Friday, November 09, 2012

Good news, and bad news. You're more likely to outlive your super

A decade ago an Australian man who had just turned 50 could expect to live another 29.9 years. Today the official figure is 32 years. Even the past year has made an enormous difference. A year ago a man turning 50 could officially expect an extra 31.7 rather than 32 years.

The extraordinary jump in longevity detailed in the new Bureau of Statistics life tables is playing havoc with Australia’s superannuation system. Australians who get their super in a lump sum are increasingly likely to exhaust it before they die, and even Australians who take it out gradually at recommended rates are facing the same fate.

Michael Sherris, professor of actuarial Studies at the University of New South Wales says financial planners don’t understand the risk.

“They’ll sell people what they call superannuation accounts because they let people draw down what they need, but they typically last fifteen, maybe twenty years. While twenty years is what the tables say retirees have left, longevity is improving all the time in a way not fully recognised in the tables and there’s enormous variability about the central figure.”

The life tables released Thursday say a girl born today can expect to live 84.2 years and a boy 79.7 years, but if they survive the first few relatively dangerous decades the figures and higher. Professor Sherris says generational changes and improvements in medicine mean a girl born today is quite likely to live to 100, with about half the girls born this year likely to live beyond 100.

“When their super runs out these people fall back on the pension. For some it’s a sudden drop in income. But they won’t buy lifetime annuities - so called longevity insurance - in part because the annual income it gives them is small.”

Jeremy Cooper who chaired the government’s inquiry into superannuation in 2010 is now an executive at Challenger Limited, one of the few firms selling lifetime support. He says most Australians prefer the “Holden Kingswood” - a product that pays them what they want, until it runs out.

“What they hell do you do when you turn 87?” he asks... “You are still spritely and you think you’ve been frugal, but the money’s just not there.”

“It isn’t so bad for Australians who grew up during the war - they are used to hardship. But for the next wave of retirees it’ll be an awful shock.”

“It’s the biggest problem in our superannuation system. We’re pretty good when it comes to accumulating money, but we mess it up at the end.”

Professor Sherris thinks one of the reasons Australians shy away from longevity insurance is that they get upset at thought they mightn’t live long enough to get what they could. “It’s an odd attitude. When we insure our cars we don’t much mind if they are not damaged and we don’t get a payout, but when we insure our lifetime income we seem to feel cheated if the insurance company keeps the money rather than our families.”

The figures show men born in the Australian Capital Territory likely to much longer than those born elsewhere with a boy born in Canberra facing an even chance of reaching 81 compared to 80.3 in Victoria and 79.8 in NSW. The difference is much less marked for women, with girls in most states likely to live between 84 and 84.5 years.

Indigenous Australians are more than twice as likely to die at any age as non Indigenous Australians. Australians in cities are the least likely to die suffering only 5.6 deaths per 1000 compared to 8.2 per thousand in very remote locations.

In NSW the death rate is the highest in Bourke, Brewarrina, Wellington and Central Darling local government areas. In Victoria, the worst areas are Ararat, Central Goldfields and Nurrindindi.

In today's Canberra Times, Sydney Morning Herald and Age

TECHNICAL NOTE: The ABS life tables are likely to underestimate actual life left in two ways.

1. They ignore cohort effects. They are prepared using death rates for people who have just been a certain age. But the next group of people to be that age will be from a younger cohort and likely to have a lower death rate because of changes in medical technology etc that have already taken place whether or not there are any further improvements in medical technology etc from here on.

2. There may be further improvements in medical technology etc from here on. (Or there might not be. There might even be outbreak of disease that sets things back, but there are usually improvements.)

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