The Grattan Institute report, ‘Money in retirement: More than enough’, launched with a sensational headline arguing that most Australians have more than enough to retire. The claim, “The vast majority of retirees today and in future are likely to be financially comfortable”, was also reinforced by the CEO of Grattan Institute, John Daley, who called out the financial services industry as a “fear factory”. Daley believes the industry charged with delivering one of the world’s most admired superannuation systems is ‘typically over stating the retirement crisis many Australians are facing’.
At Laneway Analytics, we have independently reviewed the Grattan Report and have found some questionable assumptions in the Grattan Retirement Income Projection (GRIP) model which forms the basis of its report and its many critical statements.
Flaws versus Facts
These are some of the most significant flaws we have found, and our rebuttal outlines why we think these flaws discredit the overarching narrative of the report:
| The assumptions used… | The challenge to these assumptions… |
|---|---|
| Continual full-time employment of all people from age 30-67 | Continual full-time employment is an unlikely scenario, especially for women and the modern changes in employment (i.e. casualisation of the workforce). |
| Everyone has an industry superannuation fund | Industry funds typically have lower fees than retail and corporate funds, but only 39.5% of all super accounts are held by industry funds (ASFA Super Statistics, Sep 2018). |
| Everyone has their funds managed in a MySuper product | MySuper products have lower fees, but only 39.8% of all funds under management are managed in a MySuper product (ASFA Super Statistics, Sep 2018). |
| Everyone has only one super account | Having more than one account increases fees, however 39.2% of Australians with a super account have two or more super accounts (ATO 2018). |
| Income distribution of the Australian population based on ATO data | This choice of data ignores the bottom earning 15% of our working population who do not lodge tax returns, meaning that people are assumed to be earning more than they actually are, thus contributing more to their super accounts. |
| Everyone dies at age 92 | 17% of men who reach retirement age are expected to live to past age 92, while 27% of women who reach retirement age are expected to live to past age 92. If we look at retiring couples who generally have a better mortality experience, there is a 39% chance that at least one of them will live past age 92. These people are ignored by the Grattan report (Australian Life Tables 2015-2017). |
All these fundamental modelling issues mean that their model results in an Australian population where most people will achieve a much higher retirement balance.
How much is enough?
Additionally, the Grattan report disputes what should be considered an adequate retirement balance.
The ASFA Retirement Standard is the current standard of the superannuation industry, used extensively by superannuation funds and financial advisors, and recommended for personal use by ASIC MoneySmart. The large portion of the Grattan report is focused on ASFA and its retirement standards, calling them “too high” or “unrealistic” in multiple instances.
The ASFA Retirement Standard benchmarks the annual budget needed by Australians to fund either a comfortable or modest standard of living in the post-work years. It is updated quarterly to reflect inflation, and provides detailed budgets of what singles and couples would need to spend to support their chosen lifestyle.
With regards to the ASFA Comfort Standard, the Grattan report argues that this standard reflects “the lifestyle typical for the top 20% of Australian retirees today” and is an “irrelevant aspiration” for most Australians.
With regards to the ASFA Modest Standard, ASFA presents it as an income that is “only sufficient for fairly basic needs”. However, the Grattan report disputes ASFA’s claim by taking the position of two separate out of date reports, both published in 2004, where the standard was evaluated to be “modest but adequate”. It also should be noted that both budgets assume that the retirees own their own home outright and are relatively healthy.
Instead, the Grattan report argues that the full Age Pension, along with maximum Pension Supplements and Rent Assistance, is sufficient for adequate lifestyle for most people and would, in fact, represent a “pay rise” from the income of many low-income earners prior to their retirement. For homeowners, this so-called “adequate retirement income” translates to $23,929 pa for singles and $34,036 pa for couples.
Relying on outdated standards
The Grattan report justifies this claim on the basis that level of income is 1% – 17% higher than the Low-Cost Budget Standard released in 1998, and 9% – 16% higher than the Henderson Poverty Line established in 1973. Both standards have been arbitrarily indexed for growth but never properly rebalanced over the years, ignoring the composition changes in household expenditure (i.e. Australians spend a much higher share of wallet on household expenditure than they did 20 and 45 years ago). The Grattan report goes as far as to suggest that since the Henderson Poverty Line ignores accumulated wealth and subsidies, it is considerably higher than the true bottom line of poverty. Presented directly below the ASFA Modest Standard, it paints the ASFA Modest Standard figures of $27,425 pa for singles and $39,442 pa for couples to appear quite comfortable in comparison.
We do not agree that any of this reasoning is sufficient basis to suggest that the ASFA Modest Standard is anything more than modest. We also do not believe that a retirement life funded solely by government welfare is what most Australians would be satisfied with, nor is it something we should encourage Australians to actively pursue.
In summary, we feel that the GRIP model has chosen modelling assumptions that result in more people achieving much higher retirement outcomes than they would under realistic circumstances, and these retirement outcomes have then been compared to out of date retirement standards which are not comparable to today’s societal living standards. The combination of multiple flaws in the model have resulted in figures that are unrealistic for many – and not what Australians want in retirement.
Analysing the data – that’s what we do!
While we believe the Grattan figures are skewed and show an unrealistic level of retirement preparedness, there have been some emerging patterns and findings pointed out in the Grattan report that are in line with some of our findings in previous work.
For example, here at Laneway Analytics, we have worked with a number of large super funds to provide data and analytical solutions to business problems, such as estimating retirement balances for fund members.
Finding 1: From our experience, we can concur with the Grattan report that people aged 40-50 who have not enjoyed the benefits of the superannuation guarantee their entire working lives are most likely to be faced with retirement inadequacy.
Finding 2: We also concur with the Grattan report that renters, especially those in Melbourne and Sydney, are more vulnerable than their homeowning counterparts.
Setting the real time benchmark for retirement standards
Another set of interesting findings we have made with funds is that generally around 15% – 25% of fund members are ready to meet the ASFA Comfortable Standard assuming no additional contribution or action from the member. This figure improves to 45% – 55% if we used the median between the Comfort and Modest Standards, and further still to 75% – 85% for the ASFA Modest Standard.
Whether we think Australians are ready for retirement really depends on which retirement target we choose to use, and realistically that differs from household to household. At most super funds and certainly in our own analytics work, we have chosen to use the ASFA Comfort Standard to be in line with the principal of prudence. Members may very well be satisfied with less than comfort, but how would you know? And what steps do you need to take to reach that goal?
About Author
Garvin Tso is an Analytics Solution Engineer at Laneway Analytics and an actuary-in-training. Garvin’s work varies from developing sophisticated retirement adequacy models for Super Funds, to designing engaging data visualisations for Laneway’s analytics platform and customers. While being able to work with numbers and large data sets is a core part of the job, Garvin’s passion is understanding and communicating the real-life consequences of these insights.
Laneway Analytics partners with funds to help fill this knowledge gap by informing Australians of their current retirement trajectories, and how making small decisions such as in their investment choices or additional contributions could possibly change their retirement outcome. At a broader level we hope our work will allow Australians to make informed decisions for their retirement plans.
The findings we make in this article are based on our experience with super funds we have worked with [and not the Australian population as a whole].