The man who headed the review of Australia's
superannuation system has questioned whether it makes sense to expose
workers' retirement savings to volatile financial markets.
Jeremy Cooper chaired a review of the super system which suggested
sweeping reforms, including a shift to low-cost default accounts for
He says for much of the last decade, super returns from financial markets have barely beaten inflation.
In an exclusive interview, he told ABC's PM that as the baby boomers
begin to retire Australia needs to develop ways to protect their
superannuation in retirement.
"It just so happens that in 2011 we've got our first so-called baby boomer, who was born in 1946, retiring this year," he said.
"Because it's a new system and because we've been focusing on
accumulation, that is the building up of savings, we haven't spent a lot
of time working out... what does that next phase - which we call the
draw down phase or retirement phase - what does that look like?
"You are no longer contributing, so you're not working, you're not
putting money into your superannuation and you're actually taking money
out. You're slicing pieces off to live on."
Mr Cooper says at the moment the available money in the system is not
adequate because on average retirement savings went backwards four
years out of 10.
"We've had 10 very, very difficult years... between 2000 and 2010 the
average person in superannuation actually had less money at the end of
each of those years, ignoring their contributions, than they had at the
start," he said.
He says over those 10 years super funds delivered an inflation return of 3.3 per cent on average.
"3.3 per cent a year over those 10 years and the inflation rate was
3.1, so that puts you in real terms only 0.2 per cent a year ahead of
the inflation rate," he said.
"Look, there are many 10-year periods that are better than the one we
just had and people say, 'Well look, no, actually, the option I was in
or this fund earned more than the 3.3 per cent'.
"Of course the mathematical answer to that is well there must have been someone else who correspondingly earned less."
Mr Cooper says people have to accept the random outcome that the
market delivers and "you do get very good years and very bad ones".
"The conventional wisdom is, in the accumulation phase, exposure to
equities market linked assets is the way to maximise your wealth, albeit
with a considerable amount of volatility," he said.
But he acknowledges that with upsides in the market come downsides,
and that downsides are becoming more frequent in a globalised financial
"It feels like that and you do have to ask whether in a compulsory
system - so that you're exposing all Australian workers to the raw
market volatility - and whether that is actually the sort of system that
we ought to aspire to."
Mr Cooper believes people in the retirement phase face multiple
challenges and they need much more certainty than they are currently
"They have to deal with inflation - so the purchasing power of their
dollars that they've saved up gets eaten away by inflation," he said.
"They have longevity. In other words, not knowing how long you're
going to live, and a lot of people have a lot of difficulty in accepting
that they might be alive for 30 years after their retirement.
"They have to be able to somehow cope with not running out of money
over that period, and then they've got this volatility problem, the
market risk that we've talked about.
"So I believe that in the retirement phase people need something that looks a lot more like the aged pension.
"What the industry needs to do is work out private ways that life
insurance companies and superannuation funds and other organisations can
provide, effectively, a private pension.
"We have what's known as a pay-as-you-go pension system, where the
taxpayers in any particular year effectively fund the pension.
"Now, in Australia that's a figure of around about $30 billion in round terms a year and that has to come out of a tax system.
"So you have to be very careful how much of a burden you place on the Government."
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