Retirement income in Australia: An overview

Generally speaking, incomes and the standard of living have risen over the past decade. This coupled with the superannuation system and Aged Pension means that more than 60% of older Australians are set to enjoy above a “modest” level of retirement.

The CEPAR research also found the owning your own home mortgage-free, instead of renting, and being in a couple will also help significantly to provide a modest level, or better, in retirement.

How Australia compares internationally

In terms of outcomes in retirement, the OECD calculates that an Australian worker on average Australian earnings, contributing at the mandated rate over a full career, can expect to have almost 60% of their working-age income in retirement.

This actually places Australia below the OECD average and highlights the importance of the Age Pension as part of the retirement system.

Someone on half of average earnings can expect around 90% of their working-life income in retirement, an outcome that places Australia in the top third of the OECD.

The CEPAR study found that not only does Australia’s retirement income system deliver a good outcome for most people, it is also relatively sustainable with public spending on pensions remaining below 3% of GDP from 2010 to 2015.

This was the third lowest among developed countries and much lower than in EU countries like Spain, France, Italy and Greece. Australia’s spending rate on pensions is also expected to stay relatively flat between now and 2050, unlike other nations which are expected to need spending increases to fund an ageing population.

Are current incomes adequate for retirement?

Incomes are improving and older Australians have higher incomes than in the past.

The mean and median household disposable income of Australians aged 65 and over was $44,000 and $34,000 respectively, which equates to 68% and 60% of the incomes earned by people aged 15-64, according to the Australian Bureau of Statistics (ABS).

The Association of Superannuation Funds of Australia (ASFA) says a “modest” retirement lifestyle can be financed by the Age Pension and a moderate top-up of $70,000 in super savings.

A single person on $27,595 a year can enjoy a modest lifestyle, compared to the basic Age Pension of $23,824, which is considered “below modest”. For couples, $39,666 a year will provide a modest lifestyle, while the Age Pension is $35,916.

A “comfortable” retirement lifestyle can be achieved on $43,200 a year for a single person and $60,843 as a couple. This enables a broad range of leisure and recreational activities and the purchase of private health insurance, a reasonable car, good clothes, a range of electronic equipment, and travel. (Some have argued that this level is set artificially high to serve the superannuation industry, notably Grattan Institute chief executive John Daley.)

Using ASFA’s “retirement standard” as a guide, it means that 21% of older Australians can afford a comfortable standard of living, 41% of older Australians in 2016 will enjoy a modest standard of living and 37% had income that equated to a “below-modest” lifestyle.

Income for Australians usually peaks around the age of 50 and declines thereafter. Not surprisingly the biggest declines in income occurs when the household head ends the decade in their late 60’s, driven by lower income offset by super and Age Pension with an 18% drop in adjusted median income.

Despite these declines, older people today have much higher real incomes (about 45%) than those of similar age 10 years ago.

Over the past decade, incomes have increased in real terms for all age groups and the greatest gains were at older ages. A household headed by a 70-year-old today is much better off than one headed by a 70-year-old 10 years ago, by around 45% for the median household and 55% for the average household of that age.

Super Guarantee boosts private retirement income

Older Australians are increasingly relying on private retirement income. In 2016, about 65% of total gross income of those aged 65 and over came from private sources, while 43% of this age group relied on non-public-pension income as the main income source and 28% received no pension at all.

All these numbers are up from a decade ago (from 59%, 35%, 20%, respectively, according to the ABS). Much of this extra retirement income has come from the second pillar of the retirement income system, the Superannuation Guarantee.

As for the ongoing debate over whether the Super Guarantee rate should be raised from 9.5% to 12%, CEPAR says the vast majority of workers would receive higher retirement incomes, enjoy a diversification of assets away from housing, and greater liquidity in retirement. But younger, low-earning renters are likely to experience greater financial stress as a result.

Singles versus Couples

The CEPAR report also highlighted the fact that changes in marriage and cohabitation can affect retirement incomes because couples can pool resources and share expenses.

According to the ABS, 14% of Australians entered their 60s living alone in 1986, and by 2016, the figure was 17%.

Those entering retirement without a partner are much more likely to rely on the public pension. Around 82% of pensioners who live on their own receive more than half of their income through the Age Pension, compared to 65% of pensioner couples.

Women who own their homes have a similar risk of having income below the modest threshold as men who own at 41%, but women who rent have a higher risk (87%) of having income below the modest level than men who rent (81%).

Standards of living in retirement

Source: CEPAR

Owning versus renting

One of the key take-outs from the CEPAR report is that renters will generally be considerably worse off financially than home owners in retirement.

CEPAR senior research fellow Rafal Chomik says while most Australians will enjoy their “modest” retirement lifestyle, the living standards of those who rent in retirement are very different as only around 15% of older renters can afford a lifestyle better than modest.

Around 80% of retirees own their own home, and for the remaining 20% the outlook is not so great. Single renters are particularly at risk of living below a modest retirement.

Among all older people only about 10% fall below the poverty line set at half the median income. Among older Australians who rent, 40% fall below.

Among older Australians who rent alone, it’s more than 60%.

“The pension has always favoured home owners,” Chomik wrote in November.

“On the one hand it is insufficient for renters and on the other it doesn’t cut pension payments to the owners of very valuable homes, because the value of any home – no matter how big – is excluded from the pension means test,” Chomik says.

Asset rich, income poor

The majority of Australians over 65 are asset rich and income poor when the family home is included, however they are regarded as ‘poor’ on both counts when home ownership is excluded.

In 2016, 54% of those aged 65 and over were in the bottom half of the income distribution and top half of the wealth distribution, also known as the ‘income-poor-asset-rich’ quadrant.

Older Australians: Income poor and asset rich

Source: CEPAR

Around 20% were in the ‘income-poor-asset-poor’ quadrant. If home equity (net of mortgage debt) is excluded, only 37% end up in the ‘income-poor-asset-rich’ quadrant, while 40% appear as ‘income-poor-asset-poor’. CEPAR says this illustrates that housing plays a large role in Australia’s retirement income system and social policy.

However, in the decade to 2016, the proportion of ‘income-rich-asset-rich’ older people increased by between 5% and 6% (depending on whether housing is included) and the proportion of ‘income-poor-asset-poor’ individuals decreased by 6% when housing is excluded.

A decreased focus on housing due to unaffordability, along with increases in Age Pension rates and growing superannuation balances, led to the spreading out of individuals over the income and wealth deciles over the last decade.

Tapping into equity with reverse mortgages

For asset-rich-income-poor retirees, a reverse mortgage is regarded as a viable strategy and allows you to borrow money against the equity that has been built up in the home. It works a little like a home loan in reverse. These loan products can provide either a lump sum or an income stream to top up your regular income.

CEPAR’s research found that lump-sum reverse mortgages are more profitable and less risky to providers than income stream products, explaining why the former dominates most markets. It found reverse mortgage products to generally be poorly priced in Australia, in favour of providers rather than consumers, and recommend regulation and education to ensure better risk sharing.

CEPAR suggests the highest welfare benefits in retirement come from combining a reverse mortgage with long term care insurance because of strong complementary effects between them.

The relative safety of annuities

An annuity provides a guaranteed pay cheque in retirement in return for investing a lump sum for the rest of your life, or for a specified period. It is regarded as a secure and simple financial product.

Unlike account-based pensions, the returns from annuities are not reliant on movements in investment markets. They’re locked in from the outset and are regarded as one of the more stable investments for retirees which can be used in conjunction with other strategies.

According to CEPAR, annuities account for just 7% of total pension member accounts and only 4% of total pension members’ benefits. The average annuity is also small at about $17,000.

What to do with a lump sum

In recent years, more retirees have been using their super to generate an income stream through account based pensions rather than take a lump sum payment.

The most common purpose of using a lump sum was to clear debt but the highest spending was on the home.

Average amount of lump sum ($) by main use of lump sum (% of persons), 2015-16

Source: CEPAR

The second most common purpose was to invest the money elsewhere while a small percentage of people invested their lump sum back into super, although the amounts were relatively high. Lump sums were also used to buy or pay off motor vehicles, pay for living and medical expenses and going on holiday.

The most common lump sum was between $10,000 and $25,000

Persons who received lump sum in last 2 years by lump sum value and year (%)

Source: CEPAR

Paying off the mortgage at retirement

While it is correctly assumed that the majority of older Australians own their own home, this is not the case for an increasing minority of retirees. Home ownership rates of each successive generation have been declining.

Someone aged between 35 and 44 is now less likely to own a home than a baby boomer at the same age and mortgages are being paid off at later ages than in the past.

In 2016, around 36% of home owning households still had a mortgage at the point of retirement, up from 23% a decade earlier.

Consumption trends

The rates of consumption, or expenditure, is an important consideration when it comes to retirement income.

How much a person spends and consumes is often a better measure of living standards than income or wealth since it captures how all resources over the long term. Trends in consumption expenditure show that it peaks on average around age 50 then declines throughout retirement.

Comparing changes over the decade shows that on average all age groups have seen higher consumption in real terms, though some had small increases when adjusted for household size. Age groups between 55 and 70 saved more (shown as capital spend) than people in those age groups that came before them, while health expenditure increased considerably in the age group 70-74, compared to the previous cohort of that age.

Those with household heads that crossed the age threshold of 65 over that period, saw a real drop in consumption of 13%. Much of that decline was due to lower spending on transport, food, and clothing. Notably, average households during the period have continued to save in old age.

Life expectancies and retirement income

Low income Australians live five to six years less than high income Australians and are often in poorer health. This can be observed by considering the life expectancy in different parts of Australia.

While recent increases in life expectancy have been recorded across rich and poor regions, basic analysis suggests that every extra $1,000 in average wages for a region in 2012 translated to over one month more in average life expectancy in that region.