Superannuation: CPA Australia is reaching out to the general public to become more engaged with their super, write Michael Davison and Rell Hannah.
The superannuation age is upon us. Thanks to successive reforms since the early 1990s, most Australians have a long-term compulsory savings account with attractive tax advantages attached. In fact, for young people now in the early years of their working lives, their superannuation account may well become their single biggest asset.
Nevertheless, superannuation seems to be the final frontier for financial literacy among the Australian general public.
While it's now cool to take an interest in the sharemarket and shop around for the best home loan or mobile phone plan, most people find superannuation mind-numbingly boring. Newspapers, personal finance magazines and TV commercial breaks carry abundant information about the subject. But how many people are paying attention?
Superannuation used to be the exclusive domain of public servants and well-off executives. In two decades, Aus-tralia has moved from very narrow to very broad superannuation coverage. Most of us have it, but we don't necessarily have a relationship with it. We need to understand it better and learn how to make the most of it.
CPA Australia has been an active contributor to the public policy debate on superannuation for many years. In 2001, it commissioned the National Centre for Social and Economic Modelling (NATSEM) at the University of Canberra to evaluate the impact of various superannuation options on living standards before and after retirement for representative retirement groups, based on family type, income level and retirement age. The resulting report Superannuation the right balance? was released in November 2001 and updated in 2004.
These reports revealed that compulsory superannuation contributions alone would not be enough for many Australians to maintain their standard of living in retirement. For those who have not had the benefit of compulsory superannuation over their whole working life, because they started late, had broken work patterns or retired early, the reduction in living standards in retirement was even more dramatic. Our findings attracted much public interest and significantly contributed to the debate about the adequacy of retirement savings.
Since then, we have again seen more changes to superannuation in Australia, culminating in a plan to simplify and streamline superannuation announced in the May 2006 Federal Budget. With these changes in place from 1 July 2007, we decided that it was timely to examine their impact on retirement savings. Will retirement savings improve and will we be able to maintain our standard of living in retirement?
Our third Superannuation the right balance? report, released this month, shows that the simplified superannuation changes will certainly improve retirement savings, although mostly for those on average or higher earnings. There is no room for complacency, however. Most Australians will have less income in retirement than they've been accustomed to during their working lives.
The plain fact is that most Australians will need to make their own voluntary superannuation contributions, over and above the compulsory level, if they
have not worked full-time for 40 years
want to enjoy living standards in retirement in line with what they had before retirement
want to retire before age 65
want to allow for higher health and aged-care costs in retirement
they don't own their own home
Concerned that many consumers have their heads in the sand about superannuation, we decided to reach out directly to the general public and make our case for better engagement as effectively as possible.
Our research report compares the pre- and post-retirement scenarios for 12 hypothetical cases of people who turn 25 in 2007 and work full-time until at least age 55. Therefore, it effectively models Generation Y's retirement outlook.
This gave us an idea to modify our messages for different age groups and make a concerted effort to reach young people.
Much has been written about Gen Y being the first generation to live entirely in the digital age. Just as importantly, perhaps, Gen Y is the first generation in Australia to spend their entire working lives in the 'superannuation age'. As such, they have a better opportunity than any preceding generation to plan well for retirement.
To reach them, we recognised that we had to use a different sort of message style and media platform. So we hatched a plan to produce a funny-but-serious video and post it on YouTube, as well as CPA Australia's own website. Our aim was to create a talking point and encourage people to look at superannuation differently.
The result was Learn to love your super, a mockumentary (mock documentary) about the unrequited love Superannuation has for his owner, Kim. Through the mockumentary format, we understand that all Super wants is to do the right thing by Kim, to support her, make her feel secure. But Kim wants to live in the moment. She claims she isn't ready for the kind of commitment Super is talking about and therein lies the drama, the comedy and the essence of young people's reluctance to embrace superannuation.
Running at around three minutes, the video is short enough to watch on a computer in a tiny window of time and long enough to really attach to the character of Super. It's this attachment that lets us understand what a solid and loveable character he is despite the fact he might be the most boring guy in Australia.
Members and staff are being urged to participate in a 'viral' campaign to spread the video link. At the same time, we have targeted the mainstream media to advise them of our research findings and to announce the online fact sheets we have produced for different age groups.
On the home page of the CPA Australia website, you will find a link to the Learn to love your super materials. As well as the video and the full Superannuation the right balance? research report, you will find three different versions of a fact sheet. Tailored respectively to Gen Y, Gen X and Baby Boomers, the fact sheets contain high-level advice, Q&As and case studies.
The advice is framed to encourage people to care about their superannuation in a three-step process: learn, love and make it last.
Michael Davison is CPA Australia's superannuation policy adviser. Rell Hannah is a senior communications adviser for CPA Australia.
What the research says
There have been significant improvements to Australia's superannuation system since the first Superannuation the right balance? report was commissioned in 2001.
Superannuation is now more accessible, benefit options are more flexible and incentives for increasing retirement savings have improved.
However, adequate retirement savings will still only be a reality under ideal conditions where individuals enjoy compulsory superannuation contri-butions for their entire working life and are in a position to make voluntary savings. More needs to be done for Australians who don't fit the 'ideal'. Women, people with broken work patterns or forced into early retirement, and non-home owners will find it difficult in retirement. We believe there are opportunities for the government and the superannuation industry to work together to address these needs.
Early contributions enjoy the benefits of compound interest much more than later ones. Put just 3 per cent of your take-home pay into superannuation from age 25 onwards and you will typically increase your retirement income by a quarter. But if you delay your superannuation top-up plan until you turn 45, for example, you will need to contribute between 9 per cent and 18 per cent of your take-home pay, depending on your income and family situation, to achieve the same effect.
Making additional contributions before tax (that is, through salary sacrifice) is a tax-effective option for those on higher incomes. However, it's important to remember that salary sacrificing $10,000 will not boost your superan-nuation balance as much as kicking in the same amount after tax. You need to allow for salary sacrifice contributions being taxed at 15 per cent.
The earlier you retire, the less time you will have to build up your nest egg and the further your funds will need to stretch. Let's say you want to retire at age 55 after 30 years of superannuation contributions. You'll need to double your annual superannuation contribution over those 30 years to achieve the same sized superannuation pension that you'd have retiring at 65 after 40 years of superannuation.
Higher income earners will face the biggest lifestyle shock if they retire early. A single male who earns around $77,000 in today's dollars and chooses to retire at 55 will more than halve his retirement income compared with an equivalent earner who continues working until 65. In contrast, a single male on a low income (about $34,000) will only experience a 20 per cent drop in retirement income if he stops working at 55.
Investment decisions are important. For all of our case studies, we have assumed that superannuation funds will average 4.5 per cent annual return, which is conservative given past history. However, it's really worth bearing in mind that if your superannuation fund averages only 3.5 per cent annual return over 40 years, you will need to contribute 30 per cent more to match the result of a fund averaging 4.5 per cent annual return.
Renters need more superannuation than home owners in retirement, particularly if they are single. Before retirement, renters and home owners tend to have similar housing costs, because rent and mortgage payments absorb about the same proportion of income. In retirement, however, home owners tend to own their homes outright, so they fare better than renters at this stage of life. Indeed, single renters barely manage a modest but adequate life-style in retirement.
Reference: February 2008, volume 78:01, p. 60 - 61
