12/11/2008 - 22:00

Ageing population not saving enough

12/11/2008 - 22:00


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THE average debt per person in Australia is now about $28,000.That's $28,000 for each of the almost 20 million people we have in our great nation.

Ageing population not saving enough

THE average debt per person in Australia is now about $28,000. That's $28,000 for each of the almost 20 million people we have in our great nation.

In spite of how we might apportion this total amount - to government or industry expenditure - the reality is that Australians find it very difficult to save money, either at a public level or a private level. While we are not as badly off as, say, the US in this regard, we need to remember that the US still has the world's largest economy - our economy may or may not correct as quickly.

Lack of savings is a major problem behind what has happened in this global economic crisis. Many countries have gone through significant housing booms during the past decade - Australia has been a part of that. And although countries such as Ireland, and the UK (more specifically London) have enjoyed the property boom, some are now just floundering. It is not unfair to suggest that the source of the current crisis has its roots in the US sub prime crisis - inadequate savings and "Liar" mortgages. But the problems may not end in the US - Australia's savings is as problematic as the US has been. These problems are only of our making - we spend too much rather than save.

In less than 40 years, the Australian population projection is that one out of every four people will be aged 65 years and over. If the traditional retirement age that I grew up with holds true, the first male baby boomers, born in 1946, will retire in three years.

But already the average life expectancy for a surviving partner of a couple turning 65 years of age in 2008 might well be 87 years of age - that's 22 years of retirement living.

While the population of labour force age is projected to grow by just 14 per cent, the number of people aged 55 to 64 is projected to increase by more than 50 per cent over the next two decades. This is expected to be the fastest growing group of labour force age.

From a recent peak of 9.3 per cent (household savings rate as a percentage of disposable household income) in 1990, in 2004 this rate was an alarming -2.6 per cent, and is still just in negative territory in 2006.

Are there adequate savings being set aside by Australians to ensure that as many people as possible are going to retire in comfort, to buy a first and subsequent home with a better than even chance of being able to meet the mortgage repayments?

The Keating Government Superannuation Guarantee charge requires today that employers set aside a top up of 9 per cent of annual salary for each employee into and approved retirement fund - industry or private sector fund - for the retirement benefit of employees. The intention of this guarantee charge was to reduce Australia's forward reliance on government only paid pensions.

An option worth considering is related to two inputs into the Superannuation Guarantee Charge (SGC) system.

- The immediate next minimum fair wage review to be offset entirely by employers providing a further 3 per cent contribution to the super funds (that is, raising the charge from 9 per cent to 12 per cent), with employees foregoing an increase in the next minimum wage case in lieu of additional superannuation contributions.

- Four successive years of increase by an additional 1 per cent each year over four years from employer contributions (again offset against a wage increase*), plus either of: an additional 1 per cent from employees through taxation collections; or an additional 1 per cent from employers offset from a same amount saving in fringe benefits taxation from the company. This makes a total of 20 per cent of salary contribution to superannuation - up to 16 per cent by the employer without assistant (up from 9 per cent), and 4 per cent either from the employee or from equivalent tax relief to the employer.

*For example, if the subsequent wage increase is 2 per cent, an amount equivalent to 1 per cent is allocated to SGC, and the other 1 per cent going to the employee as a wage increase. Some might consider this to be unfair, but there are two comments that should be noted:

1) I reiterate that we desperately need to save; and

2) Japan has accommodated such hardship for some years - they have had zero or negative growth for almost a decade, and people have learned to restructure their personal lifestyles accordingly.

The effect of greater savings will assist the reduction of overall national debt, and better prepare people for what might be a very lengthy period of retirement.

This will also provide ample recurrent income during retirement from which a long-term care fund can be partitioned to be used as user-pays aged care.

While the accessibility to capital contribution by a client is still to be determined, we are creating here a de facto long-term care insurance fund that should ensure that, over time, dependence on government subsidy for those with means diminishes, while providers gain the benefit of appropriate levels of income from their residents that adequately off sets the cost of care.

- Wayne Belcher is chief executive of The Bethanie Group Inc and has just completed the Advanced Management Program at Wharton Business School in Philadelphia.


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