Getting the Measure of the Problem

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November 2015

By Emily Millane

Among the many contested features of Australia’s retirement income system is how much money a person needs to get by. What a person “needs” is inherently subjective, depending on personal values and informed by a person’s income and spending patterns before retirement. What type of lifestyle the tax and transfer system should support is open to debate. Beyond alleviating poverty, what is the point at which the system is aiming? These are just some of the reasons why trying to use a measure of retirement income adequacy is laden with problems.

Existing research shows the limitations of various retirement income measures. One measure determines a desirable retirement income by reference to wages earned before retirement.

Another measure is based on a typical basket of goods consumed in retirement. The arbitrary nature of what constitutes the “typical” basket is an inherent limitation of this measure. Another limitation, the focus of this paper, is that the basket of goods does not include ongoing housing costs for people who are renting or who have mortgage debt in retirement. This is of particular concern given the growing number of Australians in these two categories.

This paper uses three scenarios to quantify and illustrate the additional costs in retirement for people paying private rent or servicing mortgage debt.

The first scenario is a single woman living in Melbourne and in private rental. We found that at age 65, this person had an additional $8,670 per year in housing costs, and an additional $3,680 per year at age 85. The number of people in this woman’s situation are growing at a rate of 19%.

We also found that a likely superannuation balance for this woman in 2015 is $73,629. Over the course of this woman’s life, the difference between a “modest” standard of living in retirement that includes housing costs and the income she is likely to derive from her superannuation balance is $173,034.

The second scenario is a couple living in Sydney who have mortgage debt. We found that this couple had an additional $4,419 per year in housing costs in early retirement but had paid off their debt by the time they had both reached 85. The number of households in this situation is growing at a rate of 22.7%.

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