Boomers facing day of reckoning in funding retirement

I SEE a problem looming. How do baby boomers fund retirement later this decade and into the 2020s?

I SEE a problem looming. How do baby boomers fund retirement later this decade and into the 2020s?

There is of course a blithe answer to this: they will draw down their superannuation or rely on the age pension. The problem is this: the age pension for a single person is $19,000 per annum; for a couple it is $29,000 a year. I don't think this is nearly enough for boomers to live comfortably in retirement.

But that's OK, many boomers won't need the pension because they'll be self-funded retirees; after all, they've been paying into superannuation throughout their working lives. Well, actually this isn't quite correct.

The super guarantee did not come in until 1992, which means boomers born in the late 1940s and who entered the workforce in the early to mid 1960s (and who are now approaching 65) spent the first 30 years of their 50-year working lives paying tax but not saving for retirement.

There was no national pension plan prior to the early 1990s; first-wave boomers paid taxes for up to three decades to governments of the day who promptly spent those funds on education, health and defence, but not on a super savings scheme. As a result, first-wave boomers are unlikely to have that much super to fund retirement.

If a boomer couple was to plan for a modest retirement income of say $50,000 a year, then the amount of super they would require is $1 million. I don't think that with barely 20 years of super payments at 9 per cent anything like this pool of funds would be available to many, let alone to most first-wave boomers.

But this lack of funds to sustain a better-than-the-pension retirement lifestyle is only part of the problem.

You see, boomers are quite unlike previous generations who endured the Great Depression and war rationing and who excelled at frugal living. Boomers matured to adulthood and into household formation during an era of economic prosperity.

Women returning to the workforce from the 1970s onwards increased the spending capacity of the average household. The point being that progressively boomers adjusted material expectations of life to reflect their broadly improving circumstances: McMansions, plasma TVs, Bali holidays, mobile phones, branded clothing, restaurants and two cars are now the new basics of modern living.

How do boomers who have become comfortable with this lifestyle pare back their expectations to fit the financial constraints imposed by inadequate superannuation or the age pension?

I also suspect many boomers in their 50s and early 60s intuitively know that their lifestyles cannot be maintained in retirement and have opted for the don't-think-about-it approach, arguing that they could be dead tomorrow.

And for a lucky few this might well be the case. But for others there is a very different future. Boomers born in 1951 and who turned 60 this year have, according to actuaries, another 25 years of life to look forward to.

Some demographers argue there will be improvements to health and wellbeing over the next quarter of a century to the extent that the average 60-year-old today will actually live to 92. And this is merely the median; the other half of today's 60-year olds are expected to live well into their 90s.

For many, this is 30 years beyond the working life where living arrangements are funded by either an age pension or by an inadequate superannuation. No wonder boomers would prefer to not hear the bad news about retirement funding. The reason why this is an issue now is easily explained: previous generations either dropped dead soon after the end of their working lives or because of a lifetime's training in frugality they were able to mange quite well on the pension.

Boomers are not frugal and many will live for decades in retirement.

One way around this dilemma is for boomers to remain in the workforce, cribbing a few extra years to boost meagre super savings and to postpone the day of financial reckoning. This trend is already under way. In the three years to October this year, the Australian workforce expanded by 5 per cent to 11.478 million workers. However, over the same period the over-65 workforce expanded by 37 per cent to 362,000 workers.

Boomers have worked out that they cannot live in retirement in the manner to which they have become accustomed without at least a modest weekly income. In the brave new world of the 2010s, boomers will cling on to work, seeking ever more innovative ways of securing one or two days work a week: coaching, mentoring, training.

Or, the ultimate middle-class boomer fantasy: a board position on a public company which comes with kudos and a sinecure.

And it has to be said that there is every reason to support this trend of boomers working beyond 65: it alleviates the skills shortage; it reduces the drain on pension funding; a boomer working is a boomer paying tax; and arguably it keeps boomers grounded in the real and working world.

And don't go thinking Generation Y will come to the rescue: boomers' indulgence of this generation during their formative years means this lot will look after their own interests, not those of old fogeys who frankly should have made better provision for retirement.

Perhaps the solution is not to grow the tax base or to have boomers furiously invest more and more in their super; perhaps the real solution is for boomers to be trained in how to make do with less.

KPMG Partner Bernard Salt is an adjunct professor at Curtin University Business School

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