The vast majority of retirees in Australia today and in future are likely to be financially comfortable, says a new report from Grattan Institute, dismissing the conventional wisdom that Australians don't save enough for retirement.
Grattan Institute is a non-partisan think tank providing independent, rigorous and practical solutions to some Australia’s most pressing problems.
The report titled “Money in retirement: More than enough” shows that retirees are less likely than working-age Australians to suffer financial stress such as not being able to pay a bill on time, and more likely to be able to afford optional extras such as annual holidays.
Grattan Institute modelling shows that, even after allowing for inflation, most workers today can expect a retirement income of at least 91% of their pre-retirement income – well above the 70% benchmark endorsed by the OECD, and more than enough to maintain pre-retirement living standards.
And many low-income Australians will get a pay rise when they retire, through a combination of the Age Pension and their compulsory superannuation savings.
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Australians tend to spend less after they retire, and even less into old age. Their medical costs increase, but are largely covered by the taxpayer. Many retirees are net savers, and current retirees often leave a legacy almost as large as their nest egg on the day they retired.
“The financial services industry ‘fear factory’ encourages Australians to worry unnecessarily about whether they’ll have enough money in retirement,” Grattan Institute CEO John Daley said.
But the retirement income system is not working for some low-income Australians who rent, particularly in Sydney and Melbourne. And this problem will get worse because on current trends home ownership for over-65s will decline from 76% to 57% by 2056.
To boost retirement incomes for the poorest Australians, the report calls for a 40% increase in the maximum rate of Commonwealth Rent Assistance – worth more than A$1,400 ($1,020) a year for a single retiree.
Loosening the Age Pension assets test could boost retirement incomes for around 20% of retirees today, rising to more than 70% of retirees in future. It would also deal with anomalies in the system: some people who save A$100 while working increase their total retirement income by less than A$100 in real terms.
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But because most Australians will be comfortable in retirement, there is no need to boost retirement incomes across the board. The report says that the legislated plan to increase compulsory superannuation contributions from 9.5% to 12% should be scrapped, saving the Budget about A$2bn a year.
Superannuation tax breaks and age-based tax breaks should be reduced, to ensure the retirement incomes system does not become an excessive burden on future budgets, and endanger funding for aged care and health, the report adds.