Retirement Adequacy through Higher Contributions: Is This the Only Way?

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In view of ongoing concerns about the adequacy of retirement incomes for Australian workers, this study compares the previous 9 per cent Superannuation Guarantee with the 12 per cent rate, effective from 1 July 2025. We use long-horizon historical returns data from various asset classes to simulate retirement outcomes of workers investing in typical asset allocation strategies. Our findings indicate that the retirement adequacy of workers could be more simply improved through investment strategy design that mitigates sequencing risk rather than a broad-based increase in the contribution rate.

In 1992 Australia introduced a mandated system of retirement savings known as the Superannuation Guarantee (SG), under which employers are required to make tax-deductible superannuation contributions for their employees.

In an effort to combat the pension liability of an ageing population, exacerbated by increased life expectancy and rising health care costs, the federal government plans to gradually increase the SG from the original 9 per cent of workers’ earnings to 12 per cent to improve the standard of living of Australian retirees.

While increasing the compulsory level of savings may seem like a straightforward solution to improving retirement adequacy, added contributions are not without cost. A major risk facing workers is an unfavourable sequence of returns in the years immediately prior to retirement.

Unfavourable path dependency of portfolio returns, or ‘sequencing risk,’ is a key risk facing the retirement portfolios of workers. Coupled with a sub-optimal asset allocation strategy, the sequencing risk exposure of a larger portfolio represents a significant risk to the retirement portfolios of most workers under both a 9 per cent SG and a 12 per cent SG.

Our simulation results show that increasing the SG contributions without appropriately altering the asset allocation strategy of these investments will continue to expose workers to sequencing risk that may undermine the objectives of the increased contributions. In particular, asset allocation strategies with a higher proportion of stocks are shown to be more suitable for achieving adequate retirement outcomes for workers invested in the ‘default’ superannuation asset allocation option without the need for increased contributions.

To counter the sequencing risk experienced by workers contributing a greater proportion to superannuation under revised SG provisions, we examine the effectiveness of competing asset allocation styles within the default option to offset this risk.

Key findings

Using a simulation methodology, we find that, overall, increasing the SG from 9 per cent to 12 per cent for defined contribution plans increases retirement adequacy in expectation only.

A large proportion of modelled retirement outcomes exceed the retirement adequacy threshold. However, although increasing the mandatory contribution rate has a positive impact on the retirement adequacy of workers, the retirement outcomes from increased contributions observed in the lower end of the distribution make no substantial difference in absolute terms.

Increasing the SG provision is therefore not a straightforward solution for improving retirement adequacy. An increase in contributions means workers are exposed to greater sequencing risk as the size of their superannuation portfolio grows, particularly when coupled with a static asset allocation strategy. Indeed the downside risk relative to a target appropriate for the level of contributions nearly doubles.

We find that the impact of changes in the portfolio asset allocation on retirement adequacy depends largely on the proportion of growth assets in the portfolio. Default investment options that maintain a constant proportion of asset classes are known as target risk funds (TRF). TRFs with a higher proportion of stocks produce significantly better retirement outcomes and also experience less retirement inadequacy exposures despite the higher risk associated with stocks.

Target date funds (TDF) and dynamic lifecycle (DLC) strategies that change the proportion of growth and defensive assets during the investment horizon also support this result.

We also show that the downside risk relative to an adequacy target was lower for the DLC strategy than for any other strategy. We showed that increasing the contribution rate for a portfolio with a static asset allocation strategy merely generates a smoother profile toward an adequacy target. The same result may be achieved at a lower contribution rate coupled with a dynamic strategy that accounts for sequencing risk exposure during the accumulation phase.

There are several limitations to this study:

  • Retirement adequacy can be partially or fully met by the age pension and voluntary superannuation savings. Our analysis is confined to retirement adequacy under the SG regime only.
  • Workers’ retirement wealth ratio (RWR) may be different from those computed here due to wealth external to retirement portfolios.
  • We assume a constant investment horizon of 40 years; clearly a different investment horizon may yield different outcomes.
  • This analysis excludes taxes and inflation, which are important factors affecting retirement adequacy.

While no investment technique can make up for a fundamentally low rate of retirement savings, the DLC approach is merely an empirically grounded strategy that can reasonably be expected to outperform the TDF and TRF strategies that are commonly used by funds.

Scope exists for further research on variations of this DLC strategy. Further refinements including more flexible switching rules could make the strategy more applicable for retirement savings in practice. More sophisticated dynamic strategy algorithms are also an obvious area for future research.

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This Working Paper was produced by the CSIRO-Monash Superannuation Research Cluster a collaboration between the CSIRO and Monash University, the University of Western Australia, Griffith University and the University of Warwick in the United Kingdom. In addition, the Cluster engages on an ongoing basis with a range of industry supporters, government agencies and industry peak bodies who assist in providing guidance and feedback to researchers, providing data, and in disseminating outcomes. The purpose of the Super Research Cluster is to examine issues pertaining to the future of Australia’s superannuation and retirement systems.