Age pension reliance higher than claimed

Age pension reliance

Long-term analysis shows retirees are more reliant on the age pension than recent reports suggest, according to an industry research group.

More people draw down on the age pension and are less reliant on their own savings than recent claims by the Retirement Income Review (RIR) suggest, according to an industry research group.

Rice Warner stated retirement income spending was still the subject of debate, despite a number of reviews and attempts to mandate purposes and objectives for the superannuation system, and the RIR report released in December 2020 also overestimated the degree of reliance on the age pension.

“Despite the overall quality of the RIR report, its comment that people don’t draw down enough of their superannuation is based on some small studies which coincided with high investment returns,” the firm stated in an update on its website.

It added retirees tended to be grouped into those who were well-off, those with moderate balances and those with low balances, and the reliance on the age pension only increased as the level of savings at retirement decreased.

Longitudinal analysis, however, showed this was not the case, according to Rice Warner, which noted that, based on the experiences of people aged 65 to 70 in 2000, the reliance on the age pension of the total cohort increased over time.

“At that point most of the cohort would have been in retirement for a few years and nearly half were on a full age pension. This group retired before the superannuation guarantee went to 9 per cent, so many had little accumulated savings in superannuation,” it said.

Rice Warner stated that in 2000, at age 65 to 70, 48 per cent of the cohort relied on the full pension and 27.7 per cent relied on a part pension, with 17.7 per cent self-funded, but this decreased to 29.9 per cent, 13.5 per cent and 6.65 per cent, respectively at age 84 to 89, in 2019.

The firm added that removing those who died during that 20-year period showed a clear trend for a higher age pension dependency of the surviving pensioners, which increased from the previously stated figure for the full age pension in 2000 to 59.7 per cent in 2019, for those aged 84 to 89. Part pension dependence remained steady at 27 per cent and self-funded retirees declined to 13.3 per cent.

“[This] clearly shows that the proportion of the population on a full age pension grows over time,” it said.

“This is counterintuitive as the mortality rate of full age pensioners is higher due to socioeconomic factors. Therefore, we would normally expect a higher proportion of those retiring on a full age pension to die early.

“The fact that the proportion increases is due to the wealthier cohorts, with lower mortality, surviving and reducing their asset bases so that they eventually become eligible for the full age pension.

“The trend shows that people do spend quite a bit of their accumulated superannuation early in retirement – more self-funded retirees shift to part pensions over time and more part pensioners shift to become full pensioners. Overall, the behaviour appears rational and does not point to unnecessary frugality.”

Rice Warner suggested efforts could be made to improve expenditure patterns in retirement, including increasing the drawdown rate from 5 per cent to 6 per cent between ages 65 and 75 to encourage higher drawdowns from a tax-privileged environment earlier in retirement, as well as introducing default comprehensive income products in retirement for those with more than $200,000 at retirement to encourage smoothing of their retirement income over the remainder of their life.

New research released by ASFA echoes the Rice Warner findings, with the superannuation body claiming the majority of retirees die with no remaining superannuation funds.

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