Off target: why Mercer’s critique of our retirement modelling misses the mark

by Brendan Coates

Grattan research has shown that the conventional wisdom that most Australians don’t save enough for retirement is wrong. The vast majority of retirees today and in future are likely to be financially comfortable. Our research seems to have come as a surprise to many retirement income researchers.

In a recent report, superannuation firm Mercer claimed Grattan’s retirement incomes research was ‘very misleading’ and was based on assumptions that were ‘not realistic’ for the average Australian. This Grattan policy paper shows that the Mercer critique of our work misses the mark.

Some of Mercer’s claims result from an unfortunate misreading of our approach. Mercer mistakenly concludes that we model a decline in working-age incomes in the lead-up to retirement, when in fact incomes in our modelling peak just before retirement.

Mercer argues that retirement incomes should be assessed against the peak in earnings from ages 40 to 55, indexed forward by wages to age 67. But such a benchmark is 15 per cent higher than Australians ever earn while working. It also ignores the fact that most Australians aged 40-55 are still incurring the costs of raising dependent children, whereas in retirement they are not. Spending by Australian households falls by about 15 per cent between ages 45-49 and 60-64. Mercer’s work falls into the same trap as much Australian research on retirement incomes: it makes assumptions about what retirees need without looking closely at what they spend, or what they earn while working.

And Mercer’s preoccupation with ensuring all retirees, and especially wealthier retirees, are as well off in retirement as beforehand is a recipe for higher inheritances. Its approach would force low- and middle-income Australians to over-save for their retirement. Policy makers can justify lowering someone’s living standards during their working life only if they’re protecting them from even worse outcomes in retirement.

In contrast, our modelling is consistent with the lived experience of retirees today. Our 2018 Money in retirement report showed that most retirees today have a similar or higher living standard as they had while working. Most retirees today feel more comfortable financially than younger Australians who are still working. And retirees are less likely than working-age Australians to suffer financial stress such as not being able to pay a bill on time.

Retirement incomes policy needs to balance the trade-off between higher living standards when retired against lower living standards when working. And retirement modelling should reflect the reality of Australians’ spending needs, in retirement and beforehand. Unfortunately, Mercer’s critique of Grattan’s retirement research does neither.

Download the policy paper