Wednesday, May 31, 2006

Closing the retirement savings gap

Not long before the recent boomer-bonanza Budget, actuaries Rice Walker released a study showing that Australia’s retirement savings gap (the difference between currently accrued super plus future contributions/compounding, vs an actual “comfortable retirement” amount, deemed as 62.5% of pre-retirement earnings) had decreased by 25%, or $150bn, in just three years (2003-2006).

The explanation for such an apparent miracle? Introduction of the super co-contribution (a boon for un- or ultra-low waged boomers in rich families) and removal of the surcharge tax for high-income earners is part of it. More mundane though, is the impact of tweaking one underlying statistical assumption: whether the age-pension helps to bridge the gap, or not.

The 2003 stats are age-pension exclusive - they leave working-age low-income earners (= on less than 0.75 of average weekly earnings), who are likely to be totally reliant on the age-pension in retirement out of the equation completely, and make a rough guess at what part-pensions may be worth in closing the gap for the rest. In contrast, the 2006 stats are age-pension inclusive, in part. While they still leave low-income earners out of the whole equation, the calculations factor-in how much age-pension an individual will receive, rather than repeat the 2003 exercise, which tried to distill notional statistics for “pure” self-funded retirees.

This difference may be more ideological than statistical. Anyway, let’s cut to the chase, to see for which age groups, and genders, the $150bn has gone to the ostensible (retirement) benefit of.


Here’s my text adaptation of the 2003 table (PDF).


Age Band
Retirement Savings Gap – Males ($m)
Additional Contribution of Income Required to Close Gap (Males)
Retirement Savings Gap – Females ($m)
Additional Contribution of Income Required to Close Gap (Females)

25 – 29 30,957 2.9% 67,396 5.6%

30 – 34 31,395 3.5% 76,039 6.7%

35 – 39 29,595 4.1% 84,939 9.0%

40 - 44 30,143 5.1% 88,143 12.2%

45 – 49 26,143 6.1% 84,160 17.0%

50 – 54 27,287 8.8% 78,950 23.3%

55 – 59 21,961 13.5% 55,071 34.3%

60 – 64 NIL NIL 13,574 27.3%

Total males 197,481m, Total females 548,272m

As foreshadowed above, the ~$750bn apparent total "gap" is then discounted, reflecting a rough estimate of part-pensions’ value in offsetting the gap, to result in the widely-reported headline total retirement savings gap of $600bn (penultimate URL) .

Looking down and across the table, the gap appears much direr for females than males, in all age groups. For men, the stat curve is both neater and less steep. For men under 45, in particular, a comfortable self-funded retirement is only a ~$30bn per five-year-age-bracket away. Meanwhile, the percentage required to close this gap (which of course gets smaller with youth, as youth equals more upcoming contribution years at the current 9% standard), remains a single-digit percentage for men right up to the age of 54.

While for females in 2003 then, prospects of a "comfortable", self-funded retirement looked virtually impossible, for most males, kicking in 6% on top of the current compulsory 9% would comfortably suffice to close the gap to nil.


Here’s my text adaptation of the 2006 table*.

(Percentage figures for Additional Contribution of Income Required to Close Gap were not given in the hardcopy original)


Age Band
Retirement Savings Gap – Males ($m)
Retirement Savings Gap – Females ($m)

25 – 29 32,717 39,231

30 – 34 37,554 34,755

35 – 39 36,069 28,385

40 - 44 41,145 35,541

45 – 49 37,942 35,652

50 – 54 35,090 28,388

55 – 59 19,303 12,268

60 – 64 6,667 5,002

Total males 246,448m, Total females 219,223m

What a difference three years (plus the above-mentioned statistical tweaking and substantive changes to super law) make, eh? To remind you, the 2003 total-gap figures were 197,481m (males) and 548,272m (females).

Curiosities abound here, but surely the largest is to do with why the male “gap” has gone significantly (~25%) up since 2003, while at the same time the female “gap” has gone meteorically (~60%) down? Thus, using the 2006 figures, females are financially closer to a “comfortable retirement” than males in all age groups, bar the 25 -29 one.

Of course, this doesn’t mean that women are sitting on fatter super accounts than men in absolute terms: the deemed “comfortable retirement” of 62.5% of pre-retirement earnings makes $100k in savings look more “comfortable” for an average woman than a man, given their average earnings differentials.

But there is still something disquieting about the figures, particularly in the peak gap for men currently being in the 40-44 year-old cohort (this peak is in absolute dollar terms; the percentage figure for Additional Contribution of Income Required would be exponentially higher) . This 40-44 age group, having enjoyed (or otherwise) compulsory super for most of its working years, now finds itself hand-in-pocket, short in the small matter of, ahem, $41bn, as they/we start their/our career’s downhill run into retirement.

The recent Budget does nothing to close the gap for men in this age group, who are also statistically less likely to be home-owners than any living, older generation of Australians. Abolishing super contributions tax might have been a sufficient carrot for these men to immediately start saving for retirement at punishing rates (I’m guessing an extra 20% of their income may need to be put away to get to the “comfortable retirement” at 65 threshold), but instead the Budget abolished taxes only for current and near-to-medium term retirees**.

If you think here that I am once again playing the whingeing Xer violin on my lonesome, consider this (PDF):

One of IFSA’s critical questions has been to examine the relative merits of changes to the various components of superannuation taxation: contributions tax, earnings tax and benefits tax. Table 3 shows the impact on revenue of removing each component. Table 4 shows the benefit to retirees of this removal, while Table 6 shows the net cost/benefit over time.

• Of the three taxes, removal of contributions tax has the largest net benefit to retirees – however the main benefits do not accrue until Generation X is retiring. This change has least benefit to baby boomers

• Removal of earnings tax has an immediate benefit, particularly for baby boomers.

• Removal of benefits [exit] tax has a marked impact on baby boomers, but is a zero-sum game overall.

We all know which one got the nod, of course. (Hint, it wasn't the Greater Good one.)

For Xer men, their/our only realistic “option” is the familiar Xer trademark move, of going “short”, this time on super. If a “comfortable” self-funded retirement can only be achieved through super-human savings measures, then an uncomfortable retirement (aka taking it to the wire) is the better choice. Which means in practice, putting nothing into voluntary super in one's 30's and 40s (and 50s, on present indications), even if one can afford it. Instead, it’s going to be more profitable for my generation to simply wait for the wheels to fall off the whole boomer-greed bandwagon over the next two decades.

* Anna Fenech, "Brave new world for boomers" (Table, note table not in above URL) Australian May 13, 2006

** I say this because of the triple whammy the Budget kicked Xers with. Boomers (born before July 1959) can access their super at 55 (tapering to 60 for Xers born after June 1964), and so start part-withdrawing and juggling it around for tax effectiveness, even as they await their age-60 tax-free-of-the-lot day. Second, there is the risk of the 15% exit tax being reimposed (possibly at a higher rate, to boot) in future – and the longer before one can access one’s super, the higher this risk. Finally, there are the age-discriminatory transitional provisions, that allow boomers born pre-1957 five years grace for a belated, tax-privileged ramp-up of their super, and boomers born between 1957 and 1962 up to five years to do this. Again, this taper cuts out as soon as Xers cut in.

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