Why won’t retirees spend their superannuation?

It is not only longevity risk – fear of outliving money – that is the main driver of retirees not spending.

A paradox is emerging in Australian retirement: retirees aren’t spending, even when they can afford to do so.

By James Dunn

With about 85 per cent of retirement benefits being taken as income streams, actuarial firm Milliman analysed the spending of more than 300,000 Australian retirees and discovered that more than half are spending less than the age pension each year. Milliman found that even those who are picking up a partial age pension or who are entirely self-funded are also behaving frugally.

Jeff Gebler, a senior consultant at Milliman, says it is not only longevity risk – fear of outliving money – that is the main driver of retirees not spending. 

“Covering unexpected expenses like future medical bills and residential aged care also worries them, and they are reluctant to spend their superannuation too quickly. The result is that many retirees are holding money back for future years when they will never spend it.”

Age pensioners fear spending

It appears that even people receiving the age pension – the safety net – probably won’t spend it all, says Gebler. 

“Rationally, they should have no need to self-insure by keeping part of their age pension payment. If your only source of income is the age pension, it’s a guaranteed, inflation-linked income stream. They are protected from inflation and investment risk.”

Related: Is the golden age of super over?

The data “raises as many questions as answers”, he says, and directly undermines common practices such as linking pension products, including the proposed comprehensive income products for retirement (CIPRs), to a rising consumer price index (CPI), as well as industry assumptions such as the 70 per cent replacement ratio for retirement income.

“If, as our analysis indicates, retirees’ overall cost of living does not increase in line with CPI – instead, it falls or stays flat – and the components of their spending differ substantially, this means that CIPRs will assume an income target that is not in line with retirees’ real-world lifestyles,” says Gebler.

Boosting super may not improve retirement

The data strongly suggests that measures to boost super may not be enough to produce improved retirement lifestyles without a deeper understanding of the motivations driving retiree behaviour.

“We’re only really scratching the surface in understanding what motivates people. Everyone is going to have different spending patterns, depending on whether they own their house or rent, their health, their needs,” says Gebler.

“Retirees overestimate some expenses and underestimate others, and the likelihood of those expenses, because they have different perceptions of their needs and the risks they face; we see this spending data that surprises us,” he says.

Do older people need less income?

Nick Callil, senior consultant and head of retirement income solutions for Willis Towers Watson Australia, sounds a note of caution about the “cohort effect”.

“If we’re saying that spending declines as people get older because, say, people of 80 aren’t doing around-the-world trips, is that a cohort effect? Do today’s 80-year-olds have less money and so they’re going to spend naturally less anyhow because they’ve got naturally less to live on?”

Callil says current debate and products being built now are for the next generation of retirees. This generation may expect to maintain their standard of living to their retirement, but in many cases this will mean spending more than the age pension. 

He says the Australian Government’s retirement income framework is designed around the concept of a broadly constant real income throughout retirement.

However, is this likely to be the case? Will someone who is 60 years old now be spending the same amount at the age of 90 as they did in their first 10 years of retirement?

Probably not, says Callil.

Today’s 60-year-old typically wants to travel overseas every two or three years if they can afford it, but this is likely to drop off in later years.

“I think there’s an argument for the system to be based on expectations of a step-down spending pattern, in real terms, as people get older.”

Selling the family home

About 74 per cent of retirees own their homes outright and some are sitting on valuable home equity due to the rise in house prices.

They could sell the home and spend more in retirement, but many have a strong attachment to the family home.

Gebler says the problem when designing policy is that there can be a big difference between revealed preferences and stated preferences. 

“Surveys of retirees suggest there isn’t really a strong preference for leaving money to their children, but then you see a revealed preference that suggests otherwise. It’s very common for the house to be left to the kids – people say one thing and they do something else,” he says.

Downsizing the home for retirement

The government wants older people to downsize their houses to augment their super.

Its latest scheme aimed at encouraging older Australians to downsize their homes took effect on 1 July 2018 – but both the government and the super industry are “only just starting to understand that people’s reasons for not downsizing might not be financial”, Gebler says. 

“People are driven by emotional or other decisions.”

Read next: Federal Budget 2018 – the verdict on super and retirement

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