For boomers, retirement the elephant in the room

THE downside of compulsory super is that it leads to complacency about savings.

Retirement is a concept that plays well to the frugal generation. Never heard of the frugals? This is a generation that comes from the Great Depression, from before World War II. This lot values bizarre concepts such as sacrifice and going without.

The frugals are better known these days not for their own modest lifestyles but for the fact that they are the parents of baby boomers.

And if there is one thing that will distinguish consumerist baby boomers from their frugal parents it's the matter of retirement. Frugals can, and do, happily live on an age pension. The very idea of an age pension existence frightens baby boomers.

In fact I suspect that this notion frightens baby boomers to such an extent that they would much rather not even think about difficult issues like, do they have enough money to live in retirement in the manner to which they have become accustomed?

Questions about retirement are a bit like the elephant in the room. Everyone knows it's there; they just want to pretend that it doesn't exist. I suspect that many baby boomers regard addressing their financial plans for retirement in much the same way that some approach their doctor about a potentially fatal disease: if they don't ask then the problem doesn't exist.

But the problems of course do exist and they exist on several fronts in Australia. Consider this fact. There are 400,000 Australians now aged over 85. These are the frugals who came through depression and war. By 2030 this number will rise to almost 800,000. And this later, bigger, number still doesn't yet include the baby boomers. That demographic time bomb (lots of people over the age of 85) is a surprise waiting for the taxpayers of the 2030s.

The issue is that we are living longer and even though we are prepared to work longer, especially since the advent of the global financial crisis, there is still a good 20 to 30 years of life beyond work that needs to be funded. This point was brought home by a new survey recently completed by international research group GfK for the AXA wealth management & insurance group.

This survey of 500 retired and 500 working Australians completed in early 2010 confirms that 29 per cent of retirement income now comes from a personal savings plan with the remainder coming from state pensions and superannuation funds.

The same survey confirms that barely 22 per cent of Australians are even aware of their likely retirement pension. This compares with 39 per cent of Americans who know precisely what their 401k retirement pension will be. This merely confirms the view that for many Australians the idea of retirement planning, and saving, is something they are quite uncomfortable with. Or at least they are content to believe that the matter "is taken care of" by the government.

The same survey goes on to show that when Australian workers apply their minds to the issue of saving for retirement some 46 per cent would prefer that this be achieved by the state raising contributions (for example by lifting the superannuation guarantee from 9 per cent to 12 per cent); only 34 per cent thought increased personal savings would be a better way to go.

In the US this issue is approached differently: only 17 per cent of workers thought that ensuring there were sufficient funds for retirement should be resolved by the state raising contributions; some 58 per cent thought this issue should be resolved by the individual increasing their savings.

I see this as an important difference that highlights a uniquely Australian attitude towards retirement planning. Australians are fortunate to have had a national savings plan, the superannuation guarantee, in place since 1992.

But there are problems with this facility. It leads to complacency. The superannuation guarantee is unlikely to provide sufficient funding to allow many baby boomers to live the retirement lifestyle they expect. And, importantly, for as long as they expect. It is also relevant that many first-wave baby boomers worked and paid taxes for perhaps two decades prior to the implementation of the superannuation guarantee.

This has probably left many within the boomer generation with a false sense of security. For the past 20 years "the state" has been taking care of retirement funding by the superannuation guarantee. But despite this, many boomers understand that they have not been contributing to this scheme for the entirety of their working lives and, even if they had, their expected retirement lifestyle is likely to be much more expensive than that of their frugal parents.

And this is why the elephant in the room is such an appropriate metaphor for the boomers. It addresses the "r" word (for retirement). It's an issue that they know is important but for the moment at least they are happy to waft along in the delusion that "the state" will take care of everything. It's odd that this is not the view of the people from the richest economy on earth (the US) and yet it is precisely the view of Australians.

This may well be an inconvenient truth but perhaps it's time for Australian baby boomers to confront the elephant in the room and at least establish what will be their retirement income based on their lifetime contributions. After all, it is only after establishing where you stand that you can move forward.

Oh, and if you do move forward, do mind the elephant.

The full report is available at axa.com.au

Bernard Salt is a KPMG partner; [e-mail]; www.twitter.com/bernardsalt