Minister for Revenue and Assistant Treasurer, Senator the Hon. Helen Coonan, today took issue with ASFA's criticism of Treasury's methodology for analysing retirement incomes.
"Treasury's expert Retirement Income Modelling Unit have been of the view for some time that ASFA's often quoted retirement income figure of $19,000 is misleading and Treasury officers have told them so," Senator Coonan said.
"Indexing tax scales by the consumer price index is the standard approach in such work and this is the approach Treasury takes.
"Treasury have re-run the numbers using ASFA's non-standard method of indexing tax scales with wages rather than inflation and the difference in replacement rates is minimal."
In Treasury's submission to the Senate Superannuation Committee the replacement rate for a male on median earnings with the SG after 30 years of work is 73% if an annuity is taken in retirement.
If tax scales are indexed to average weekly earnings (AWE) rather than inflation, the replacement rate would still be 73%.
The reason for this result is that under AWE indexation of tax scales retirement expenditures are actually higher. While using AWE indexation, less tax is paid while working, the greater indexation of the tax scales also results in much less tax being paid in retirement, and the replacement rate is typically about the same.
Using ASFA's model for indexing tax scales, retirement expenditure would actually be almost $1400 higher than the amount estimated by Treasury.
Overall, the Treasury's methods tend towards a conservative result for replacement rate with key elements including:
- Very long term earning rates for super funds are used, significantly lower than the rates of the last 15 years;
- Full allowance is made for trends in longevity;
- Tax scales are indexed in line with inflation.
Treasury also adds value through having a very comprehensive model (including the capacity to model couples) and a rigorous definition of replacement rates.
Treasury argues strongly that its approach of using Consumer Price discounting to show projected real standard of living is fully appropriate.
If one is looking at what a retiree can buy, it is appropriate to discount future amounts by inflation rather than by wages. Discounting using average weekly earnings, as promoted by ASFA, is misleading because it does not capture the real growth in the value of the Age Pension over time, which is an important feature of Government policy.
Senator Coonan said ASFA's uses of AWE discounting is non-standard and gives a misleading picture rather than the Treasury approach.
"The emphasis on dollar values is itself misguided," Senator Coonan said.
"A better picture is gained in looking at replacement rates which measure people's spending power after retirement in relation to their spending power before retirement.""
Senator Coonan said it was understandable that ASFA and the superannuation funds it represents would want to encourage people to put more money into their superannuation accounts, but they should be able to do so without attempting to undermine confidence in the superannuation system.
"I would never discourage people from saving more for their retirement, but I think it is only reasonable that they are provided with an accurate picture of the system," Senator Coonan said.
"Misleading claims about people's retirement savings do nothing to encourage them to invest in a system that has seen superannuation assets more than double in size in the past six years, from about $247 billion to $527 billion in December 2001."