Our perception of retirement is uniquely Australian:
“She’ll be right mate, my employer takes care of my super and the government will give me a pension when I run out.”
Because of this laid-back attitude, retirement is an afterthought for most Australians:
All that rushing doesn’t leave much time to pause and reflect on how we can make superannuation and retirement work best for ourselves, let alone everyone else.
Take me for example. For a person who only recently exited his twenties, I spend an (un)healthy amount of time thinking about retirement. This isn’t so much a reflection of my Millennial eagerness to race through the different stages of my life but borne out of a fascination of how the human experience evolves over time.
It’s clear that we have a world class retirement savings system – Australia has the 4th largest in the world by assets and consistently ranks among the top 3 for Adequacy, Sustainability and Integrity (Melbourne Mercer Global Pension Index 2017). We punch above our weight. But why aren’t we the best and how can we get to the top?
Mercer raised four areas that need more focus in Australia’s superannuation system:
- Part time workers, contractors and gig employees
- Working women and stay-at-home mums
- Ensuring retirees have an adequate income
- Stability in legislative and regulatory reform.
Addressing these areas would make a real difference. But how can we continue to evolve our retirement system? Maybe should can start by reflecting on how others around the world culturally view and experience retirement.
UK and USA – one step back, two steps forward
Our closest cultural cousins, the UK and USA, can teach us a few things from opposite ends of the retirement spectrum. The UK is still feeling the effects of a tumultuous transition from compulsory annuitisation in 2015. Where previously Brits were obliged to take out an annuity at age 75, the UK has now adopted a model that looks a lot like where Australia is heading (although they have arrived at it from the opposite direction). The challenge for the UK, like Australia, is to provide the right mix of tax and social security incentives to ensure a balance of private retirement savings, public pension welfare and longevity risk protection.
At the other end, the USA has a comparatively miserly retirement system (the 401K) that relies largely on voluntary opt-in savings. Without a compulsory retirement savings framework, the USA continues to struggle with incentivising working Americans to adequately self-fund their retirement. Amidst this landscape, innovations in public policy are arising as bureaucrats turn to behavioural finance or “nudge theory” to incentivise employers and their employees to save for retirement.
As explained in the Planet Money Podcast “Nudge, Nudge, Nobel”, Richard Thaler (the father of modern behavioural finance) and some of his academic protégés proposed changes to how employers enrol their employees in 401(k) retirement savings programs with profound results:
- implementing default enrolment into 401(k) programs where the employee must specifically elect not to contribute has now been adopted by 68% of companies
- a Save for Tomorrow scheme where employers automatically increase the 401(k) contribution rate each time an employee receives a payrise has also been adopted by 3/4 of the companies above.
Continental Europe – a house is not a home
There are diverse retirement models throughout continental Europe but three examples I will touch upon provide an insight into the important role that progressive housing arrangements can play in a high quality retirement system:
- Scandinavia, the world champions of retirement systems (MMGPI 2017), where both the “Neighbourhood aged care” and “Co-housing” models originate.
- France, the home of Viager, a quasi-gambling style system of property exchange where the buyer wins or loses depending upon how long the seller lives.
- Germany, which has protection for rental tenants practically written into its Constitution: “Property comes bound with duty. It must be used to serve the public good.”
Neighbourhood aged care (also known as Buurtzorg) and Cohousing has experienced a meaningful surge of public policy interest around the globe. Buurtzorg was first pioneered in the Netherlands with nurses self-organising to provide in-home care services. Enabled by technology with little administrative overhead it has been shown to reduce costs per patient by approximately 40% (compared to comparable care models). Cohousing involves retirees pooling their resources to establish sustainable living environments and sharing the cost of in-home care. This provides them with greater control over their retirement housing as they age and also tackles the most insidious and underappreciated risk associated with aging – social isolation.
The viager system in France is a little more complex to understand but shares some things in common with equity release products. Viager involves a private contract between two parties whereby:
- the seller remains within the property and receives a lump sum amount (known as the bouquet) and a fixed monthly payment from the buyer for the rest of their lives
- the buyer receives a discounted purchase price for the property (determined by the sellers calculated life expectancy) but is exposed to the risk that they are required to continue paying the seller if they live longer than their calculated life expectancy.
Germany has a relatively simpler approach to guaranteeing housing security for retirees through an extremely strong legislative framework designed to protect renters. Germany has one of the lowest home ownership rates in the developed world precisely because of how heavily stacked the decks are in favour of renters:
- tenancy laws strongly favour tenant rights over landlord rights
- rental increases are legally capped to 15% over a 3 year period
- mortgage-interest payments are not tax deductible by home owners
- long-term leases are common and may be transferred across generations.
Japan – why retire at all?
Japan has one of the highest average life expectancies in the world. If anyone could be considered the masters of a long and healthy retirement, it’s Japan. So where in Japan should we look for the secret sauce? The region where women live longer than anywhere else in the world – Okinawa.
In the local Okinawan dialect, they have no word for retirement. Instead, the concept of “Ikigai” remains supreme. Translated literally it means “a reason to wake up in the morning.” Ikigai imbues Okinawan’s entire adult life and extends beyond just pursuing hobbies in retirement. Okinawans take responsibility for what they are taking from and contributing back into the world until their final days.
Hear Dan Buettner explain this better than I ever could in his TED talk:
To culturally shift our mindset from retirement to purpose, we must ask ourselves:
- What do I like doing?
- What am I good at?
- What allows me to live my values?
- What can I give back?
Our Ikigai lies at the centre of these 4 questions.
Returning to Australia
The flip side to all of this is that many economies around the world don’t enjoy the freedoms and benefits of a strong social safety net (let alone a generous lifetime age pension). As a result, many cultures do not yet enjoy the expectation of a long and relaxing retirement. Instead, the combination of shortened life expectancies and the need to work to maintain an adequate income mean that most reach the end of their life still employed.
Even with emerging economies that are more matured, such as in Latin America, retirement products are so homogenous that the only competition occurs on price. This provides little incentive to innovate and consumer engagement in their retirement savings all but impossible.
Australia should be grateful for our world class retirement system but acknowledge that it has largely been built on the back of 3 long-standing pillars:
- pioneering compulsory superannuation contributions
- our cultural obsession with home ownership
- a generous age pension safety net.
“So what can we do to keep Australia at the forefront of global retirement trends?”
Mercer had a few ideas which they shared in their 2017 MMGPI survey:
- apply a mandatory Superannuation Guarantee (SG) Contribution requirement at all wage and salary levels (currently applies above $450 per week)
- review superannuation arrangements for part-time workers, contractors and the gig economy (where employers are no legislatively required to contribute)
- focus on reform to improve retirement savings outcomes for women through increased mandatory contributions and greater protections for stay-at-home mothers who are dependent upon their spouse’s superannuation savings
- separate superannuation regulatory reform from the political cycle by placing ongoing legislative responsibility in the hands of independent bodies.
One thing is for certain, Australian consumer expectations about superannuation will change dramatically as technology, demographics and regulatory forces ripple through the system. Personalisation will be demanded by a Millennial-dominated workforce. Speed and control will be expected as on-demand real-time services (such as Amazon, Uber and the New Payments Platform) become ubiquitous.
Trustees and service providers can either ride the wave of innovation and reform that will sweep across the Australian superannuation landscape or be swept away in the tide. Regulators, employers and trustees will need to work together to make this innovation work for end consumers, but the ideas below should be possible:
- employers to offer salary packages which include automatic increases to the super contribution rate at each pay rise (particularly whilst the government drags its heels on increasing the mandatory SG contribution rate).
- jointly held retail superannuation and pension accounts that provide consolidated retirement outcome projections for couples and families
- unique superannuation accounts that can be easily switched between funds allowing the “pot to follow the person” wherever they go in their career
- legislation to make renting a stable and compelling alternative to home ownership and reduce the tax incentives associated with property investment.
- flexible workplace arrangements that enable a slow disengagement from full-time work and encourage retirement gap years before returning to the workforce
- retirement counselling and transition services provided by super funds to support involuntary retirees who exit the workforce in a sudden manner
- including the family home in the assets test to determine age pension eligibility to encourage downsizing and retirement funding through home equity release.
- progressively lifting the eligible age to access superannuation and the age pension to align automatically with increasing life expectancy assumptions.
But perhaps, more than anything else, we all would benefit from adopting a more nuanced perspective on retirement (akin to the Ikagai concept I described earlier).
If we did, maybe we would all segment our lives a little bit differently:
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Disclaimer: The views and opinions expressed in this article are solely those of the author in his personal capacity. The information contained in this article is general advice only and does not take into account your individual needs, objectives or financial situation.