Mind The Income Gap

Sydney Morning Herald

Wednesday August 27, 2008

Barbara Drury

Many Australians, and women in particular, will not have enough super for a comfortable retirement.

Retirees have been applying the blowtorch to the Rudd Government in an effort to score an increase in the age pension but the superannuation industry warns that much more needs to be done to fill the gap between retirement incomes and the cost of living.

Australia's system of compulsory super has gone a long way towards boosting retirement savings but low- and middle-income earners fall far short of the amount needed to fund a comfortable retirement.

Pauline Vamos, the chief executive of the Association of Superannuation Funds of Australia, is also pushing the Government to fill the gaps.

"For a lot of low-income earners, their ability to salary sacrifice is restricted and the tax benefits [of making voluntary contributions] are not as great as they are for high-income earners," she says.

Fiona Reynolds, the chief executive of the Australian Institute of Superannuation Trustees, agrees.

"I'm very hopeful that when the Henry tax review looks at retirement issues, the Government will finally do something with this problem," she says.

Headed by the Treasury secretary, Ken Henry, the review of Australia's tax system, including the age pension, is due to report late next year.

Reynolds says women are over-represented among low-income earners, earning 84.7c on average for every dollar men earn, because women are more likely to be employed on a casual or part-time basis.

"While super is linked to employment, and while women have kids and take time out of the workforce to care for them, nothing will improve," she says.

According to the latest Westpac ASFA Retirement Standard, a single retiree needs an annual income of $19,141 to provide a modest lifestyle, while a couple needs $26,851. These figures assume that people own their own home, so retirees paying rent need even more income.

The present age pension - $14,216 a year for singles and $23,753 for couples - falls well short of providing a modest lifestyle, especially for the former.

A comfortable lifestyle with a few more luxuries - which the Retirement Standard calculates costs $37,002 for singles and $49,502 for couples - is hopelessly out of reach for pensioners.

Vamos says more needs to be done to make super and the age pension work together and says her group will push hard for a range of measures to be included in Henry's tax review.

For example, she says you would need a lump sum of $250,000 to generate an age pension level of income in retirement. But to have a modest-to-comfortable retirement lifestyle, you need a lump sum closer to $500,000.

"That figure is out of most people's reach but with the age pension you only need to accumulate $200,000-250,000 [in super]," Vamos says.

She says this amount is achievable over the long term with the help of an enhanced Government co-contribution scheme for low-income earners and a range of other incentives.

Reynolds would like to see eligibility for the co-contribution extended to people on incomes up to $70,000 instead of the current cut-off mark of $58,990, as well as automatic Government contributions for low-income earners.

In a similar vein, the super funds' group has been looking overseas at countries offering pension credits, where the government still contributes a nominal amount towards the pension account (or super account in local parlance) of people out of the workforce.

At present employers have only to make super guarantee payments for workers who earn more than $450 a month, so someone could earn just under $450 a month for several part-time jobs but miss out on the guarantee for all of them (see also p4).

Reynolds would like to see the $450 threshold abolished and the 15 per cent contributions tax on super payments scrapped for low-income earners, an idea she says Superannuation Minister Nick Sherry has suggested at recent industry gatherings.

Women suffer a triple whammy when it comes to super. Not only do they earn less than men but they are also more likely to take time out of the workforce to care for children and other family members. They also tend to live longer than men, so their retirement savings must last longer.

The average super balance for women aged 60 and under is $56,000, compared with $90,000 for their male counterparts. The figures are worse for women aged 60 to 65, who have an average super balance of $45,000 compared with the average male balance of $130,000.

But those are averages; half of all women who are set to retire in the next decade have less than $20,000 in super.

"The average seven-year career break for a woman on average earnings of about $50,000 costs $77,000 in lost retirement savings. This is a crucial issue for women," Reynolds says.

Vamos says more employers are looking at continuing to pay the super guarantee to female employees while they are on maternity leave. "Some employers already do this and more are thinking about it - it's a way to encourage women back into the workforce."

The super funds association also wants the Government to look at tax benefits to help low-income earners. At present, a taxpayer on the 31.5 per cent marginal rate saves 16.5 per cent on taxable income contributed to super, while someone on the top rate of 46.5 per cent saves 31.5 per cent. Yet low-income earners are most in need of an incentive.

BOOST YOUR SUPER

* Check whether you are eligible for the co-contribution through the Government or your super fund.

* Make extra contributions. If your employer allows it, salary sacrifice is the best way to make extra contributions.

* Check the investment option your super payments go into and make sure it is the right option for your time of life and your needs.

* Make sure you reclaim any lost super you are entitled to - but beware of rogues who offer to reunite you with your super for a fee. See the Australian Taxation Office website (www.ato.gov.au/super) and search for your missing millions free.

* See the retirement-planner calculator on the Australian Securities and Investment Commission consumer website (www.fido.gov.au) to check what sort of retirement your current level of super contributions will fund.

* If you can afford it, get financial advice but make sure you understand how the adviser is paid for any products he sells you. Is there an upfront or continuing commission? Many non-profit funds provide financial advice on a fee-for-service basis instead of commissions.

Source: The Australian Institute of Superannuation Trustees

© 2008 Sydney Morning Herald

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