Retirement Saving

Question 1

life cycle

Answer 1

individuals ability to work declines with aging and continue to live after they are unwilling/unable to work

Question 2

standard life-cycle model prediction

Answer 2

absent any government program, rational individuals would save while working to consume savings while retired

Question 3

actual retirement programs

Answer 3

all oecd countries implement substantial government funded retirement programs, started in first part of 20th century and have been growing

Question 4

common structure of retirement programs

Answer 4

individuals pay social security contributions while working and receive retirement benefits when they stop working till the end of their life

Question 5

two forms of retirement programs

Answer 5

funded and unfunded

Question 6

unfunded (payg) programs

Answer 6

benefits of current retirees are paid out of contributions from current workers
current benefits = current contributions

Question 7

funded programs

Answer 7

workers contributions are invested in financial assets and will pay for benefits when they retire
current benefits = past contributions + market returns on past contributions
e.g. superannuation

Question 8

objective of retirement incomes in australia

Answer 8

to deliver adequate standards of living in retirement in an equitable, sustainable and cohesive way (Retirement Income Review, 2020)

Question 9

three pillars of retirement income in Australia

Answer 9

private voluntary saving
means tested age pension
compulsory employer-contributed superannuation

Question 10

goal of superannuation

Answer 10

reduce reliance on public pension by encouraging saving

Question 11

three primary saving encourage devices for super

Answer 11

mandatory contributions: super guarantee
concessional tax treatment of contributions
concessional tax treatment of investment earnings

Question 12

mandatory contributions: super guarantee

Answer 12

employer must remit 10.5% of earnings to employee’s super fund
SG rate legislated to rise to 12% by 2025/26

Question 13

concessional tax treatment of super contributions

Answer 13

concessional contributions to super funds are taxed at flat 15% rate up to a total of $27,500 per year

large benefit to high income earners. Division 293 surcharge of 15% on Super contributions for those earning above $250,000

Question 14

concessional tax treatment of super investment earnings

Answer 14

earnings of assets in Super funds taxed at 15% rate. lower than tax on income held outside of super funds. Can make non-concessional contributions to super fund of up to $110,000/year

Question 15

accessing super

Answer 15

from the preservation age if fully retired (55 if born before 1 July 1960, increasing to 60 if born after)
from 65 years even if working
under a transition to retirement arrangement

Question 16

withdrawals from super

Answer 16

either an income stream or lump sum amounts

Question 17

superannuation costs: tax expenditures

Answer 17

foregone taxes on labor income
foregone taxes on investment income

Question 18

indirect costs of superannuation

Answer 18

inability to withdraw restricts consumption smoothing
potential unintended distributional consequences

Question 19

means tested public pension age range

Answer 19

available from from 65.6 if born before 1953 to 67 if born 1957 onwards

Question 20

basic pension rate

Answer 20

$971.5 per fortnight for singles or $1464.60 for couples

Question 21

means testing for pension

Answer 21

based on non-housing assets and income:
full pensioner if assets under $280k for single or $419k for couple
no pension if assets above $634.5k for single or $954k for couple
pension cut off if income above $2318 per fortnight for single or $3544 for a couple living together

Question 22

pension phase out implications

Answer 22

creates an implicit tax on saving
family home exemption creates a bias toward housing consumption

Question 23

evidence for myopia and adequate savings

Answer 23

Diamond (1977): old age poverty has fallen in the US as social security expanded
poverty for other groups has not fallen nearly as much

fall in consumption during retirement: Hamermesh (1984) shows that consumption falls by 5% every year for the elderly

Fall in consumption at retirement: Bernheim, Skinner, Weinberg (2001) show that drop in consumption is significant for all groups except the wealthiest (consistent with myopia)

Question 24

default behaviour in retirement saving

Answer 24

Madrian and Shea (2001)
- private retirement saving plan participation is substantially higher under automatic enrolment
- a substantial fraction of people retain the default contribution rate and fund allocation

Question 25

implications of default behaviour in design of retirement plans

Answer 25

powerful role of inertia
perceptions of defaults as investment advice

Question 26

do automatic contributions crowd-out private saving

Answer 26

little evidence that increase in offset in lower saving elsewhere
price subsidies have little effect

Question 27

longevity risk: market failures

Answer 27

adverse selection: people who expect to live longer are more likely to buy an annuity
moral hazard: those with an annuity may invest more in health to live longer
moreover, there is aggregate risk that insurance companies cannot diversify against: general underestimation of expected longevity

Question 28

demographic changes and effects on retirement saving

Answer 28

pensions and super are strongly affected by changes in demographics (increased life expectancy, declining fertility, declining labour force participation)
increases in retirement ages to offset these issues
need to lower benefits, increase contributions, reduce length of retirement, or increase labour productivity beyond growth of life expectancy to deal with funding issues