The 2021 InterGenerational Report (IGR)* highlights just how important and central Australia’s superannuation system is to prosperity of future generations.

Similar to most western democracies, the IGR shows we have an ageing population, inevitably meaning that we will be dealing with a larger cohort of people moving into retirement. The ratio of working Australians to retirees is forecast to drop from 4 to 2.7 over the next 40 years. In 2000-01, this ratio was 5.3.

Inevitably, this places greater pressure on the government’s welfare budget allocations to Age Pension payments, rising health and aged care accommodation costs. It also squeezes the working generation whose taxes support them.

In a nutshell, our children and grandchildren will be challenged with providing regular income and other benefits for ageing parents and grandparents for decades.

The still unresolved COVID-19 pandemic’s impact on immigration, perhaps for several more years, will exacerbate this problem, curtailing growth in the economy, the employment pool and income tax revenue.

If brings into focus how strategically important it was for mandatory contributions from wages into superannuation funds to commence in Australia from 1992-93. The system launched with the introduction of Superannuation Guarantee (SG) contributions at 3%, woefully inadequate to save for retirement. Since then, the SG has progressively risen to 10% on 1 July 2021, with plans for it to cap at 12% in 2025. Some analysts believe a 15% contribution rate is required for true financial adequacy in retirement, but the trade-offs during working lives have made for hotly contested debate about the desirable rate.^

At face value, a positive takeout from the IGR were Treasury projections suggest that, thanks to the mandatory superannuation contributions scheme, the median superannuation balance at retirement will increase from around $125,000 in 2020-21 to around $460,000 in 2060-61, as measured in 2020-21 dollars. 

This current day dollar projection makes it easy to understand how this translates into retirement finances and lifestyle. In the same 2020-21 dollar terms, the Association of Superannuation Funds Australia (ASFA) calculates that the amount of super needed for a comfortable retirement is $640,000 for a couple, or $545,000 for a single.** On the IGR projections, over 50% of Australians will fall short of self-funding through super for at least the next 40 years.

Regardless of the contribution amount prescribed by legislation, the IGR projections should prompt anyone concerned about the legacy left to future generations to become as financially self-sufficient in retirement as possible.

It is one of the best things that those who are employed and have financial capacity can do for future generations, who will be better off having their taxes directed into resolving other issues like housing affordability, rising education costs for themselves and their children, dealing with the impacts of climate change on the environment and avoiding conflict in a resource-depleted world.

The reality is that many Australians, through inconsistent employment, low wages or other more pressing commitments will never achieve a self-funded retirement and will continue to rely on a full or partial government pension. Their superannuation is destined to only be a supplement to the government Age Pension. Consequently, retirees will continue to erode the future prosperity of their descendants by sustaining upward pressure on welfare spending.

The declining ratio of workers to retirees will amplify this over generations. The resultant reduction of saving capacity among younger Australians, combined with rising housing and living costs will become a pincer on their future financial security as they become more likely to carry mortgage and other debts into retirement.

The lesson of the IGR is that aiming to achieve the highest level of financial self-reliance in retirement is one of the most generous things we can do to enable future generations to build the resources and financial resilience to face the challenges of tomorrow.

——————————————

*The Intergenerational Report is published by the Australian Government every five years and is an education crystal ball analysis of the outlook for the next 40 years. The 2021 publication is an aberration in the cycle, delayed to allow it to take into account the impact of the COVID-19 pandemic.

^ Think tank, The Grattan Institute, argues its research has shown, raising compulsory super from 9.5% to 12% of wages, as already legislated, would force most Australians to save for a higher living standard in retirement than they have while working. It would cost the budget more in extra super tax breaks than it saves in reduced pension spending. And it would make pensioners today worse off since the pension is benchmarked to wages, which will grow more slowly should compulsory super contributions rise.

** https://moneysmart.gov.au/grow-your-super/how-much-super-you-need