the OECD. And this situation is exacerbated for renters. Property prices are high, as are rentals. With a median rent in Melbourne of nearly $400 per week, the base rate of the single Age Pension at $350 weekly makes it unsurprising that homeless statistics reveal a steep increase in the number of homeless people aged 50 and over, particularly women.

Where once an annual return on share investments or cash might have been expected to range between five and 10 per cent, a collapse in share prices and record low interest rates now mean a three per cent return is a best-case scenario.

So why don’t older people just work longer? Many try, but regular employment is increasingly difficult to get. There are only so many Bunnings in the land. Those aged 50 or over often find that age discrimination rules, and resign themselves to an average wait of more than a year before, if they are fortunate, they can secure another job.

So if you’re feeling concerned about your financial future in retirement, it’s with good cause. The risk of funding retirement income risk has well and truly shifted – and now it’s all yours.

Written by Kaye Fallick



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