Friday, 3 November 2006

The Benefits of Compulsory Personal Retirement Accounts

A major concern that has arisen throughout the developed countries in recent years has been in relation to the aging of the population, with the implication that unfunded pension schemes will become unsustainable as the number of tax-payers supporting each pensioner gets less and less. Some countries began to address this issue by the introduction of private pension arrangements many years ago - for example, in Australia, compulsory superannuation savings were introduced in 1992. Prior to this only 58% of full-time workers, and around 20% of part-time workers had a private pension account (1998 figures).

Although compulsory superannuation has now been in place for 14 years, the median superannuation balance of female baby boomers in 2004 was only $8,000 (males $30,700).

The picture would not be so bleak for baby boomers that have been working full-time, especially women. The following table shows the amount that baby boomers working full-time since the SGL was introduced would have contributed into their personal retirement account:

avg female average F/T male average F/T
FY SGL rate wage SGL amount wage SGL amount
92/93 3.75% $27,809.60 $1,042.86 $34,814.00 $1,305.53
93/94 4.00% $28,750.80 $1,150.03 $35,973.60 $1,438.94
94/95 4.50% $29,884.40 $1,344.80 $37,689.60 $1,696.03
95/96 5.50% $31,059.60 $1,708.28 $39,431.60 $2,168.74
96/97 6.00% $32,448.00 $1,946.88 $40,794.00 $2,447.64
97/98 6.00% $33,716.80 $2,023.01 $42,400.80 $2,544.05
98/99 7.00% $35,094.80 $2,456.64 $43,914.00 $3,073.98
99/00 7.00% $36,238.80 $2,536.72 $29,286.40 $2,050.05
00/01 8.00% $38,183.60 $3,054.69 $46,800.00 $3,744.00
01/02 8.00% $40,190.80 $3,215.26 $49,306.40 $3,944.51
02/03 9.00% $42,088.80 $3,787.99 $51,849.20 $4,666.43
03/04 9.00% $44,465.20 $4,001.87 $54,932.80 $4,943.95
04/05 9.00% $46,384.00 $4,174.56 $57,226.00 $5,150.34

If the fund had been conservatively invested (earning, say, 5% pa), then typical current balances for female and male baby boomers who have worked full-time since compulsory Superannuation was introduced would now be around:
Female: $31,628.53
Male: $38,212.73

The actual balance will vary for each person, depending on the fees charged by their superannuaton fund and what investment options they had chosen.

The main problem facing the baby boomers is that a) they didn't start work in 1992 - even the youngest boomers were in their 30's when universal private retirement accounts were introduced, and b) the SGL was phased in, so the first 12 years of compulsory super were only equivalent to 9.5 years at the current rate of 9%. SO the typical boomer who has worked F/T since 1992 only has a super balance equivalent to a 30 year old Gen X/Y/Zer. Some people think that the SGL rate needs to be higher than 9% over a persons working life to accumulate enough to self-fund a comfortable retirement lifestyle (say 12-15%)

Hopefully, the increase in average personal retirement account balances at retirement age over the next 30 years will match the necessary reductions in age pension benefits paid by the government. The fairest method would seem to be to restrict pension entitlements (via assets and income tests) and reduce benefits over time, with the new rules being 'grandfathered' so they phase in with age. This sort of restriction has already been done with the phasing in of raising the "retirement age" from 55 to 60, based on each persons date of birth.

Of course, in countries such as the US and UK where the move to personal retirement accounts has started later, there is going to be a much bigger "gap" to be be funded while state pensions are phased out self-funded retirement accounts start to accumulate meaningful balances.

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