How is your retirement nest egg looking? It's a question ever more Australians are asking themselves.
Whether you're 22 or 62, there's a good chance that the fallout from the global pandemic will have a material impact on your retirement outlook.
With that in mind, Australians do live in the lucky country in terms of our retirement income systems. Though not the luckiest.
That honour goes to the Netherlands.
That's according to the 12th annual Mercer CFA Institute Global Pension Index, which compares 39 retirement income systems around the world, covering almost two-thirds of the total population.
The number two spot goes to Denmark, while new addition Israel bumped Australia from its previous number three position into fourth place.
The Global Pension Index found that the economic fallout from COVID-19 will increase pressure on health and welfare systems, already strained by increasing life expectancies as more people enter retirement.
Businesses, interest rates, investment returns and community confidence in the future are all impacted, altering the provisions for adequate and sustainable retirement incomes over the longer term.
With a comfortable retirement high on most everyone's wish list, The Motley Fool reached out to Global Pension Index Author and Senior Partner at Mercer, Dr David Knox to get his unique insights.
Our chat with Dr David Knox
With the changing outlook for a comfortable retirement, what advice do you have for younger Australians?
Generally speaking, what younger Australians can do is put money aside for the future. Whether that's inside superannuation or outside, they can do a bit of both. There are taxation concessions with respect to super that's beneficial, but of course the money is preserved, tied up. Ignoring the early release arrangements we've just had.
I think we're moving to a period where there will be more and more individual responsibility. Government debt is increasing with COVID. Now debt's pretty cheap at the moment, but will it remain cheap? At some point we may return to some normality where interest rates have gone up a bit, and that cost of debt is starting to bite. In various circumstances governments will not be able to afford to spend as much on pension or health costs or aged care.
So the more you can have control over your own finances, the better.
The natural end point for that is a self-managed super fund. But not everyone wants one because it takes time and effort. But the principle is the same. 'I'm putting money aside for the future. I know where I'm engaged. I've got some control.'
Is that advice different for varying age groups?
I think it's sensible to buy a house if you can afford to do so. The mortgage now isn't costing as much as it was 5 years ago.
You do go through stages of life. If you've got children or school fees you may not have the capacity to invest at that time.
But investing early is quite beneficial. If you can put that money aside, as Einstein said, the eighth wonder of the world is compound interest. The sooner you get into that compounding pattern – say if you're 25, 40 years before you retire – that's 40 years of compounding. If you leave it until your 50 you've only got 15 years of compounding.
But it does inevitably vary on personal circumstances. Some people can afford to put money aside earlier and some people might not be able to do that.
How can employers help?
Employers can help their employees by doing things like financial literacy lunchtime seminars, or bringing speakers in from their most common super fund.
If people have a bit more understanding of their finances, they're now less worried. And if people become less worried, they actually are more productive. Because if you're constantly worried about paying off the mortgage or paying off the credit card, you're not concentrating in the work place.
The other benefit is that employees who see their employers helping them are more likely to stay.
Do you think it was a mistake to offer impacted Australians early access to their super funds?
I understand why the government did it. And I fully appreciate that some people needed super to survive. Unfortunately, the government announced it [early access to super] before they announced JobKeeper. So people gravitated to that before they realised JobKeeper was coming.
In contrast, New Zealand had similar access provisions. But the government and the retirement commissioner clearly said superannuation is your last resort. We will do everything we can to support you before you access your super. We [Australia] didn't say that.
And there was no superannuation component of JobKeeper. It was deliberately excluded. You look at the Netherlands who did something similar, and they said to employers, here's some money and here's your pension contribution.
Do you expect we'll see significant changes with the Aussie pension and superannuation systems?
I don't think we really know, because COVID is still working its way through. What will that mean for investment markets? What will that mean for economies? We don't really know.
One of the things it means is, I think we'll have lower interest rates for longer. So what will be the returns in the equity markets? They've bounced back in some respect. But is that a little bit of optimism and hope or is it reality? I think the jury is still out.
I think it does mean many individuals and households have become a bit risk averse. They're not sure what the future holds, so even some people who accessed their super are saving that. Because they don't know if they'll have their job back. I'm not going to spend it but at least I took the opportunity to access it.
I think you can say that COVID, over time, will have a negative impact on the accumulation of superannuation. Returns will be lower. Contribution levels will be lower because of unemployment. We've had early access. So people probably won't have as much in super as they thought they were going to get.
Will that mean that some people work a bit a longer because they can't afford to retire? Will it mean retirement living standards will be a bit lower than they might otherwise have been? Will it be that some people look for higher returns, because that's what they're used to? But inevitably that means higher risk.
We really don't know the long-term impact yet. We know in Australia the government debt is going to be higher. Immigration is going to be lower. That's going to have an economic impact.
Generally, it's appropriate for people to be a bit more cautious, because our 27–28 years of economic growth has ended. And we're not quite sure what the next few years are going to promise.
You hear a lot of arguments about whether or not increased superannuation contributions will lead to lower wage growth. What are your thoughts?
You will see in some cases people who get paid as a package, which includes super, their wages will be affected. In other cases we've seen that when the SG [super guarantee] goes up the employer might actually pay a little bit extra. There's not a single story here.
But if we don't go to 12%, we're clearly saving less for retirement. And people will have less money in retirement.
If you look at the systems above us, Israel, the Netherlands, Denmark, in each of those cases they're putting in at least 12%. Israel is 12.5% and the Netherlands is about 15%. And they also have the universal pension. When you look at that from the big picture the better systems have a pension from the government and on top of that they have a very good pension system, which means people can confidently look to the future and retire and make plans accordingly.
The Global Pension Index revealed that women's retirement outlook will be more deeply impacted than men's. How can we address this?
What we can do is in terms of parental leave. Whether it's paid or unpaid we should make superannuation contributions part of that. The better employers do it but it's not compulsory.
The pension gender gap has got a number of factors to it including more part time work for females, lower average salaries, time in the workforce, etc. But there are little things we can do, like with the parental leave. If you're on parental leave and you're looking after young children, then you should still get your super paid because you're doing something for the broader community.
Immigration has temporarily come to a standstill. Looking ahead, will a return to higher immigration help Australians' retirement prospects, or is this simply kicking the can down the road?
Increasing population has a number of consequences, both positive and negative.
From a pure economy point of view, it has a positive impact because you're generating economic growth. You're also keeping the average age of the population lower because the immigrants tend to be younger families. It does keep the old age dependency ratio lower than it otherwise would be.
What was your takeaway from the overall Index results from an Australian perspective?
We've talked about the number of concerns. But the Australian system is still ranked fourth out of 39. So, we're not doing badly!
We can improve things by reducing multiple [superannuation] accounts and improving engagement. But let's recognise that the SG [super guarantee] system is actually working. People are saving money for their future.
And that's a good thing.
(You can access the complete 12th annual Mercer CFA Institute Global Pension Index here.)
