PensionReforms' summary and comments
Australia has an income- and asset-tested Age Pension at Tier 1 plus compulsory private provision at Tier 2 (the so-called Superannuation Guarantee or SG).  Generous tax breaks apply at Tier 2 and Tier 3.  They cost about the same as the total amount spent on Tier 1(see here).

The report updates earlier work from 2001 and 2004 by the National Centre for Social and Economic Modeling (NATSEM) and allows for changes to the regulatory regime (the so-called "simplified superannuation") that started on 1 July 2007.  These significantly improved the tax subsidies to retirement savings.

It models "..the adequacy of current and alternative superannuation arrangements and choices by looking at the relativities between a household's discretionary income and the costs of a modest but adequate (MBA) standard of living."

For the model, 12 "..selected hypothetical lifetime cases (comprising four family and three income groups) are used, taking into consideration labour force activity, demographics, earnings growth, superannuation accumulation choices, social security, taxation, and housing costs."

For the 12 cases, the report produces ".three measures of income adequacy: a pre-retirement living standards index, a post-retirement living standards index, and the change in living standards (replacement rate)."

PensionReforms notes that these types of projections are very dependent on the assumptions that underpin the calculations and so it is here - and acknowledged by the report.  Apart from other things, it ".makes reasonable assumptions about the "most likely" superannuation and lifestyle choices."

Australia's retirement income environment passes the first test - all 12 family types exceed the "modest but adequate" (MBA) living standard in retirement.  According to the report, this demonstrates the value of the SG and shows that families will be better off than had they relied on just the income- and asset-tested Tier 1.  The changes introduced in 2007 apparently 'improved' things in this regard.

PensionReforms wonders about that conclusion as the counter-factual appears to depend on the families' doing nothing else about retirement saving, in the absence of the SG.  That seems a bit of a stretch.  Regardless, the news looks good for the lower-paid:
"While low income earners can expect replacement rates of around 80 per cent to almost full replacement, middle income earners will experience falls in living standards of 20 per cent to over 30 per cent and high income earners will be up to 43 per cent worse off in retirement."

Owning a debt-free home by retirement makes a material difference to these numbers because, on average, those who are expected to be renters in retirement will be 17% worse off than home-owners:
"Single renters across all income groups will be faced with a standard of living in retirement only equivalent to the MBA standard."

The report suggests that contributing more to the SG than the minimum 9% employer's SG contribution will, unsurprisingly, improve the replacement rates.  But that will, also unsurprisingly, reduce pre-retirement living standards.

"As a comparison, increasing the SG amount to 12 per cent or 15 per cent has a similar impact on living standards in retirement to making 3 per cent or 6 per cent salary sacrifice contributions but without any reduction in pre-retirement living standards."

PensionReforms thinks this is a fairly extraordinary conclusion.  It's as though the amount paid by the employer comes from nowhere and has no impact on the other remuneration of employees.  But then, if everything is measured in terms of pre-retirement taxable pay (as is the case in the report) then the employer's contribution does seem like a costless (to the employee) increase in remuneration - a seeming "free good".  Tax implications aside, that clearly cannot be the case.

"As a guide, to maintain the same level of income in retirement as was enjoyed before retirement, an individual will need to contribute the equivalent of 15 per cent of their after tax income each year of their working life."

The Australian system of public, semi-public (the SG) and private provision tends to encourage males, at least, to retire early (see here).  Based on the report's methodology, that will have a significant impact on post-retirement replacement rates:
"Retiring at age 60 will see retirement living standards around 20 per cent lower, on average, than for those retiring at age 65, while retiring at age 55 will see retirement living standards around 35 per cent lower."

PensionReforms wonders about the utility of projections like these.  The first reason is that they attempt to deal with a raft of assumptions.  Here is the report's own description:
"The model calculates discretionary income over a lifetime by developing a set of income profiles from sample data, and applying provisions for likely circumstances of earnings growth, labour force participation, taxation, housing costs, superannuation, family composition, and so forth. The model tracks the measure of discretionary income relative to a modest but adequate cost of living standard for the hypothetical lifetimes from age 25 years [in 2007] to death."

Here are some of the 'qualifiers' - there is no unemployment over the lifetimes; all current conditions stay unchanged in real terms and half the eventual benefit is used to buy an annuity.  And then there are the guesses about future investment returns, inflation and state pensions.

"Adequacy" is measured by comparing just superannuation assets (including the Age Pension) in terms of disposable income at retirement - what the report calls "discretionary income" - that is then compared "with an average measure of different needs over people's lifetimes."  In other words, this has nothing to do with what the retired actually spend their money on.  It's as though needs are frozen at retirement and in relation to disposable income at that fixed date.

There needs to be some sort of sense test applied to the overall conclusions.  The reason the lowest paid are relatively best off ("replacement rates of around 80 per cent to almost full replacement") is the impact of the flat Tier 1 pension.  There is no surprise therefore that, as the post-retirement income and asset tests bite, the total retirement incomes of slightly more highly paid households (the "middle income" earners) reduce, relative to pre-retirement pay.  But should public policy be concerned that replacement rates for this group are 70-80% of pre-retirement incomes?  PensionReforms suggests not.  Neither should the expected replacement rates of "high income earners" (at 57%) be any concern; they have the resources to look after themselves and already profit generously from regressive tax concessions.

Given the significance to retirement living standards of debt-free housing that the report identifies, PensionReforms wonders whether the "renters" in the lowest paid group might not be better off using the employer's contributions to buy a home while they are working, rather than worry about saving in a retirement savings scheme. File size 922 KB; 60 pp) 351