Live Long and Prosper? Projecting the Likely Superannuation of the Baby Boomers in 2020
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National Centre for Social and Economic Modelling
• University of Canberra •
Live Long and Prosper? Projecting
the Likely Superannuation of the
Baby Boomers in 2020
Simon Kelly, Ann Harding and Richard Percival
Paper presented at the
2002 Australian Conference of Economists
Business Symposium
4 October 2002National Centre for Social and Economic Modelling
• University of Canberra •
The National Centre for Social and Economic Modelling was
established on 1 January 1993, and currently receives core funding
from the University of Canberra and the federal departments of
Family and Community Services, Health and Ageing, and Education,
Science and Training.
NATSEM aims to be a key contributor to social and economic
policy debate and analysis by developing models of the highest quality,
undertaking independent and impartial research, and
supplying valued consultancy services.
Policy changes often have to be made without sufficient information about
either the current environment or the consequences of change.
NATSEM specialises in analysing data and producing models so that
decision makers have the best possible quantitative information on which
to base their decisions.
NATSEM has an international reputation as a centre of excellence for
analysing microdata and constructing microsimulation models. Such data
and models commence with the records of real (but unidentifiable)
Australians. Analysis typically begins by looking at either the
characteristics or the impact of a policy change on an individual household,
building up to the bigger picture by looking at many individual cases
through the use of large datasets.
It must be emphasised that NATSEM does not have views on policy:
all opinions are the authors’ own and are not necessarily shared by
NATSEM or its core funders.
Director: Ann Harding
© NATSEM, University of Canberra 2002
National Centre for Social and Economic Modelling
University of Canberra ACT 2601 Australia
170 Haydon Drive Bruce ACT 2617
Phone + 61 2 6201 2750 Fax + 61 2 6201 2751
Email natsem@natsem.canberra.edu.au
Website www.natsem.canberra.edu.auiii Abstract The extent to which baby boomers can provide for themselves in retirement is becoming a critical issue for government policy makers. Clearly, the burden on future governments will be influenced by the level of superannuation assets that baby boomers take into retirement. This paper uses microsimulation to make projections of the superannuation assets of baby boomers as they enter retirement over the next 20 years. It considers the current situation of the baby boomers and then presents their circumstances in 2020 under differing superannuation policy — namely, a higher level of compulsory contribution. The impact is considered from both the individual and government perspective. Author note Ann Harding is the inaugural director of NATSEM and Professor of Applied Economics and Social Policy at the University of Canberra. Richard Percival is the Deputy Director and Simon Kelly is a Senior Research Fellow at NATSEM. Acknowledgments This research was supported by a large Australian Research Council grant (A79906127). General caveat NATSEM research findings are generally based on estimated characteristics of the population. Such estimates are usually derived from the application of microsimulation modelling techniques to microdata based on sample surveys. These estimates may be different from the actual characteristics of the population because of sampling and nonsampling errors in the microdata and because of the assumptions underlying the modelling techniques. The microdata do not contain any information that enables identification of the individuals or families to which they refer.
iv
Contents
Abstract iii
Author note iii
Acknowledgments iii
General caveat iii
1 Introduction 1
1.1 Background 1
1.2 Approach 3
2 Baby boomers at present 4
2.1 Who are the baby boomers? 4
2.2 Labour force and other characteristics 5
2.3 Income comparison with younger and older cohorts 8
2.4 Baby boomers’ current superannuation situation 9
2.5 Current Adequacy 11
3 Baby boomers in 2020 12
3.1 Baby boomers’ financial situation in 2020 13
3.2 Adequacy in 2020 16
4 2020 outcomes 17
4.1 SG not effective for baby boomers 17
4.2 Increasing the SG contribution rate to 15 per cent 18
4.3 Age Pension outlays 19
5 Conclusion 20
A Additional statistical tables 22
References 241
1 Introduction
1.1 Background
In a study of pension systems in fifteen OECD countries Disney and Johnson (2001)
found that most of the pension systems were ‘in a state of flux’. Each was suffering
from increasing costs and had projections of even greater demand. While the
circumstances and proposed responses in each country were quite different, there
were some common threads — namely, greater reliance on self-provision and
reductions in the future unfunded provisions of schemes.
The increasing costs and the greater demand are the result of an ageing population.
A number of circumstances have created the ageing population. On the one hand
are the large numbers of people born in the post-World War 2 demographic of 1946-
1964. These ‘baby boomers’ are now aged from 38 to 56 and are fast approaching
retirement. As a result, the number of retirees is forecast to swell — not only from
the increased numbers entering retirement but also because they are living longer,
thanks to medical advances. On the other hand, birth rates have fallen steadily in
most OECD countries since the early 1970s. This combination of greater numbers of
older people and fewer younger people is leading to an increase in the elderly
dependency ratio – the ratio of people aged 65+ to the population of working age
(see Table 1). The economic dimension of this demographic change is one of the
main reasons that most major industrial economies are concerned about the future of
their pension schemes and escalating health care costs.
Table 1 Elderly Dependency ratios (population aged 65+ as a percentage of the
working aged population), 1996
1960 1990 2000 2010 2020 2030
% % % % % %
Australia 13.9 16.0 16.7 18.6 25.1 33.0
Canada 13.0 16.7 18.2 20.4 28.4 39.1
France 18.8 20.8 23.6 24.6 32.3 39.1
Germany 16.0 21.7 23.8 30.3 35.4 49.2
Italy 13.3 21.6 26.5 31.2 37.5 48.3
Japan 9.5 17.1 24.3 33.0 43.0 44.5
Netherlands 14.7 19.1 20.8 24.2 33.9 45.1
New Zealand n.a. 16.7 17.1 18.9 24.6 30.5
United Kingdom 17.9 24.0 24.4 25.8 31.2 38.7
USA 15.4 19.1 19.0 20.4 27.6 36.8
Source: Disney and Johnson, 2001 Table 1.5 p.12
From Table 1 it can be seen that the issue of an ageing population is very relevant to
Australia. In 1989 the then Minister for Social Security outlined the government2 Live Long and Prosper? Projecting the Likely Superannuation of the Baby Boomers in 2020 approach to the issue as ‘… a flexible and sustainable retirement income policy which delivers fair and adequate incomes’ (Howe, 1989, p. iv). He believed this could best be achieved by a system based on the twin pillars of a public pension system (the means-tested Age Pension) and private savings. Since 1989 the second pillar has been strengthened and separated into two components - compulsory private saving through superannuation and voluntary private retirement savings. These two components and the Age Pension are now normally referred to as the ‘three pillars’. As implied above, a very significant element of the success of the three pillars is convincing the baby boomers to save for their own retirement. Andrew Mohl, of AMP, provocatively summaries the baby boomers’ core values as individuality, being in control, freedom of expression, choice, equality, change and peace. He adds that they are well educated and can be demanding or even belligerent (AMP, 2002). The life style and values of the baby boomers may be reasonable but they come at a financial cost. For most of this age cohort these costs have not yet been particularly stressful, as their working years have aligned with times of high employment and comparatively high salaries. By 2020 the story may be quite different. Most of the baby boomers will have left the labour force and will be living off their compulsory and voluntary savings and the government’s Age Pension. But the pension is only 25 per cent of average earnings and the three pillar ‘adequate retirement income’ design expects that the pension will be considerably topped up by income from private savings. Unfortunately, one thing that the baby boomers have not done well is to voluntarily save for their retirement. They know that they will live in retirement for considerably longer than previous generations and they have plenty of plans of what they will do during this time. In fact, many cannot wait for retirement and are choosing to enter their retirement phase early. Others are entering retirement earlier than they wanted through retrenchment. Overlooking the financial aspects of retirement may be the BIG mistake for baby boomers. They know what they want to do and they have the time to do it — but will they have the money? The government also has a problem – it has put the three pillars in place but it may have put them in place too late to provide an adequate income in retirement for this large baby boomer group of Australians. Compulsory private savings through superannuation may have been introduced too late to have a significant impact upon the retirement incomes of this group and, as mentioned above, voluntarily saving for retirement has not been terribly well accepted. The complex and constantly changing nature of the superannuation taxation laws have not helped in this regard. Now a very large, demanding, vocal and politically aware group of Australians are entering a period where they will not be happy. They will want someone (the
Live Long and Prosper? Projecting the Likely Superannuation of the Baby Boomers in 2020 3 government) to help them achieve their goals in retirement and will not accept the low levels of support just because previous generations have accepted them. But meeting these needs will put enormous fiscal strain on the federal purse. The government knows it must convince the baby boomers to save more for their own retirement or lower their expectations to a more realistic level. The recent Intergenerational report (Treasury, 2002) is part of this education process, as it dramatically showed that unless budgetary expenditure is curtailed, the country is going to run up a massive deficit. One government initiative that has been a success is under the second pillar – compulsory private saving. In the early 1990s, the government introduced the Superannuation Guarantee (SG) under which employers were required to contribute superannuation for employees. The government legislated that employers must contribute three per cent of an employee’s earnings to superannuation (this has since been raised incrementally to nine per cent). Many commentators believe one way to ensure an adequate retirement income for the baby boomers is to further increase the compulsory employer contribution to 15 per cent. This suggestion is in addition to other measures already introduced by the government to encourage superannuation contributions – two of these changes being an increase in the minimum age at which superannuation benefits can be withdrawn and tightening of the criteria under which early withdrawal of superannuation can be made. In summary, the funding of public pensions with an ageing population is a global issue. In Australia, the government has taken a three-pillar approach to limit future costs – an approach that is based on a public pension supplemented by compulsory and voluntary private savings. The success of the approach requires the government to convince the baby boomers (and successive generations) to save more for their own retirement. Its ability to convince people will have a critical impact on the future Federal Budgets. 1.2 Approach The National Centre for Social and Economic Modelling (NATSEM), through an Australian Research Council grant (A79906127), has been actively developing a model to provide better projections in the areas of superannuation and retirement incomes. NATSEM’s particular area of expertise lies in the usage of micro – or individual level – data, and in the development of microsimulation models using such data. Because the data and model operate at the micro level – with estimates for the entire population still being achievable by simply summing the individual records - they can provide much more detailed answers to questions about distributional impact. These models are particularly suited to modelling the individual employment and social paths people take during their lives.
4 Live Long and Prosper? Projecting the Likely Superannuation of the Baby Boomers in 2020
Using the NATSEM model we are able to compare the superannuation outcomes for
baby boomers under a variety of scenarios, including the maximum SG set at 9 per
cent and 15 per cent. In this paper the characteristics and financial situation of the
baby boomers at the present time and in the year 2020 are presented. The analysis of
their financial situation in 2020 includes a comparison under the 9 per cent and 15
per cent SG scenarios. The impact is evaluated from both a government and an
individual perspective.
2 Baby boomers at present
2.1 Who are the baby boomers?
In the years following World War II, the number of births rose to over 3.0 live births
per woman. It was the first time the fertility rate had been at this level since the early
1920s. The fertility rate stayed above 3.0 until 1965 (see Figure 1).
Figure 1 Total Fertility Rate, Australia, 1930-2000
4
Total Fertility Rate
Live births per woman
3
2
1
1930 1940 1950 1960 1970 1980 1990 2000
Data source: Births, Australia, ABS Cat. no. 3301.0
This high birth rate combined with high levels of immigration has produced a large
number of Australians – the baby boomers – who, in 2002, are aged between 38 and
56.1 In 2002, there are 5.3 million baby boomers. They represent 27 per cent of the
1 The definition of a baby boomer is not really as strict as described here. The term is an
international one and while the start year is always referred to as the first post-war year
(1946), the last year is not quite so rigid. It can vary from 1960 to 1965 (for example, SaltLive Long and Prosper? Projecting the Likely Superannuation of the Baby Boomers in 2020 5
overall population or 35 per cent of the voting population. It would be a very brave
government that ignored the opinion and interests of one-third of the country’s
voters. Another challenge for government will be that they are very diverse group
with a myriad of different opinions, interests and allegiances!
Figure 2 Population change by gender and age, Australia, 2002-2020
120%
100% Male
Population change 2002-2020
Female
80%
60%
40%
20%
0%
-20%
15 25 35 45 Age 55 65 75 85+
Note: The shaded area covers the Baby Boomers, i.e. those aged 56-74 in 2020.
Data source: Series II projections, Population Projections, 1999 to 2101, ABS Cat. no. 3222.0
The population of Australia will age considerably over the next 18 years. For most
ages up to 55 the number of people at any age will grow by less than 20 per cent
(Figure 2). For ages over 55, all ages will grow by at least 20 per cent with the
average around 60 per cent. Clearly a population with the number of older members
growing three times faster than younger members is going to age.
2.2 Labour force and other characteristics
In Table 2 the employment status, some occupations, marital status and family type
by age groups of the population are presented. The percentages relate to 1998-99
when the baby boomers were aged from 35 to 54 years. People aged 15 to 34 have
been labelled Gen X and Y and those aged 65 and over have been grouped together
and labelled as Retired although some are still employed.
1999 p.3 sets the end date as June 1961). The most common end year is 1964 and that is
the year I use in the remainder of this paper.6 Live Long and Prosper? Projecting the Likely Superannuation of the Baby Boomers in 2020
Table 2 Characteristics of individuals within various birth cohorts, 1998-99
Gen X and Y Baby Boomers 55-64 year olds Retired
% % % %
Employment Status
Employee - full time 44.0 47.3 22.0 1.0
Employee - part time 19.3 16.5 10.5 2.4
Self employed 5.2 11.6 11.9 2.8
Unemployed 8.0 4.7 2.3 -
Not in the labour force 23.4 19.8 53.3 93.8
Occupation
Managers/administrators 2.4 6.7 5.6 1.6
Professionals 11.2 15.7 6.6 1.2
Associate professionals 6.4 10.3 4.3 0.7
Tradespersons 10.8 9.2 5.3 0.6
Marital status
Never married 58.7 8.8 4.3 3.7
Widowed 0.2 1.0 6.5 28.6
Divorced 1.2 7.0 8.7 4.7
Separated 1.5 4.1 3.8 1.3
Married 28.1 73.7 74.4 61.1
De facto 10.2 5.4 2.2 0.5
Family Type
Couple with dependants 38.0 51.4 8.6 0.5
Couple only 16.0 27.0 67.5 60.0
One parent with dependants 6.3 4.9 0.7 0.1
Lone person 39.7 16.6 23.2 39.4
Note: Gen X and Y refers to persons aged 15-34; Baby Boomers to those aged 35-54; Retired to those aged
65+
Source: ABS 1998-99 Household Expenditure Survey, unit record data
The baby boomers are quite different from the other age groups in that they have the
highest proportion in employment, the highest proportion in senior occupations, and
the vast majority are married with children.
Examination of the baby boomer marital statuses and family types show that half are
married and have dependent children. This is in stark contrast to the 55-64 year olds
just ahead of them. Only one-tenth of 55-64 year olds have a family type consisting
of a couple with dependent children. Before suggesting that the next decade should
see the baby boomers dropping to this level, external factors need to be considered
for these birth cohorts. For example baby boomers have had fewer children but had
the children later in life. The children of the 55-64 year old group traditionally left
home at a younger age than will be the case for the children of baby boomers. The
wash-up of these various trends is messy but a probable scenario is that many baby
boomers will have children living at home until an older age than the cohort ahead
of them.Live Long and Prosper? Projecting the Likely Superannuation of the Baby Boomers in 2020 7
The observation that a higher proportion of baby boomers are occupying
management, professional and associate professional positions than the next older
age group is a little surprising. It would appear that people in these occupations are
deciding to retire earlier than the nominal retirement age of 65. It may be that some
of these people are being made redundant, but this seems less likely to be the reason
for those in the professional occupations where the proportion drops by almost 60
per cent (from 15.7% to 6.6%). It would seem likely that many of these professionals
are voluntarily taking early retirement rather than having it forced upon them.
The employment status proportions are in line with expectations based on the phase
of the life cycle of each group. Just under half of the baby boomers are in full-time
employment and only one in five of the baby boomers are not in the labour force.
However, the examination of the next older age group shows the changes that we
might expect the baby boomers to go through in the next ten years. For this age
group the proportion in full-time employment is less than half the level of the baby
boomers and the proportion of the 55-64 group that are out of the labour force has
increased two and a half times (from 20% to 53%). These large changes may be a
result of cohort or period effects, that is, effects that have impacted on these people
or existed at a particular time. As we cannot be sure these effects will be the same for
the baby boomers over the next decade or two, we cannot be sure they will
necessarily follow in the footsteps of the group in front of them. However, it seems
safe to say we can expect to see a large proportion of the baby boomers changing
from full-time employment and /or taking early retirement.
Figure 3 Proportion of people not in the labour force by age group, 1998-99
100
baby boomers
80
NILF proportion (%)
60
40
20
0
15-19 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69 70-74 75+
Data source: ABS 1998-99 Household Expenditure Survey, unit record data
The baby boomers are currently employed full-time, often as a manager or a
professional. They are married and their children are still at home. If they are like8 Live Long and Prosper? Projecting the Likely Superannuation of the Baby Boomers in 2020
the birth cohort ahead of them, by the time they are 64 most will have no children at
home and they will leave the labour force soon after they turn 55.
2.3 Income comparison with younger and older cohorts
In Table 3 the incomes of various age groups of the population are compared by
source and level. Using the same data source as the previous section, the figures
relate to 1998-99 when the baby boomers were aged from 35 to 54 years. People aged
15 to 34 have again been labelled Gen X and Y and those aged 65+ have been labelled
as Retired.
Table 3 Average total personal income by source, 1998-1999
Earnings Government Superannuation Investment Other Total
benefits Income Income Income Income
$ $ $ $ $ $
Gen X and Y 18,246 1,893 1 125 286 20,551
Baby Boomers 26,163 1,873 132 703 286 29,157
Aged 55-64 12,182 3,237 1,406 1,370 177 18,373
Retired 957 6,638 1,834 2,436 73 11,937
Overall 17,951 2,737 479 821 242 22,230
Source: ABS 1998-99 Household Expenditure Survey, unit record data
The baby boomers were both the highest earners and had the highest total income.
Their total income of $29,157 was more than 40 per cent higher than the next highest
group – Gen X and Y – at $20,551. The baby boomers total income was almost 60 per
cent higher than those aged 55-64 and almost two and a half times higher than the
Retired group. The higher participation rate of the baby boomers, as presented in
Table 3, was a significant factor in producing their higher total incomes. If the
comparison is limited to those employed full-time (see Table A1 in the Appendix)
then baby boomers still on average earned slightly more at $44,600 than those aged
55-64 ($40,500), but nowhere near the more than double that the average earnings
would suggest. A similar result is found if the comparison is restricted to only those
employed part-time. For those in employment the differences are not great, but the
lower participation rate of the 55-64 year old group greatly drags down their overall
earnings average and their total average income.
The Gen X and Y earnings are lower for two reasons. Higher proportions of this
younger age group are not in the labour force, are students working part-time or
unemployed. This brings their average earnings down. Secondly, the younger
generation have less experience than the baby boomers and earn less on average.
Again restricting the comparison to those in full-time employment, the average baby
boomer is earning $10,000 more than his younger compatriot. Even in part-time
employment the baby boomer is $6,500 better off.Live Long and Prosper? Projecting the Likely Superannuation of the Baby Boomers in 2020 9 Another interesting feature of the table of income sources is the large amount of government benefits being received by those aged 55-64. For Gen X and Y and baby boomers the value of government benefits was just under $1,900 per annum. It might be expected that the benefits received by those aged 55-64 would be similar or even less as family related payments would be reduced. This is not the case with government benefits for those aged 55-64 averaging more than $3,200. A re- examination of Table A1 shows that the higher average government benefit of the 55- 64 group can be attributed to the large proportion that has already left the labour force. Those aged 55-64 who are not in the labour force receive around $5,400 in government benefits, compared with the $109 received by those of the same age in full-time employment. While these figures are similar for baby boomers, the larger proportion who are out of the labour force increases the average government benefit significantly. A further surprising finding is the similarity of the average income being received by those aged 55 and above from superannuation and annuities. In most cases, to be able to gain access to superannuation funds, a person must be at least 55 years of age and not in the labour force. The income received from superannuation by those aged 55-64 year olds averages $1,836 per annum, while those in the Retired group in the same circumstances average almost the same at $1,793. 2.4 Baby boomers’ current superannuation situation In 1982 superannuation was generally restricted to high paid individuals in white collar industries. Only 45 per cent of all employed persons who worked more than 20 hours per week were covered by superannuation. At lower incomes the situation was worse, with coverage often being less than 10 per cent. Superannuation was almost non-existent for those working less than 20 hours per week. By 1991 superannuation coverage had risen to 78 per cent of employees (ABS, 1992). In 1992 the government introduced the Superannuation Guarantee (SG) that obligated employers to contribute to superannuation for all their employees earning more than $450 per month. Baby boomers entered the work force from around 1966 to 1984 and, from the above, it can be assumed that probably less than half were covered by superannuation until the early 1990s. From the early 1990s onwards almost all baby boomers would have been covered by superannuation due to the SG. The high labour force participation rate of baby boomers means that almost all baby boomers will have accumulated some superannuation during their working life. However, for half of them it will be only be from the early 1990s onwards.
10 Live Long and Prosper? Projecting the Likely Superannuation of the Baby Boomers in 2020
NATSEM has developed a model which enables us to analyse the distribution and
levels of superannuation from 1993 out to 2050. The full description of the NATSEM
model, DYNAMOD, is found in King et al. (1999) and the details of the
superannuation modelling and its assumptions are found in Kelly et al. (2002). In
this paper the model has been used to provide estimates of superannuation from
1999 to 2020. 1999 was selected as the start year as it allows comparison with the
income and circumstance information presented above. A summary by age and
gender is shown in Table 4. It is important to note that the superannuation balances
shown include both compulsory contributions and voluntary contributions. The
voluntary contributions have been estimated and simulated based on historical
behaviour (again this is described in detail in the Kelly et al. 2002). People who have
already retired have been removed from the estimates.
Table 4 Estimated average superannuation balance of those not retired, 1999
Age Males Females Persons
$ $ $
15-19 235 120 180
20-24 3,618 2,510 3,068
25-29 11,509 8,158 9,834
30-34 21,069 10,741 15,880
35-39 33,357 13,713 23,626
40-44 49,404 19,280 34,372
45-49 67,076 24,012 43,779
50-54 83,888 31,068 53,822
55-59 98,734 37,537 60,471
60-64 109,001 38,366 56,031
Overall 33,741 15,647 24,344
Note: The shaded area covers the Baby Boomers, i.e. those aged 35-54 in 1999.
Source: NATSEM simulation
The table shows that baby boomers had around $39,000 on average in accumulated
superannuation in 1999. Male baby boomers, with an average $58,000 in
superannuation, had more than two and a half times the average of female baby
boomers ($22,000). This reflects the lower earnings, the higher proportion in part-
time employment (and thus later access to superannuation), the disrupted work
patterns and the higher incidence of non-participation in the labour force of females.
Examination of the superannuation balances of those approaching age 65 (the
traditional retirement age), and those at the minimum age at which access can be
gained to superannuation, shows that males and females can expect to see an almost
doubling of these balances if they continue to participate and contribute toLive Long and Prosper? Projecting the Likely Superannuation of the Baby Boomers in 2020 11 superannuation until age 65. For males aged 60-64 the average balance is $109,000 (up 87 per cent) and for females the average balance is $38,400 (up 74 per cent).2 2.5 Current Adequacy People have a number of choices with superannuation. The first option is to spend their total superannuation payout and then survive on the Age Pension for their remaining years. As the Age Pension is set at only 25 per cent of average earnings, this is unlikely to meet the lifestyle expectations of most people — and particularly not the baby boomers! This option is also not available to those who retire before eligibility to the Age Pension (until they reach age pension age). The second option is to invest their superannuation payout and then live off the interest. This option, possibly in combination with a part-pension, provides a retirement income higher than the Age Pension and continues until the death of the person. The lifestyle that this option allows depends on the amount invested. Clearly, a larger superannuation payout will provide a higher ongoing retirement income. Other possible options lie somewhere between the “spend it all” and the “don’t spend any” options. They include two popular options of (a) spending some of the payout within the first few months of retirement and then investing the remainder; and (b) investing the payout but then gradually drawing it down over time. The spend some immediately option requires that the superannuation payout is significantly large, otherwise the remaining investment income will not raise retirement income much above that provided by just the pension. An outcome of the drawdown option is that eventually the invested balance will reach zero. In theory this is at the time of death, but there is a longevity risk that you may live too long and then you are back to living on the pension only. At the current time, the oldest baby boomers are still too young to be eligible for the age pension and options that involve living off the pension seem off-limits. However, as noted above, significant numbers of people aged 55-64 are gaining access to other government benefits before retiring age (such as unemployment or disability allowances). Putting this aside and assuming that current baby boomers do not have access to government benefits until age 65, their only option is to live off a combination of interest from superannuation and drawing down of superannuation. 2 In this paper the superannuation balances of various groups are presented as averages for ages at various points in time. The microsimulation undertaken for this paper also provides distributional information that provides significant detail on who has superannuation and the balance at that time. A study of the variability of circumstances and its impact on superannuation is an area for future refinement of these results.
12 Live Long and Prosper? Projecting the Likely Superannuation of the Baby Boomers in 2020
From Table 4, the average payout for men aged 55-59 would be $99,000 and for
women it would be $38,000. These sums invested would produce annual returns of
around $6,000 for men and $2,300 for women. Clearly, living off the interest alone is
not viable. If we assume that baby boomers need $20,000 per annum and drawdown
their superannuation, then men would survive just over five years and women just
two years before the payout is extinguished.
Clearly, early retirement and living off their superannuation payout is not a financial
option for the average baby boomer at present.
3 Baby boomers in 2020
Having considered the current situation of the baby boomer cohort, let’s have a look
at their situation in 2020.
Table 5 Estimated characteristics of the baby boomers in 1999 and 2020
1999 2020
% %
Employment Status
Employee - full time 47.3 12.8
Employee - part time 16.5 7.4
Self employed 11.6 8.2
Unemployed 4.7 1.3
Not in the labour force 19.8 70.4
Marital status
Never married 8.8 3.9
Widowed 1.0 13.0
Divorced 7.0 7.0
Separated 4.1 2.9
Married 73.7 71.8
De facto 5.4 1.5
Family Type
Couple with dependants 51.4 5.0
Couple only 27.0 67.6
One parent with dependants 4.9 0.5
Lone person 16.6 26.9
Note: Baby Boomers refers to those aged 35-54 in 1999. The table assumes that the characteristics of those
aged 55-74 in 1999 are an appropriate estimate of the baby boomers circumstances 21 years later.
Source: ABS 1998-99 Household Expenditure Survey, unit record data
In 2020, there will be 5.0 million baby boomers aged from 56 to 74 years. They will
represent 22 per cent of the population (27 per cent of voters). Assuming they
follow the behaviour patterns of older birth cohorts, the profile of the baby boomers
will have changed considerably. As shown in Table 5, seven in ten will no longer beLive Long and Prosper? Projecting the Likely Superannuation of the Baby Boomers in 2020 13
in the workforce whereas only two in ten were out of the labour force in 1999. The
number of widows will have increased from one per cent to 13 per cent and this will
result in more than a quarter living alone in 2020. For those still married, the family
structure will have changed, with most having no children around the house.
3.1 Baby boomers’ financial situation in 2020
From a financial perspective those baby boomers that are still working will probably
not be earning a lot more than they were in 1999 after adjustment for inflation. We
saw earlier that earnings for the baby boomers would peak in 1999. A benefit for
those that choose to remain in the labour force is that their superannuation will have
grown considerably from the extra years of superannuation contributions.
Table 6 Estimated average superannuation balance for those not retired, 2020
(1999 dollars)
Age Males Females Persons
$ $ $
15-19 330 198 267
20-24 5,062 3,291 4,187
25-29 16,829 10,671 13,762
30-34 34,201 20,240 27,170
35-39 57,968 32,115 45,274
40-44 84,861 47,067 65,853
45-49 116,097 66,600 89,085
50-54 144,845 77,155 105,674
55-59 172,049 87,841 117,651
60-64 205,332 99,204 119,709
Overall 63,264 42,747 52,286
Note: The shaded area covers the Baby Boomers, i.e. those aged 56-74 in 2020.
Source: NATSEM simulation
By comparing Table 4 with Table 6 above, it can be seen that the average
superannuation balance for the youngest male baby boomers has increased from
$33,000 when they were aged 35-39 to $172,000 in 2020 when they will be aged 55-59
— a five fold increase. For women of the same age, the increase is six and a half
times, from less than $14,000 to almost $88,000. Clearly superannuation does grow if
a person remains in the workforce and does not withdraw their superannuation
early. An idea of the rate of this growth can be seen in Figure 4. The figure shows
the simulated average superannuation balance for baby boomers that have not
retired over the period 2000-2020. A breakdown by gender is provided in the
Appendix (Table A2).
The graph does reflect the ageing of the baby boomers but it also reflects the impact
of the SG. As each year passes, the baby boomers get older and the average years of
employment grows. Thanks to the compulsory nature of the SG, the extra years of14 Live Long and Prosper? Projecting the Likely Superannuation of the Baby Boomers in 2020
employment result in further contributions to superannuation and also provide
longer time for the accumulated funds to compound. The result is that the
superannuation of baby boomers grows five or six fold.
Figure 4 Average estimated superannuation balance of non-retired baby
boomers, 2000-2020 (1999 dollars)
150
Superannuation Balance (000's)
9% max SG
15% max SG
100
50
0
2000 2005 2010 2015 2020
Data source: NATSEM simulation
Despite the large increase in superannuation balances, the payouts are still too small
to consider early retirement. If the youngest of the male baby boomers (aged 56 in
2020) decided to retire early and live off their superannuation payout, they would be
living off an income of just over $10,000 per year. A woman of the same age would
receive only $5,300 in income. No matter what the gender, the superannuation
payout will not be sufficient to support the person until they become eligible for the
Age Pension. Putting it another way, superannuation alone will not support early
retirement even in 2020.
Figure 4 also shows the impact of increasing the compulsory employer contribution
to superannuation from 9 per cent to 15 per cent from July 2003. For the baby
boomers the benefits are significant, but still do not open the door to early
retirement. An increase to 15 per cent in the SG would see a 3 per cent increase in
the estimated baby boomer superannuation balance at the end of the first year, 15 per
cent by 2010 and a 23 per cent increase by 2020. The average 56-year-old male baby
boomer is now living off $12,500 and the female is living off $6,500 if they choose to
retire. Again early retirement is not an option without a top-up from other income
sources, even with 15 per cent compulsory contributions to superannuation.
What of the baby boomers who do work up until they are eligible for the Age
Pension? The first of the baby boomers to become eligible for this pension will be
women, as the minimum age is 64 for women born between 1 January 1946 and 30Live Long and Prosper? Projecting the Likely Superannuation of the Baby Boomers in 2020 15
June 1947 while the first men will not qualify until the next year as their minimum
age is 65 years. Figure 5 shows the estimated average superannuation balance of
baby boomers as they arrive at age pension eligibility age. For simplicity both male
and female balances are shown at age 64. The balances include both compulsory SG
contributions and voluntary contributions. Two SG scenarios are shown. In the first
scenario the SG remains at its current legislated maximum rate of 9 per cent. In the
second scenario, the SG rate is increased to 15 per cent from July 2003.
Figure 5 Estimated superannuation balance of non-retired 64-year-old baby
boomers with the Superannuation Guarantee set at 9% and 15% from
2003
Males Females
300 300
superannuation ($000s)
superannuation ($000s)
200 200
100 100
9% max SG 15% max SG 9% max SG 15% max SG
0 0
2010 2015 2020 2010 2015 2020
Data source: NATSEM simulation
A number of very interesting features are visible in the graphs. As noted earlier, the
projected estimates are based on a dynamic microsimulation model. This model
allows individuals to behave differently in different circumstances and a number of
behavioural changes are built into the model. For example, the model replicates the
observed trend of an increasing proportion of males retiring early (voluntarily or
because of retrenchment and then being unable to find other employment). The
decision to leave the workforce early - or to move from full-time to part-time
employment - will impact on earnings, which in turn impacts on both voluntary and
compulsory superannuation contributions. The ability of the simulation to capture
this type of actual behaviour provides extra realism to the modelling but can also
result in graphs taking unexpected courses like those for males in Figure 5. The
graph shows the balance grows but in a very non-linear way. The non-linearity is a
reflection of the large numbers of transitions between full-time and part-time
employment causing the overall average to jump around.
The clear difference between the male and female superannuation balances,
discussed earlier, is another very evident feature of Figure 5. The male16 Live Long and Prosper? Projecting the Likely Superannuation of the Baby Boomers in 2020 superannuation under either scenario is more than double that of females. On average, a 64-year-old male baby boomer retiring 2020 will have around $200,000 ($250,000 under the 15% SG) while a female baby boomer of the same age and retiring in the same year is estimated to have accumulated around $100,000 ($120,000 with 15% SG). Women retiring in 2020 will effectively have the same amount accumulated as men did 20 years earlier. 3.2 Adequacy in 2020 Most retirement advisors and financial planners estimate that a person will need a retirement income equivalent to around 60-70 per cent of their annual pre-retirement income to be financially comfortable (see for example ASFA, 2000).3 At the same time, government support in retirement is through the Age Pension, that provides a maximum income of 25 percent of the average total male earnings. If we make the not unreasonable assumption that the average total male earnings is the average pre- retirement income, those with only the age pension will have an income of 25 percent when they would like 60-70 per cent to be comfortable. (For women, of course, the percentage will be a little higher, as they currently earn less than males on average.) In current dollars terms we are saying the average income is $42,000 and most people will need a retirement income of $25-30,000 per annum to be comfortable. The pension will provide $11,000 (single rate) of this income. Compulsory and voluntary private savings are supposed to make up the $14-19,000 shortfall. In fact, the government is hoping that its three pillars approach would allow a retiree to contribute more than this amount and the government could then reduce its public pension contribution. In the previous section we saw that the average 64-year-old male in 2020 would collect $200,000 in superannuation under the current SG maximum. If this amount was invested and the man used the interest to supplement his pension, the result would be income of $12,000 from investments and a reduced pension of $6,500.4 The average man working to age 65 almost achieves a comfortable income in 2020. If he chose to slightly drawdown his superannuation investment, or the superannuation guarantee was increased to 15 per cent, he would be financially comfortable. 3 As large numbers of people wind back their hours of employment in their late 50s while others choose to take lower paying less stressful positions, maybe financial planners should be saying 60-70 per cent of their maximum annual income. 4 This reduced pension assumes all of the superannuation is assessable under the pension means-test. Investment of the superannuation funds in a variety of ways could reduce or exempt the assessable amount and increase the pension payable.
Live Long and Prosper? Projecting the Likely Superannuation of the Baby Boomers in 2020 17 For women in 2020 the picture is still not that good. The $100,000 the average 64-year-old woman would collect will add only $6,000 to her pension of $11,000, leaving her well short of the $25-30,000 needed to be comfortable. An increase to a maximum 15 per cent SG will make little difference to the retirement income of this woman. Even from these initial estimates it is clear that if a comfortable retirement income is desired, the option of early retirement must be dropped. Even with men and women working to age 64/65, the average person will not have access to a retirement income that allows them to prosper. Under the current maximum SG, men can expect that they will have about half the income they are used to, while women will be surviving on three-tenths. By 2020 superannuation will be providing a supplement to the Age Pension for these women but, even with income from superannuation, they will be well short of reaching the accepted income level for a comfortable retirement. It thus seems likely that in 2020 the average baby boomer woman will be a lot closer to poverty than prosperity. 4 2020 outcomes In the early 1990s the government recognised that a combination of public and private funding of retirement was required to achieve its goal of delivering fair and adequate retirement incomes. The looming ageing population meant that a system based almost solely on government support would not be sustainable. The three pillars (a public pension system, compulsory private savings and voluntary private savings) were born. The second pillar (compulsory private savings) was firmly put in place in 1992 with the introduction of the SG. In theory, it would produce a win-win situation. The retiree would have a greater retirement income, an income that was better able to meet their lifestyle expectations. For the government it was also a win as the strain on the public purse would be reduced. 4.1 SG not effective for baby boomers The calculations in the previous sections have shown that the SG has increased superannuation balances. In the long term the compulsory nature of the SG will have a significant impact on the retirement incomes of the aged. However, its impact is not significant on the baby boomers, a large cohort currently starting to enter retirement. A plethora of circumstances have combined to negate the impact of the compulsory private savings pillar on this generation. The introduction of SG in 1992 meets that most baby boomers will have contributed for around 20 years by the time
18 Live Long and Prosper? Projecting the Likely Superannuation of the Baby Boomers in 2020 that they retire and this is not long enough to accumulate funds that will provide significant long term retirement income. The trend to early retirement, especially for men, is further reducing the accumulation phase and the impact superannuation can have on their retirement incomes. In some cases the decision to retire early is involuntary but, in other cases, people are taking early retirement because they have access to their superannuation funds (i.e. the money is burning a hole in their pocket). The earlier calculations have shown that, on average, the decision to take the money early is short-sighted. The decision to retire early will generally result in a life in retirement that is well short of being financially comfortable. 4.2 Increasing the SG contribution rate to 15 per cent The most commonly suggested solution to close the gap between the retirement lifestyle expectations of the baby boomers and their projected retirement incomes is to increase the superannuation guarantee maximum to 15 per cent from the current 9 per cent. The calculations in this paper do not suggest that this will solve the problem unless the baby boomers remain in the workforce for longer than many currently expect. Most observers have based their projections on continuing full- time employment until age 65 and, under this assumption, the increase in the contribution rate does provide significantly increased retirement income. However, this paper has modelled the likely future behaviour of the baby boomers based on recent labour force participation trends and found that increasing the SG would only provide a small increase in the superannuation balances of baby boomers (from one per cent higher in 2004 to 23 per cent in 2020). These balances are still too low and the consequent retirement incomes will not sustain a comfortable standard of living. The increase in the SG is only effective in reducing the expectations-income gap if the person remains in employment and on a reasonable salary. If current trends to take early retirement or shift to part-time employment continue, they will reduce the amount being contributed to superannuation and partially negate the impact of the SG increase. In the past year, the long-term decline in the labour force participation rate of males aged 55 to 59 appears to have stabilised, and even to have increased marginally. This may reflect the emergence of a new trend towards later retirement, which the above figures suggest will be required if the baby boomers are to enjoy a financially comfortable retirement. Rather than considering increasing the maximum SG in isolation, other measures need to also be considered to encourage people to remain in full-time employment up to age 65. Once this has been achieved, an increase in the SG would be an effective way to increase private retirement savings. For many baby boomer women, however, even an increase in the SG to 15 per cent and working until age 65 is not likely to provide a financially comfortable retirement.
Live Long and Prosper? Projecting the Likely Superannuation of the Baby Boomers in 2020 19
4.3 Age Pension outlays
As noted in the previous section, an increase in the maximum rate would provide
some improvement in the financial situation of baby boomers. For females about to
retire in 2020, the result is around $20,000 more in superannuation assets. That is,
with a SG set at 9 per cent the average superannuation balance of a non-retired 64
year old female is estimated to be $100,000, rising to $120,000 with the SG set at 15
per cent from 2003. For males of the same age the increase is $50,000, with the
balance rising to $250,000.
Figure 6 Estimated aggregate Age Pension payments with SG of 9% and 15%,
1990-2030
25
Age Pension Outlays ($billions)
20
15
10
Actual (DSS/FaCS) Simulated (SG max 9%) Simulated (SG max 15%)
5
1990 2000 2010 2020 2030
Data source: NATSEM projections
In Figure 6 simulated aggregate Age Pension outlays are plotted under the
assumption that the superannuation guarantee stays at 9 per cent and under the
assumption that it increases to 15 per cent in 2003. Actual Department of Social
Security and Department of Family and Community Services expenditures for
1990-1999 on the pension are also plotted. A comparison of the actual and simulated
figures shows that our simulated expenditure is around 20 per cent higher than the
actual values. However, the gradients of the lines are similar and the over-
estimation remains reasonably constant. While the model is slightly over-estimating
the amount paid out under the Age Pension, it is correctly tracking the trend.
Under the very significant assumptions that the rates of payment and means-testing
criteria of the Age Pension do not change in real terms, it appears that increasing the
SG to 15 per cent would not have an impact on age pension outlays until around
2020. From this date onwards, Age Pension outlays under the 15 per cent SG would
be lower than under the current 9 per cent SG. The reason for the delayed impact is
the application of the Age Pension means-test income and asset thresholds. Both of20 Live Long and Prosper? Projecting the Likely Superannuation of the Baby Boomers in 2020 the tests allow an individual or family to have a certain level of income and assets and still receive the full pension. Above these thresholds the pension decreases at a rate proportional to the level of assets or income. It is only from 2020 that the average person’s superannuation balance will be sufficiently lifted above the threshold - and different from that of the same retiree under the current SG rate - that an observable saving in outlays will be made. There are quite different outcomes in the change to the SG when viewed from the government’s perspective and from the superannuation industry’s perspective. The superannuation industry would see increases in the amount contributed to their funds almost immediately from an increase in the SG, while the government would not see any real reduction in its pension outlays for some 20 years. These differing perspectives probably explain the different positions taken on the issue. 5 Conclusion The baby boomers are entering a period of transition. Most are currently working and have children at home. In the next 20 years most will quit work, some will be widowed and their children will leave home. Increased life expectancy means they will live considerably longer than their parents and they have plenty of ideas about what they will do with the time. But will they have the retirement income to support this expected lifestyle? This paper suggests that for the average baby boomer it is most unlikely they will have enough. Financial Planners suggest a person needs around 60-70 per cent of their annual pre-retirement income to be financially comfortable – about $25-30,000 per year in retirement for a male on average earnings. The age pension provides $11,000 to a single person. If a baby boomer in 2020 has taken early retirement, then they will probably be living on just the Age Pension, as they are likely to have spent all or much of their superannuation during the years before they reached 65 and qualified for age pension. If the baby boomer is a male who contributed to their superannuation until age 65 then they should have a lump sum that, when combined with the pension, will provide an ‘almost comfortable’ retirement income. For the average 65-year-old woman in 2020 the picture is not as good. Her lower earnings, smaller number of years of full-time employment and the years of not contributing to superannuation while she was at home caring for the children mean that her payout will only provide a small supplement to the pension. Increasing the compulsory superannuation contribution rate to 15 per cent will only improve the picture significantly for the baby boomers if they do not take early retirement. Otherwise, the trends towards early retirement and reduced hours prior
Live Long and Prosper? Projecting the Likely Superannuation of the Baby Boomers in 2020 21 to retirement will effectively negate the increased contribution rate. These trends need to be addressed before the benefits of a higher SG will be realised. From the government viewpoint, we estimate that increasing the SG to 15 per cent in 2003 would not impact on Age Pension outlays until 2020. The results found using this dynamic microsimulation model are preliminary and have a number of significant underlying assumptions. The dynamic nature of the model means that significant resources need to be put into validating every part of the model before the outcomes are truly reliable. While this validation is well underway, the process is not complete. However, the results to date are very interesting and the level of detail unparalleled.
22 Live Long and Prosper? Projecting the Likely Superannuation of the Baby Boomers in 2020
A Additional statistical tables
Table A1 Average current personal income by employment status, 1998-99
Number Earned Government Superannuation Investment Other Total
(weighted) Income Benefits Income Income Income Income
Persons $ $ $ $ $ $
Employee - full time
Gen X and Y 2,366,816 34,792 136 1 114 70 35,113
Baby Boomer 2,567,150 44,649 202 63 610 158 45,682
55-64 365,118 40,544 109 330 1,057 162 42,202
Retired 21,611 28,513 1,106 1,528 2,561 0 33,708
Employee - part time
Gen X and Y 1,038,944 11,527 1,674 0 48 285 13,534
Baby Boomer 895,270 18,071 1,861 91 869 322 21,214
55-64 175,150 15,280 1,522 1,285 2,256 298 20,642
Retired 51,515 9,619 3,478 4,124 2,878 345 20,444
Self employed
Gen X and Y 282,156 12,661 1,234 0 204 441 14,540
Baby Boomer 631,036 16,858 794 48 777 186 18,663
55-64 197,046 13,225 477 1,722 1,841 96 17,360
Retired 61,001 12,534 2,575 1,351 4,042 0 20,502
Unemployed
Gen X and Y 431,183 119 5,128 0 61 304 5,612
Baby Boomer 256,085 134 6,808 183 451 285 7,861
55-64 38,787 1,909 4,975 683 639 179 8,385
Retired 0 - - - - - -
Not in the labour force
Gen X and Y 1,255,371 93 4,424 0 212 655 5,385
Baby Boomer 1,073,300 378 5,338 370 805 619 7,510
55-64 885,212 89 5,404 1,836 1,251 178 8,758
Retired 2,015,616 90 6,901 1,793 2,374 69 11,227
Source: ABS 1998-99 Household Expenditure Survey, unit record dataLive Long and Prosper? Projecting the Likely Superannuation of the Baby Boomers in 2020 23
Table A2 Estimated average superannuation balance of non-retired 64-year-old baby
boomers with the Superannuation Guarantee set at 9% and 15% from
2003, 2011-2020
Year 9% max SG 15% max SG
Males Females Persons Males Females Persons
$ $ $ $ $ $
2011 163,357 70,076 87,109 191,645 75,702 95,465
2012 192,950 70,699 89,128 190,032 80,103 97,113
2013 165,640 69,666 83,224 191,987 78,118 92,773
2014 171,929 73,945 87,802 210,387 81,858 98,519
2015 174,169 76,808 89,611 222,050 87,114 106,273
2016 186,282 85,422 98,481 222,234 96,798 116,135
2017 193,408 89,065 103,184 246,544 99,415 117,379
2018 197,700 88,860 102,844 217,725 103,824 118,117
2019 212,684 91,909 107,647 218,256 108,689 122,212
2020 198,483 96,853 110,297 249,865 119,493 137,594
Source: NATSEM simulation24 Live Long and Prosper? Projecting the Likely Superannuation of the Baby Boomers in 2020
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