The rise of superannuation

Phil Ruthven identifies which Australians will be able to retire without relying on the age pension, thanks to the ongoing growth of superannuation assets.

Universal superannuation became an embedded component of the wealth accumulation by workers some 21 years ago. So it has a coming-of-age in 2014, so to speak. 

Only retired or non-working households have missed out on compulsory saving as part of employees’ remuneration. Voluntary contributions to super have also risen over the years.

Of course, life offices had been offering retirement benefit packages for a long time prior to the introduction of compulsory super in the form of industrial (weekly payments), ordinary (monthly payments) and superannuation type policies. Only the latter is significant today.

Government employee retirement benefits had also been around for many decades, usually unfunded, with retirement benefits paid out of current government receipts from taxes and government business enterprises surpluses. That unfunded legacy is with us today, but addressed by the Howard/Costello government while it was in office via the Future Fund.

Figure 1 shows the spectacular growth of retirement assets, only temporarily reversing for two years during the onset of the global financial crisis.

Assets will pass $2.3 trillion this year, from less than $100 billion 30 years ago.

They will account for nearly 30 per cent of the total assets of all financial institutions by the end of 2014. Banks had an 80 per cent lion’s share of all assets up to 1940, but this has now been diluted to around 55 per cent. Figure 2 provides perspective in this regard.

At the end of 2013, half the superannuation assets were in local shares (and account for nearly 60 per cent of the $1.6 trillion market), 17 per cent in overseas assets (including shares), 14 per cent in bonds and other securities, 13 per cent in cash and deposits, and the balance in property and other assets.

Clearly, superannuation has become a very important part of household net worth, as Figure 3 shows.

At 27 per cent of average household net worth of $751,000 in mid-2013, super is well ahead of investment property (16 per cent) and is likely to overtake the value of owner-occupied housing (32 per cent) in the not too distant future.

Indeed, financial assets in total – including super, shares and deposits – are poised to overtake all hard assets (property, equipment and durables) within a few years. Some 25 years ago, financial assets represented 35.5 per cent of net worth (11.4 per cent of that being super).

By the end of this year, the ratio will be over 50 per cent, of which 24 per cent will be super.

This is a very positive development, as hard assets can only ever yield a modest rental return plus capital gain, and never match the returns from active assets, notably shares.

So how much super does one need to have to be able to retire with independence (of the pension) and with dignity?

Firstly, twice as much as the average home; meaning that a home should never be regarded as the biggest investment of one’s life, as was the claim for much of the post-World War II years.

Average household income for the 9 million+ households of the nation will be just over $150,000 by the end of 2014.

It is suggested that retiring on –and maintaining – a one-third share of average household income is a desirable goal.

In turn, this would suggest a nest egg of around $830,000, taking out six per cent of it as income each year and leaving enough to grow the capital in line with inflation.

Currently average super sits at around $100,000 per person or $240,000 per household, but this includes young people and households as well as retirees.

A look at the differences across age groups is helpful in seeing how close we are to “dignified retirement” at present. (See Figure 4.)

It suggests that recent retirees (aged 65-74) have a median super of $181,000 per person, or around $360,000 per household, or 40-45 per cent of the “dignified retirement” level. Even older households are generally pensioners, with less than $75,000 per household in super (much of it via life offices).

Being averages, there would be a minority of these age groups that do live very comfortably, but most – perhaps over two-thirds – would be living a more abstemious lifestyle.

The younger baby boomers are the best off in super, with over $400,000 per household and the capacity to improve on that level with a continuing working life for a decade or more.

Their average could edge up towards 55-60 per cent of the desirable level if they work long enough.

Again some retirees in this age bracket will easily reach a comfort zone. But generally only a third or so of baby boomers (49-71 years) will retire with their wished-for comfort and dignity.

It is not all that salubrious, reminding us that we have a long way to go and that it will have taken at least two generations (of an average of 20 years each) from 1993 to achieve this level of comfort for retirees.

So, the Net Generation (12-32 years old) and the youngest of the Gen Xers (33-48 years old) are the first of the retirees likely to be almost universally comfortable – in theory and assuming no interim catastrophes and set-backs.
However we are on the way and leading the world.