Consumption modelling to determine retirement income adequacy

Retirement income adequacy needs to be modelled on consumption needs as opposed to subsidising a percentage-of-salary model for all workers, AustralianSuper believes.

The superannuation fund said in its submission to the Government’s Retirement Income Review that  the percentage-of-salary model led to low income earners aspiring to earn less than their model wages, while high income earners would seek taxpayer subsidies for a percentage of their high income being enjoyed in retirement which was inequitable.

“The taxpayer burden in super needs to be seen through the lens of minimum provision to support retirement objectives, rather than relative to wealth during employment,” it said.

The super fund said it supported a budgetary standard (Association of Superannuation funds of Australia Comfortable standards) over a replacement rate scenario as:

• Wages tend to fall prior to retirement as workers transition into retirement, but expenses don’t fall in the same way – they fall during the middle period of retirement;
• Replacement rates work best for those who work a full career in one job but may not adequately deal with those who spend part of their career working part-time, casual or are made redundant or unemployed. Actual salaries may not always be indicative of needs;
• Replacement rates do not work for the poorest of our society as they do not address poverty alleviation (for example, intermittent workers may need a replacement rate more than 100%); and
• Replacement rates may also entrench or replicate inequitable outcomes in retirement: For example, that males will require more income than females or home-owners may require more income than renters. Taxation of income can complicate the definition of replacement rates. While many replacement rates are defined on net income, some have been set on gross income.

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Advantages of budgetary standards were:

• A budgetary standard is an appropriate measure when adequacy is focused on providing a minimum benchmark (e.g. poverty alleviation);
• Budgetary standards can more easily be linked to actual expenditure in retirement and can therefore be consistent with current retiree behaviour;
• Budgetary standards are simpler for the population to understand (one number for all or differentiated on a few key segments) and are therefore easier to communicate; and
• Budgetary standards seek to apply a more equitable retirement outcome across different cohorts in retirement.