More than one fifth of Australian retirees currently live in poverty, according to a recent report by The Australia Institute.
Given that we are one of the richest nations in the world this is both disturbing and difficult to believe. Today we review these findings and consider if there is cause for concern and, if so, what retirees can do.
What the report says
The Reducing poverty in retirement report compares the poverty rate of people aged 65 and over between Australia, Sweden and Norway. It concludes that the public pension systems in
Sweden and Norway ensure retirement security while Australia’s system doesn’t.
The rate of poverty in retirement in Australia is 22.6% – more than one in five. In Sweden it is 11.1% and in Norway it is 3.8%. This is a stark contrast. The poverty rate is measured from country to country as a percentage of the median equivalised household income – to live in poverty means to earn less than 50% of this amount. The report states:
the maximum amount that a single pensioner can get from the Age Pension is $1,144.40 per fortnight ($572.20 per week), which is below the poverty line of $612.47 per week for a single person.
Authors of the report believe that our high pension poverty is due to our relatively low spending on pensions as a percentage of GDP. Among all OECD nations, Australia spends just 5.29% on the Age Pension, compared to an OECD average of 7.43%, and above 9% in both Sweden and Norway.
The authors emphasise two other factors. Firstly, that the Australian government supports retirement income by forgoing revenue through generous superannuation tax concessions (worth $36.77 billion in 2019-2020), but that this support goes to wealthier Australians – those with the ability to top up super – as opposed to those on low or no incomes.
They also note that guaranteed Swedish and Norwegian pension systems allow recipients to work as much as they wish, unlike the Australian system which has low income allowances before pension entitlements are reduced.
Current policies have the effect of restricting the Age Pension to those on low incomes. As the amount of Age Pension is determined by income and assets held in retirement, any income earned over a threshold in retirement reduces the amount of Age Pension received. For example, at the time of publication, the amount of pension a single person received is reduced by 50 cents for each dollar they earn over $212, on a fortnightly basis. This reduces the incentive to work and, as the Age Pension is currently low, this can lead to lower standards of living.
Is the fear of running out real?
This report would seem to reinforce the notion that it is very easy to run out of funds and slip below the official poverty line. Is this realistic for most retirees, based upon the data above?
How to measure your own income security
Let’s take a step back and consider the main assertions.
Firstly, it is unclear if the Pension Concession Card, which is automatically provided to all Age Pensioners, is included in the calculation of poverty levels. It looks as though it wasn’t, even though this card is worth about $3000 per annum for those who hold it. If we add this amount to a single Age Pension entitlement of $29,754.40 it equals $32,754.40 compared to the median income measure quoted above of $612.47 per week or $31,848 per annum. So it shows the Age Pension base amount, plus Pension Concession Card, to be above the poverty line, assuming $3000 in benefits are actually received.
The Australian Age Pension is a basic safety net for those who have no other means. It is also a solid foundation for those with lower savings. Compulsory superannuation was introduced in 1992 as a mandatory form of savings to top up this pension entitlement. Many pre-retirees tend to think of their retirement income as needing to either be covered totally, or to a high degree, by their super savings. It’s important to have a very clear understanding of the role that an Age Pension will play in your retirement income mix. Here is a step-by-step guide to gaining a clearer understanding of what your retirement income will be – how it will be made up – and, most importantly, how you will stay above the poverty line.
1. Pre-retirement
Regardless of how long it is before you may qualify for an Age Pension, you can use the free Age Pension Entitlement Calculator to see the amount of pension you are likely to receive. This information is critical to your financial peace of mind. Once you know this ballpark figure, you can then consider how much of a role your super might play.
2. How long will your money last?
This is where the Retirement Essentials Retirement forecaster tool is invaluable. In this adviser-guided consultation you can model different scenarios which incorporate your spending over the likely duration of your retirement journey. The tool can literally calculate the mix of Age Pension and super drawdowns, as well as other income streams or work earnings, and how these combine.
3. Maximising your income
By using the above two steps you will now have the information you need to maximise your possible income. This is because you will have a far clearer idea of the extent to which you will depend upon an Age Pension benefit and the amount of scope you have to activate your super, using the rules that matter most, depending upon your savings, your household situation and home ownership status.
4. Using rules that matter to take control
At this stage you may wish to delve further into rules that affect your particular age and stage in retirement, be it pre-retirement, early years or a later age. Such entitlement rules could relate to gifting, younger spouse strategies, home equity access or mortgage management. Knowing more about specific aspects of your super is key to taking control. By knowing the concessions and allowances attached to super you can ensure you are taking advantage of every rule that can help to increase your income.
Is poverty a threat in your life?
To return to the research, it seems that the addition of the Pension Concession Card to the income quoted in this report would suggest that full Age Pensioners are just above the Australian poverty level. However those who rent may be paying a disproportionately high amount of their income on accommodation. And thus find that they have too little left to lead a truly comfortable existence. There is no easy answer to this challenge. But in the belief that knowledge is power, it is important to check all your current (or future) entitlements, regardless of your situation, to ensure that you are using each and every rule to your best advantage.
Do reports of Age Pension poverty concern you?
Or do you feel that your savings will make the distance?
I am about to retire but worried about having enough to live. I own my house and have about &350000 in super.
Is it wise to retire. I am 73 years old.
No, you should definitely keep working. Retirement is death!
Retirement is a totally different journey for different individuals and couples. Some people want to leave the workforce as soon as they can, others to gradually transition, still others to work as long as possible. There is no one size fits all. So it makes sense to think about your own personal goals, what brings fulfilment, how you wish to spend your time – and how much you think you will need in income to support this type of life. It helps to share this with others – be they family or qualified advisers – to test your thinking and make the best decisions for your own particular situation.
if you retire do you have a plan on what are you going to do with your time?
if the answer is no, then continue working full-time.
or you could start thinking about going part time and supplement your income with transition payments.
work out what your day life is containing before you make the leap full-time.
if you are fit, you can join hiking clubs, fishing, volunteering. There is so much out there to do, you just need to investigate first.
good luck.
Firstly, do a Budget and calculate your expenses. Get some good financial advice. Sometimes free through your Super. You should also qualify for the Age Pension. Once you understand your financial position and the income you can receive in retirement your decision should be easy. Think about things you want to do and factor that into your budget. At 73 if you are in good health, then time to enjoy yourself unless you absolutely love your job. I love being retired
I’m struggling on the aged pension. My housing costs $300 per week.
I’m not sure how best to use my super of $110,000.
I’m 69. What is the best way to use my super funds?
check to see how much interest you are receiving. If you want top up of your pension also look at transitioning to retirement. It goes into a separate account. Also check with utility services to see if you can get a discount. To date I have electricity, gas, water rates, land rates and now I check my home and contents insurance as I think my contents were priced to high, however I am not sure. Check to see if you apply for any casual work or be involved in research for your opinion. They will send you a gift voucher eg $50 to $100, it comes in handy for groceries. Government also still has the bonus money of $11,000 you are eligible for if you work where volunteer or desk or computer not physical work. Im with Health Consumer Qld (HCQ) who are always looking for people to be on research committee for comments. you are a consumer so your experience is valuable to them.