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Smart Investing
Super changes mask the most basic problem
15 June 2007
Robin Bowerman
As we countdown to the start of the new simple super regime next month it is timely to remember that for most people the biggest challenge remains simple indeed – they do not have enough money saved.
The release this week of a research report from ASFA’s director of research Ross Clare provides a reality check for where average Australians are in terms of their super savings. Using data from the Australian Bureau of Statistics 2003-04 Survey of Income and Housing it has allowed ASFA for the first time to look at actual savings on an individual and household level. Previously estimates of super savings were based on microsimulation models derived from secondary sources rather than direct collection of data from households.
The bottom line is that ASFA’s projections put our average savings in super considerably lower that Treasury estimates.
So while there is a lot of media speculation about the potential to contribute $1million in undeducted contributions into super before July 1 the reality is for the average person they are still a long way from having enough in super to fund their retirement.
Average retirement payments in 2006-07 are likely to be around $130,000 for men and $45,000 for women. More specifically for someone aged between 35 and 44 today and retiring at 60 the average payout for a man is projected to be $183,000 and a little over half that ($93,000) for a woman.
The disturbing figure is that around 70% of retirees in this age range, according to ASFA’s study, are likely to have super balances less than those amounts.
Much has been made of the new tax-free status of the new simpler super regime but even under the previous super tax regime there was a tax-free threshold of $135,590 so most people would have been up for minimal tax in any regard.
This also helps put into context the Government’s move – a master stroke of simplicity – but not initially that expensive in revenue terms. ASFA’s report argues that a boost in the co-contribution helps boost low super account balances considerably more than the abolition of tax – albeit at a greater cost to the government.
For example ASFA says for an average male aged between 35 to 44 an additional $1000 a year contribution from after tax income together with the government co-contribution would boost the retirement payout at age 60 from $183,000 to $220,000. If the government doubled the co-contribution permanently then the retirement payout at age 60 would jump further to $229,000.
For a woman the additional $1000 contributed each year would see her super payout climb from $93,000 to $154,000.
So for people on lower incomes with low super balances the co-contribution is a much more important boost to retirement savings than the abolition of tax. Whether the government will respond to ASFA’s urgings and increase the co-contribution remains to be seen but for people who have not taken advantage of it there is still time to get that $1000 into your super fund this financial year to ensure the government co-contribution can be claimed.
For example if your income is $42,000 the co-contribution is worth $800. The levels are indexed so will rise from July 1. It may not be a $1 million but over time adding that $1000 each year to super could be the difference between worrying about making ends meet between pension days and a modest but comfortable retirement lifestyle.
Whatever your views, you can discuss this article - or any of Robin's articles - on our message board Your 2 Cents.
Robin Bowerman is Head of Retail at index fund manager Vanguard Investments Australia and the former managing editor of Shares and Personal Investor magazines. To receive this column by email each week go to http://www.vanguard.com.au/ and register with smart investing.
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