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Despite the fact that Australia has a world-best retirement savings system, few Australians can be confident they’ll have an adequate standard of living in retirement.
When considering a country’s ability to support its ageing population, it’s probably fair to say that Australia leads the world with its retirement savings policies. We’re fortunate to have a well-established system, comprised of voluntary and compulsory (employer) superannuation contributions with an Age Pension safety net.
Even so, our system is still failing to reach the goal of ensuring Australians will have an adequate standard of living in retirement. How big is the shortfall? In early March 2006, the Investment and Financial Services Association (IFSA) released a report[1] which quantifies this ‘retirement savings gap’ at about $452 billion; that’s about $93,000 per person. The gap measures the difference between the amount needed to fund a reasonable standard of living in retirement and the standard of living that will actually be provided by the amount currently invested in superannuation, combined with the Age Pension safety net.
The good news is that this gap has decreased, the IFSA report says it’s about 15% less than it was three years ago, due to several important policy changes. The most impactful policy change has been the extension of the co-contribution scheme.
However, further reform is needed to encourage Australians to save more for retirement and to ensure that the funds accumulated are sufficient to match our increasing longevity.
One promising proposal is the reduction, or elimination, of the 15% contributions tax. Australia has the dubious distinction of being the only country in the OECD to tax people’s retirement savings while they’re accumulating them, rather than when they’re spending them. Australia’s retirement savings tax rates are also among the highest in the OECD.
The IFSA research found that Australians focus strongly on the contributions tax and that lowering this front-end tax would improve retirement income levels and provide a big boost to voluntary super contributions.
“The bottom line is that if the contributions tax were removed altogether, the retirement savings gap would fall to less than half its current size,” said Mr David Deverall, Chair of the IFSA Economic, Savings and Tax Board Committee, when releasing the report[2]. I agree with him that it would be prudent for the government to alter its taxation policy to encourage long term savings into superannuation.
Will you have a 'retirement savings gap'?
I may have sparked your interest in whether you’ll have a personal retirement savings gap. To find out, log on to our Web site, and go to the Super Maximiser calculator. This helps you work out:
It’s worth checking this out. A small increase in your super savings now could make all the difference to your standard of living in retirement.
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