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Modelling Retirement Outcomes in Australia

Australias retirement income system obligates employers to pay a percentage of salary (currently 9.5%) on behalf of each employee directly into a superannuation fund which cannot be accessed (except in extraordinary circumstances) prior to the national minimum retirement age. The system has received strong praise for its high participation rates (driven by compulsion) and for ensuring retirees have resources from which they can support their own post-retirement lifestyle. However, recent discourse, particularly in the context of increasing life expectancy, has highlighted the potential inadequate level of savings provision under the superannuation systems current regulatory settings. In this paper we build a stochastic model of superannuation, the SUPA (Simulation of Uncertainty for Pension Analysis) model, and use this to simulate the evolution of superannuation fund balances across time. The lifetime of a superannuation account encompasses a growth phase followed by a withdrawal phase with the aspiration being that balances are positive throughout both phases. The model we develop consists of four elements: (i) a stochastic projection of investment returns; (ii) a stochastic projection of income levels (upon which contributions to the fund are based); (iii) a projection of levels of withdrawal in retirement; and (iv) a stochastic projection of increasing longevity. These four elements are described in detail within the paper. Combining these elements together the overall SUPA model, which extends previous models utilised in actuarial science, can inform the current superannuation debate. In particular, it can be used to forecast likely outcomes (i.e. whether individuals will have sufficient funds in retirement), under the current superannuation structures. It can also be used to statistically model the potential impacts of any changes to the superannuation system, i.e. changing retirement ages or contribution rates.