How Much Superannuation is Needed to Have a Comfortable or Modest Retirement?

ZILI ZHU AND THOMAS SNEDDON, CSIRO

11 November 2014

This study examines the likely effect of the new schedule for compulsory superannuation contribution rates introduced in September 2014. We use the SUPA model to study retirement outcomes under both the newly legislated superannuation contribution rate regime and the previous schedule. The CSIRO Simulation of Uncertainty for Pension Analysis Model (the ‘SUPA’ model) has been developed to assist superannuation-related research within the CSIRO-Monash Superannuation Research Cluster.

The SUPA model is calibrated using relevant economic data from the years 1993 to 2013. In the model we incorporate the co-dependent behaviour of seven elements of the Australian economy relevant to superannuation research: (1) price inflation; (2) wage inflation; (3) Australian stock market returns; (4) international stock market returns; (5) Australian bond returns; (6) international bond returns; and (7) Australian cash investment returns.

Through a large number of simulations of probable paths of these economic variables, the model is used to project a range of retirement outcomes achievable through an individual’s superannuation fund activity given certain assumptions relating to the individual’s behaviour. These assumptions are:

  • The individual’s rate of contribution to the fund relates to the percentage of weekly salary. For the purposes of this study, the assumption is varied to match both the pre-2014 schedule of compulsory superannuation contributions and the ‘new’ schedule – these are provided in the table below:

Comparison of ‘old’ (pre-2014) and ‘new’ (2014) compulsory superannuation contribution schedules

  • The retirement age of the individual is assumed to be 65 years old.
  • The career commencement age of the individual is assumed to be 25 years old.
  • The individual is assumed to withdraw (at the beginning of each year) from their retirement age onward an annual amount equivalent to the ASFA comfortable living standard annual income requirement, which is $42,254.00 per annum at 2014, inflated in accordance with projected price inflation rate (CPI) until death.
  • The individual is assumed to receive an annual salary (at the end of each working year) beginning at the average graduate starting salary in 2013 of $54,425.00 and growing with the SUPA projected wage inflation until retirement at the age of 65.
  • Individual mortality is projected by utilising the Lee-Carter mortality model as applied to Australian Bureau of Statistics mortality data, and by including projection for longevity improvements based on this model.
  • It is assumed that no superannuation contributions tax or investment earnings tax is applied to the individual.

The following statistics on the outputs from the modelling work provide an overview of the potential impact from the amended contributions regime.

Output statistics from application of SUPA model

The results indicate that given the assumptions of the SUPA model, the post-retirement duration of the superannuation fund of an individual will fall by approximately one year, and the probability of them running out of money to support their retirement prior to death will increase by approximately 2 per cent. Furthermore, at retirement, the 25-year-old individual commencing their career in 2014 can expect to have approximately $32,200.00 less in their superannuation fund in current dollar terms, or approximately $89,100.00 less in terms of nominal dollars on retirement.

Finally, the 25-year-old individual commencing their career in 2014 can expect to have approximately $10,500.00 less in current dollar terms or approximately $13,800.00 less in nominal dollar terms by the middle of 2025.