Ending the lottery of superannuation
Wednesday, 21 August 2013
"There is a fundamental flaw in the overall Australian retirement system, with an individual's post‐retirement standard of living being a lottery," according to a senior academic in the
School of Risk & Actuarial Studies at the Australian School of Business. Associate Professor John Evans warns that some Australians will have post-retirement income of less than half of their pre‐retirement income.
Associate Professor John Evans says that politicians are "barking up the wrong tree" in trying to fix the current system, with a fundamental flaw in the overall Australian retirement system. He says we need to revert to a new "bank account" system that provides reasonably stable interest rates, backed by similar investments to those now adopted by superannuation funds but where the capital market fluctuations are reduced by holding reserves from the good times to subsidise the bad times.
He says "limited attention has been given to the stochastic nature of economic variables affecting a retiree's account balance under the current system. Most studies have assumed single estimate rates for investment returns, inflation and wage growth. Projecting expected income replacement rates by making these 'on average' assumptions about long‐term economic variables does not show the likelihood of the ratio of post retirement income to preretirement net income falling below the target rates, nor do they show that different cohorts of retirees who enjoyed similar pre‐retirement standards of living could have very different standards of living in retirement."
He adds that some people will experience some hardship at retirement - but others will have a bonanza. Repetition of the GFC and similar capital market crashes means that around 60 to 70 percent of Australians will have post‐retirement income of less than 70 percent of their pre‐retirement net income. "Even without any repetitions of the GFC and other capital market catastrophes, Australians will have postretirement income of somewhere between less than half of their pre‐retirement net income up to almost 3 times their pre‐retirement net income. It's a total lottery where some retirees will end up."
Associate Professor John Evans says this can be changed. "We need to revert to the fundamental principle behind the initial structures of the industry funds, namely, a 'bank account' system that provides reasonably stable interest rates, backed by similar investments to those now adopted by superannuation funds but where the capital market fluctuations are reduced by holding reserves from the good times to subsidise the bad times. This would flatten out the significant problem of the current lottery system."
For further comment call Associate Professor John Evans on 0414 643658, or Email email@example.com
Media contact: Julian Lorkin: 02 9385 4704