The importance of objectives

Over 20 years ago, Australia’s Federal Government introduced the Superannuation Guarantee requirements, an obligation on employers to direct a part of each employee’s remuneration to a superannuation fund. The objectives of the SG were never annunciated. As a result, nobody really knows what the purpose of the SG is. Of course, people will explain what they think its purpose is. But given that different people will explain its purpose differently and given that there is never-ending debate about whether the minimum rate of contribution is too high, too low or about right, it is clear that the SG system has no generally understood and accepted objective.

That means we don’t know how well it is doing precisely because it is impossible to know what it is meant to be doing. We can’t determine if 9% is the right rate of contribution, because we don’t know what it is meant to achieve. 

Two aspects of the SG that are clear: it forces a redirection of labour remuneration from cash to a savings vehicle and ties up those savings until retirement and the deferred cash can then be taken and spent in an afternoon if the beneficiary so decides. Apart from that, not much else is known about why it exists. 

Strangely, this system is viewed favourably by some. How can anyone decide whether it is a good system without knowing what it is trying to achieve?

An age-old solution to an old-age problem

Sooner or later, people will wake up to the fact that the actuaries of more than 100 years ago had come up with a robust and efficient system of providing for old age that did not require every individual to accept longevity and market risk on their own with no options to hedge. Having individuals plan for retirement on the basis that they ‘might’ live longer than average is a flawed approach. Risk pooling is the way to manage this effectively and efficiently. And actuaries can price that risk for trading in the market.

The asymmetry of life expectancy

According to Australian statistics, the average male aged 65 can expect to live until age 83. For females, it is age 86. (These statistics are extracted from the Australian Life Tables 2005-07). That might seem like a useful base upon which to plan for retirement. How much savings are needed before someone is able to retire depends on how much they need to meet living expenses and how long they are going to live. Predicting living expenses is a lot easier than predicting your remaining lifespan, but you have to start somewhere.

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