The Australian Retirement Incomes system is based on the three pillars of a taxpayer-funded age pension, compulsory occupational superannuation and then everything else including voluntary savings, causal work, family support etc. The introduction of compulsory occupational superannuation in 1992 has not done much to relieve pressure on the first pillar.
This chart shows how a retirement income is generated in one particular case. The hypothetical individual in this chart enters full-time work at age 21 on a salary of $45,000pa. What follows are 44 years of continuous work, with the salary rising at a real rate of 1.5%pa, superannuation contributions are at 12% of salary over the whole term and the investment return is 3%pa real before fees and taxes. On retirement at age 65, our hypothetical worker targets a retirement income of 50% of pre-retirement income.
It is not inspiring. This person would be unusual among Australians to have a full-time career with no employment breaks, through choice, necessity, unemployment, parenting etc. The earned income is better than the median. The rate of contribution is 12% of salary throughout – at present, most people have no more than 9.5% saved. The real investment return of 3%pa will require everything to go well over a very long period, including through retirement.
The conclusion is that the taxpayer is funding about half this person’s retirement income, until about age 90, when the taxpayer takes over 100% funding obligations.