Retirement now less affordable

If you think that securing a retirement income has become much more difficult in the last decade, then you may very well be correct. Reserve Bank of Australia (RBA) governor Glenn Stevens has stated that those on the verge of retiring were in a “much worse position” than those who retired a decade ago. This is largely because the costs of purchasing a flow of income for the retired community have gone up “a lot”.

In his first detailed response to the government’s financial systems inquiry, Mr Stevens told the Australian Financial Review’s Banking and Wealth Summit, “Just about everywhere in the world the price of buying a given annual flow of future income has gone up a lot. Those seeking to make that purchase now – that is, those on the brink of leaving the workforce – are in a much worse position than those who made it a decade ago. They have to accept a lot more risk to generate the expected flow of future income they want.”

As banks are forced by regulators to hold onto more capital to remain resilient to a financial crisis, the costs of borrowing are also pushed up. This means that those looking to secure an income in retirement have to pay considerably more than their counterparts 10 years ago. While the situation in Europe is considered “acute”, Mr Stevens warned that, “it is also potentially a non-trivial issue in our own country”.

The RBA governor also reminded those gathered that there must be trust in the financial system for it to work properly. Without commenting on any particular case of misconduct by financial institutions, he said, “It seems our own country has not been entirely immune from some of this. Without in any way wanting to pass judgement on any particular case, root causes seem to include distorted incentives coupled with an erosion of a culture that placed great store on acting in a trustworthy way.” 

“[But] finance depends on trust. In fact, in the end, it can depend on little else. Where trust has been damaged, repair has to be made,” Mr Stevens said.


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