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Smart Investing
Rising debt levels takes shine off super savings
 August 4, 2007
Robin Bowerman
The amount of money you have in your super fund is only one side of the coin when it comes to calculating how much you will have to live on when you retire.
To accurately measure your retirement savings you need to take into account your household debt – because for many people the amount they have to live on in retirement will be substantially less than their super fund balance because the first thing they will need to do when retiring is to clear the household debt.
Debt can be a useful tool for building wealth but it comes with a clear caveat – at some stage it has to be paid back. The concern is that while our super savings have been increasing nicely a lot of the gains in super funds are being offset by increased household debt.
At the annual conference of the Investment and Financial Services Association (IFSA) in Brisbane this week a research report on Australia’s national savings levels was released. Produced by Dr Vince FitzGerald and the Allen Consulting Group the report updates an original study done in 1993 for the Federal Treasurer.
The chilling statistic in the report is that in the 1980s the average Australian household carried $50 of debt for every $100 in income. But over the past 15 years the debt level has exploded and the average household now carries $160 of debt for every $100 of income.
Essentially household saving has been declining as a proportion of disposable income since the early 1970s. Now that is not as bad as it might seem at first glance – while housing savings has been falling household net wealth has been increasing but FitzGerald raises concerns that the increase in net wealth has been driven in large part by big increases in housing valuations – values that may be unsustainable going forward. But there is no escaping the need to repay the debt.
This brings us back to the basic question of whether people are saving enough to fund their retirement. FitzGerald’s report highlights key groups of most concern – among them people in the Generation X and Y demographic groups. For younger people this is a two-pronged issue – if the baby boomers do not save enough then the cost of providing for their retirement and health care will mean the younger generations have to shoulder an unfair tax burden.
The second issue is whether the 9% super guarantee level is enough for the Gen X and Y groups. FitzGerald’s report quotes estimates that contribution levels for younger people need to rise 2.4% while baby boomers need to be contributing around 16% to super to narrow the savings gap.
Since FitzGerald did his original report back in 1993 super contributions have reshaped the savings landscape for the better. However, the build up of household debt is clearly a concern.
For individuals it reinforces the need for having a household budget with assets and liabilities measured so that you can see exactly where you are in respect to your long-term financial position at the time of retirement.
More articles from this week's CompareShares newsletter:
Commodities: Nuclear power here to stay
Resident trader: Revenge trading
Lottery winners: The perils of sudden wealth
Superannuation: Getting behind the wheel
CFDs: Volatility highlights strengths and weaknesses
Politics: Backing a winner
Smart Investing: Rising debt levels an issue
Shares: Market depth explained
Stock of the week: ASB
Investing: Oil rising to the top… again
Gold: Gold vs the dollar
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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