Six tips on what to do if you live too long
09 May 2014
Former Australian prime minister Paul Keating, one of the chief architects of Australia's super system, has recognised the elephant in the room. The problem with super is that it does not add up. The bad news is that we are going to live too long. When superannuation was first introduced, people retired at about 55-60 years old and died aged about 80. Now, many are going to live well into their 90s, which means that superannuation accounts for many will expire long before a person dies, leaving further strain on the budget.
This is what Keating had to say:
“You can’t save under super for 30 years or 35 years and spend, live another 30 years off from it,” Mr Keating told ABC TV’s Lateline.
“In other words, the pool can never be big enough to sustain you ‘til your 90s.”
Mr Keating said the current superannuation rate of 9 per cent was not enough to sustain a person during their retirement and that it needed to be raised to “at least 12 per cent”.
He criticised the Abbott government for delaying an increase in the superannuation rate, which was initiated by the former Labor government, and said Australia needed to look at a national insurance scheme to fund the elderly.
“We have to have, I believe, a commonwealth insurance scheme for the 80-100s with a calibrated, precise product, which guarantees people income support, aged care and aged accommodation,” he said.
When asked how to fund it Mr Keating suggested: “a longevity levy of a kind — 2 or 3 per cent of wages”.
“But you put it in and the commonwealth guarantees you a calibrated precise product,’’ Mr Keating said.
“You pay it at an early age and it simply goes into a pool.”
Mr Keating also suggested access to a person’s superannuation could be staggered: 75 per cent of the money at an initial retirement and the rest when they turn 80."
Changing the levy to 12 per cent may deal with some of the structural issues long term. But that will mainly affect younger people who have a long working life ahead of them. How should those already nearing retirement react to their situation? For those who do not have a big pot of super when they retire, there is a need to think clearly about the options. Here are a few suggestions:
1. Don't look at the total amount of your super, just look at the income. The total funds in the super might look large, but the only thing that counts is the income. As soon as a person starts running down the total amount, it does not take long before the money evaporates. And as Keating suggests, many will live close to 100.
2. Think over the long term. Most people expect to live a long time, but often they do not look as far out when assessing their investments. 30 year investment strategies are hard to imagine. But Keating's point is that this is essential.
3. Don't think of retiring as stopping earning income. The best way to preserve super savings is to have another income, which takes pressure off the income you are deriving from those savings. The message from much of what is happening in public debate, including raising the retirement age to 70, is that work patterns are changing and being extended, just like ageing is.
4. Rethink what we mean by "retirement". Retirement used to mean a short period of playing golf, or just resting, before you shuffled off this mortal coil. It was a reward for decades of hard labour, the same labour that usually killed you in your 70s. For many, that is simply no longer the case.
5. Don't think the pension is an income safety net. Some people are taking their super lump sums, spending most of it on luxury, then thinking that they will be able to rely on the pension. They will be in for a nasty shock, especially if they live until 100. The pension is barely an adequate income, and the signs are that governments will progressively cut it back. Far better to have your own money, if at all possible.
6. Put in place good "corporate governance". People may live longer, but they often do not do so in an especially healthy state. Diseases like dementia and Alzheimer's pose an enormous problem for self managed super investors. How can you manage your own money when you are not aware of what you are doing? That is, in effect, a corporate governance problem. Self managed super people should put in place measures to deal with a situation where they are no longer able to make clear decisions.
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