The ASFA Report on Superannuation balances prior to death: superannuation balances of older Australians released in March 2021 points out that many older Australian have very little, if any superannuation. ASFA concludes that this supports a case for “increasing the Superannuation Guarantee (SG) to 12% (as currently legislated) so that retirees can live in retirement with dignity.”
The fact that many older retirees have very low superannuation balances is hardly surprising. While the SG was introduced at 3% in 1992, it did not reach 9% until 2012. As the Retirement Income Review* says:
"The maturity of the superannuation system influences the level of assets people hold when they reach retirement and how much they rely on the age pension. Australia’s superannuation system will have matured by the 2040s, when the SG will have been at least 9% for 40 years (the average length of a working life). Most people entering retirement over the past five years have only had around 20 years of superannuation accumulating at relatively low rates.” (RIR p.116)
There are also a significant number of Australians who retire without superannuation. According to a 2015 Productivity Commission (PC) report, around 20% had no superannuation at preservation age, which would include those not in paid employment, the self-employed or those under the $450 per month SG threshold.
The fear of running out of money
By retirement, this grew to around 40%, and by the age of 70, 60% of Australians had no superannuation. Many of these people are not exhausting their savings, but rather they are making lump sum withdrawals around preservation and retirement ages. In 2011-12 around 30% of superannuation assets were taken as lump sums by the current cohort of retirees (PC, p.81). For those with small balances it may make sense to pay down debts, purchase white goods or a car, and otherwise prepare for retirement. Residual funds are often held as term deposits.
Increasingly, as balances grow more retirees elect to establish an account-based pension at retirement and take their superannuation as an income stream.
People are cautious about spending down their retirement savings and many fear 'running out of money'. They often live frugally in the belief that they should be financially responsible, preserving their capital and only spending returns and dividends.
There is also a lack of understanding about access to 'social transfers in kind', that is, health, aged care, tax benefits, concessions etc, which constitute what is essentially a fourth pillar of the retirement system. The average value of such benefits is greater than the full age pension for people over 65 (RIR, p.134).
Despite ASFA’s claim that “there is little or no evidence that the typical Australian dies with around the same amount of financial wealth as when they retired”, multiple sources provide substantial evidence that retirees die with the majority of their retirement savings unspent.
Sources include independent research institutes, government departments, and a large superannuation fund, as outlined in the RIR. Many of the studies in this robust evidence base rely on longitudinal analysis, following people and cohorts over time and observing their spending patterns.
These sources consistently find that current superannuation drawdown patterns are conservative with at least half of all retirees drawing at the minimum rate. Data from one large superannuation fund shows that members with income streams die with around 90% of their starting balance. This was the case even for members who live to life expectancy. Fund members aged 80-90 who died in 2020, when balances were subdued due to the pandemic, died with 82% of the balance they had when entering retirement.
The real challenge
It is clear that in the absence of any guidance or advice many retirees lack the knowledge, confidence and support to spend their savings, resulting in a poorer quality of life in retirement.
This is the real retirement income challenge. The superannuation system to date has focussed strongly on accumulation, rather than retirement income. A sound retirement income system will see well-informed older Australians use retirement savings in an efficient manner to maximise their wellbeing.
*Retirement Income Review, The Commonwealth of Australia The Treasury, July 2020. (All data in this article unless specified otherwise are drawn from the Review)
Dr Deborah Ralston is a Professorial Fellow at Monash University, where she is a member of the Steering Committee for the Mercer CPA Global Pension Index. She is a member of the Reserve Bank of Australia Payments System Board and holds several non-executive director roles. In 2019 Deborah was appointed by the Treasurer Josh Frydenberg to the three-member panel for the Retirement Income Review.