Our research has identified two uncomfortable truths. One is that there is no “one-size fits all” correct contribution. The other is that 9.5% will be enough for most people, unless the aim is to replace the age pension.
It queries the need to lift lifting the contribution rate to 12%, and also the idea of having uniform compulsory contributions.
What our study did
We used what is known as a stochastic life-cycle model to calculate the optimal level of super contributions for Australians at nine different income levels (ranging from A$30,000 to $150,000), applying existing tax, super and pension rules.
While necessarily limited, it is an advance on previous modelling that does not balance the loss of pre-retirement spending power against the income subsequently gained post-retirement. Household status, gender, assets outside of super and home ownership status also matter a lot, but are not directly modelled.
For each income group, we considered different income objectives for retirement including the Ausralian Association of Superannuation Funds of Australia’s “comfortable” and “modest” standards. We examined different retirement ages, life expectancies, super returns and effective employer contributions.
How much you need
Depending on income and other assumptions, the right amount of super contributions can be anywhere between about 3% up to 20%, although the higher levels typically assume away the age pension.
This table presents selected findings.
Some optimal super contributions by income level and objectives
- ^ retirement incomes review (treasury.gov.au)
- ^ stochastic life-cycle model (www.dictionary.com)
- ^ comfortable (www.superannuation.asn.au)
- ^ modest (www.superannuation.asn.au)
- ^ wide range of estimates (papers.ssrn.com)
- ^ Source: The 'Right’ Level for the Superannuation Guarantee: A Straightforward Issue by No Means, Khemka and Warren, 2020 (papers.ssrn.com)
- ^ Productivity Commission finds super a bad deal. And yes, it comes out of wages (theconversation.com)
- ^ Source: Australian Tax Office (www.ato.gov.au)
- ^ 5 questions about superannuation the government's new inquiry will need to ask (theconversation.com)
Authors: Gaurav Khemka, Senior Lecturer in Actuarial Studies, Australian National University