In line with the discussion above, the main adequacy concept used is a replacement rate based on post retirement consumption expenditure compared with pre retirement expenditure. This includes income from all investments, all private pension payments (taxed or untaxed) and the age pension, and drawdowns from capital less any taxation payable. Current legislated policy parameters are used including the Better Super Reforms most of which started on 1 July 2007. In this aggregate analysis the comparison drawn is between the expenditure of retirees for the 5 years after pension eligibility age with income for the 5 years before age pension eligibility age. Given the structure of RIMGROUP in which new retirees are pooled with existing retirees, this definition makes it easier to do aggregate analysis, while distinguishing between cohorts which may have retired a decade or more earlier. The distinction is relevant because, in general, retirees do not maintain a living standard in retirement that is fully linked to average wages – while the age pension is linked to total male average wages, the mix of investments of retirees means that their privately sourced income, which often includes a high proportion of interest bearing investments and may have capital drawdowns, will generally not grow in real terms.
What differentiates the aggregate from hypothetical analyses?
Most studies of adequacy use hypothetical analysis (eg Rothman and Bingham, 2004). The primary difference between aggregate and hypothetical analysis is the coverage in the aggregate analysis of the entire Australian population. Aggregate analysis covers the range of labour force experiences including unemployment and other breaks from the labour force, the range of retirement ages, and the varying superannuation coverage across the population including some schemes with better than SG rates of contribution, salary sacrifice arrangements, and member contributions. Additionally RIMGROUP estimates other financial savings at retirement and adds these to the pool of monies to be allocated and invested at retirement. RIMGROUP also allocates retirement investments patterns in a realistic way and allows for dissipation at retirement and drawdowns during retirement. These patterns are a function of gender and decile, although the data base is not definitive in all of these respects.
Also important in the aggregate analysis is the time dimension, whereby the experiences of those retiring now can be compared with those retiring in thirty or forty years - time is an important and automatic dimension of the analysis. Typically hypothetical analysis only looks at those retiring in 30, 35 or 40 years time.
The analysis presented below has the capacity to project changing replacement ratios for over 40 years into the future with realistic superannuation and other savings and assuming high drawdown of assets in retirement. It will be shown that as the SG system matures the projected replacement rates rise sharply.