Why super will play a larger role for young Australians

Ballooning old-age costs are under the microscope. The cost of the age pension exceeds $41 billion a year and is expected to grow to $50 billion within four years. As the population ages and spends longer in retirement, the cost will keep growing.

The age pension makes up 10% of all government expenditure, according to Rice Warner's findings in the Institute of Actuaries' report "For Richer, For Poorer".

One of the risks for retirees and pre-retirees is reliance on the age pension. Already more than 326,000 retirees have had their pension reduced or cut out in this year's budget.

The report finds half of the population has a strong dependence on the age pension. In putting a value on it for people retiring today at 65, it says that to purchase an equivalent income they would need a capital sum of $816,000 for a couple, $419,000 for a single male and $482,000 for a single female.

One of the latest developments in the analysis of the retirement system is putting the family home up for discussion in the retirement debate, whereas before it was always absent. The main home owners are baby boomers rather than younger generations.

According to projections for the older baby boomer generation, retirement wealth from the family home is around 49% of their total assets, with 43% from superannuation. But because the younger generation is projected to have a lower level of home ownership, a 30-year-old's retirement wealth from the family home will make up only 32% of their wealth, with 61% from super.

Thirty-year-olds will do well from super as they will benefit from a lifetime of super guarantee contributions, currently at 9.5% of income and due to rise to 12% over time.

As Australians build up their super balances, they will depend less on the age pension. However, the pension will remain the foundation for families on lower incomes, who need it to have an adequate standard of living.

There are plenty of conflicting views on whether any more changes need to be made.

Rob Heferen, Treasury's head of revenue, was reported in The Australian Financial Review as saying that the low tax rates for super were fair because the highly paid have to pay a contributions surcharge and there are limits on how much people can deposit in their super accounts.

Get stories like this in our newsletters.