It’s a question many of us ponder as retirement inches closer, or perhaps even when we’re already there: where do those hard-earned, post-tax dollars actually end up when it comes to securing our future?
When we talk about retirement income systems, especially in places like Australia, it’s often framed around three main pillars. Think of them as the foundational supports for your golden years: compulsory superannuation (that’s the money automatically set aside from your pay), voluntary superannuation contributions (the extra bits you choose to add), and the Age Pension (the government safety net). The big question is, do these pillars work together smoothly, or are they a bit of a jumble?
Looking at the evidence, compulsory superannuation, as it matures, is doing a pretty decent job for most people, especially when it’s combined with the Age Pension. It helps a lot of us save enough for a comfortable retirement. And for those who have the means, those voluntary contributions offer a welcome bit of flexibility to boost those savings even further. It’s like having a regular savings plan and then the option to top it up when you can.
But here’s where things get a little more nuanced. The financial incentives designed to encourage us to save more for retirement, or even to keep working longer, don't seem to be having as big an impact as one might hope. Tax concessions, for instance, often lead people to shuffle their existing savings around rather than actually increasing their total savings. And the idea that the Age Pension's means test significantly changes how people save before they retire? The evidence for that is pretty weak.
Interestingly, when it comes to voluntary contributions to superannuation, it’s often those with middle to lower incomes who are less likely to make them. The main hurdle? Simple personal budget constraints. Life happens, and there’s just not enough wiggle room to put extra aside. When people do start thinking about retirement, their decisions are often guided by things like when they can access their super (preservation ages) and the Age Pension eligibility ages, alongside factors completely outside the retirement income system, like their health.
And what about how people actually use their savings once they retire? This is where it gets a bit surprising. There’s not much evidence that people are deliberately structuring their superannuation withdrawals to get more from the Age Pension. More broadly, the incentives to draw down assets to fund living standards in retirement just aren't very effective. A large number of people aren't using their super balances and other savings as effectively as they could to maintain their lifestyle. If they were, they might have been able to achieve a similar retirement outcome with less saving during their working lives, or enjoyed a higher standard of living then.
Retirees often express a deep-seated concern about outliving their savings. This fear tends to make them spend less, rather than embracing products designed to manage that risk. The prescribed minimum drawdown rates, while intended to ensure some spending, can actually reinforce a tendency to hold onto savings. Without a shift in this drawdown behaviour, we're likely to see larger bequests from superannuation.
Even the Age Pension means test taper rate doesn't seem to strongly influence whether people spend their assets or not. And there's a psychological element: savings framed as 'assets' – that 'nest egg' we've been told to build our whole working lives – are less likely to be spent. Perhaps if superannuation balances were presented more like a regular income stream, similar to how we think about our paychecks during our working years, it might encourage more drawing down.
Then there's the issue of precautionary saving for aged care costs. Some people hold onto their assets because they're worried about future care expenses, often unaware of the extent to which these costs are subsidised by the government. And while both the tax and retirement income systems encourage investment in the principal residence, few people actually tap into their home equity to boost their retirement income. Surveys suggest leaving a bequest isn't the top priority for most retirees, yet a significant portion of their savings often ends up as a bequest, frequently unintentionally.
Ultimately, the sheer complexity of the system prevents many from optimising their retirement income. Navigating the different parts, combining income sources, and managing the multiple risks of retirement is a real challenge. People genuinely need assistance with these complex financial decisions. And when you add in the interactions with other systems, like aged care, the complexity only grows.
It seems we're lacking a clear, guiding framework for people to make decisions about planning for retirement and managing their finances once they're there. The current financial advice landscape isn't quite meeting everyone's needs, and many struggle to achieve a stable income in retirement. Superannuation funds, while playing a role, can only do so much on their own.
