In a crisis, it's natural to focus on the short term - what do I need to do to get through tomorrow, next week, next month? Right now, the COVID-19 pandemic is changing our livelihoods and lifestyles quickly.
Much of the superannuation news dominating headlines relates to the opportunity for individuals to access up to $20,000 from their super, as well as the fall in many super balances due to the share market decline. In these uncertain times, it's also important to remember there is a longer term.
We will get through this crisis and life will continue. There's no doubt, life will be different and Australia is likely to experience a recession for the first time since the early 1990s. Life will be tough, very tough, for some people. However, for most of us, jobs will return or continue, the football will be back, and the travel and hospitality industries will gradually recover.
Historical trends also demonstrate that share markets will recover over time. We expect stability to return to markets once we feel greater certainty about how long COVID-19 will disrupt our daily routines. Whilst we live in a period of market volatility with a global recession ahead, the co-ordinated central bank and government efforts around the world will contain the long-term impact of COVID-19 on the economy.
Our working patterns may change but most of us will continue to have a role in the workforce until we hit retirement age. Notwithstanding the loss of life due to COVID-19, life expectancy in Australia continues to rise. Simply put, this means there will be an increasing number of years in retirement for most Australians.
One of the certain outcomes from the current crisis is Federal and state government debt will increase significantly. The outcome of this is that future governments will have to increase taxation and/or reduce the level of benefits provided to Australians. While not palatable to everyone, it will be a necessity.
We also expect a different approach to Australia's retirement income.
One outcome is that taxes on superannuation may rise. Inevitably, this would reduce the final benefit available at retirement.
Another is the real value of the age pension received by many retirees may reduce due to stronger means testing or if the pension indexation is linked to prices and not wages.
Another probable outcome is that investment returns are likely to be lower than in previous years. For example, interest rates are likely to remain low for many years and dividends from many companies will be reduced. A lower return will reduce the compounding effect on our super benefit.
These outcomes mean that if we want to maintain our living standards during retirement, we will need to save more than previously. For this reason, the planned, gradual increase in the Superannuation Guarantee from 9.5% to 12% has to continue.
Extra voluntary saving, either within or outside superannuation, should also be encouraged.
The superannuation industry will come through this virus crisis as a stronger and more robust industry. Fewer funds will exist due to mergers and a there will be a stronger focus on broader risk management. Funds should also have a clearer focus on the provision of retirement incomes and the provision of wellbeing in retirement, rather than just the accumulation of wealth.
Following our experience with the COVID-19 crisis, many super fund members (including retirees) will also become more risk averse, reducing the demand for equities and increasing the demand for less volatile investments.
There's no doubt we will be living in a different economic environment for many years. One of the consequences will be that there will be an even stronger need for individuals to take control and plan for their retirement with less reliance on government benefits, whether that be the age pension, health costs or aged care.
It is critical that superannuation funds clearly explain this new context to all their members and the options available for members to prepare for their retirement. As always, the availability of accessible financial advice will be critical as well as the opportunity to make additional contributions.