Actuarial firm Rice Warner has backed the superannuation guarantee (SG) rising to 12 per cent as it believes there are several good strategic reasons to increase it.
This was said in response to the Grattan Institute’s “Money in retirement: more than enough” report, released earlier this month, which stated the vast majority of retirees today and in the future are likely to be financially comfortable, while also calling for the SG increase to be scrapped.
However, Rice Warner said if the super system can continue to deliver strong real returns over decades, this is better than most people will be able to achieve with their own savings.
“The fixed costs of the industry allow the additional contributions to deliver even better value as fees will fall as a percentage of balances as cash flow grows,” the firm said.
“And the higher super benefits will lead to even lower government benefits, which will give scope to redirect expenditure to areas of need, not necessarily just to retirees.”
Rice Warner acknowledged the first 9 per cent of the SG was introduced at a time when real wages were rising.
It also noted there is an argument for timing any future increases to occur in similar economic conditions or potentially excluding lower-income people who will not realise value from a higher SG.
Further, it said the impact of a higher SG contribution would not be noticeable for many years.
“It will have the most impact on those starting their working life on 12 per cent and they will not retire for at least 40 years,” it revealed.
“Ultimately, good policy needs to incorporate the long-term strategic aims and purpose of the SG. That is, to reduce reliance on the age pension.
“The complexity of interactions between the different retirement pillars makes it difficult to evaluate the value in increasing the SG and simple cameos are not up to the task.”
According to Rice Warner, the Grattan report also relies on a series of “representative” cameos of individuals, which cannot be extrapolated to the whole population.
It labelled this as the biggest weakness in the Grattan analysis, which contained modelling showing the average Australian will have retirement income of at least 91 per cent of their pre-retirement income.
“Unfortunately, taking a 30-year-old single homeowner and projecting through to their death at age 92 is simplistic,” it said.
“This is compounded by overstating the future retirement income by discounting it to today’s dollars at the consumer price index rather than the industry standard of wage inflation.
“Grattan also glosses over several important facts, which impact greatly on retirement adequacy and cannot be modelled using its individual cameos.”
These facts include that 70 per cent of retirees are married at retirement, there will be a shift to lower homeownership over time and Australia has a large population of migrants who enter the workforce later in life.
Further, there are large amounts of investments held by older Australians, but these are concentrated among the wealthy and are not spread uniformly among the community, and there are potential changes in work patterns through the “gig economy”.
Also, while there are higher workforce participation rates for those over 60 compared to even 10 years ago, these rates still drop dramatically well before age 70, Rice Warner pointed out.
“Grattan also fails to understand the significance of the May 2016 budget changes, which led to much better equity in the system,” it said.
“In our opinion, its suggestion to drop the level of concessional deductible contributions to $11,000 a year is both provocative and ill-considered.”
