Building prosperity with grey expectations

There's no doubt prosperity is an important aspiration for Australians. We all hope to be the people who maintain their lifestyle once they stop work, the people whose "next phase" matches the sun-kissed images we see in retirement brochures. 

And we all hope to be citizens of a wealthy, stable country: a country that provides well for its people, and where those people are happy to raise their families and grow old. 

However the reality - at a national level and at a personal level - is a long way from this shared vision of prosperity. The reality of retirement for millions of Australians is shifting, uncertain and increasingly worrying. And for the nation, the picture looks equally unsettling. 

But for Australia and most of its people, that picture is a long way off, and that makes it all too easy to stick our heads in the sand and continue to live for today. 

Today, for every retired Australian, there are around five people working and paying taxes. By 2050, that number will drop to just over two and a half working people for every person who's retired. This is a demographic certainty. This has significant ramifications for the nation's future finances. 

As individuals and as a nation, we need to take decisive action to preserve and enhance the prosperity of our increasingly large numbers of retirees. We need to do this at a time when the number of taxpayers per retiree is declining.  

There are also factors working against us including we're working fewer years than we should, we're living longer and we're not saving enough for retirement.  

With a future that will see a doubling in the number of retirees per worker, the fiscal challenge ahead of us will make the current one look like child's play. 

In a relative sense, Australia has made good progress, but clearly there's room, and the need, for improvement. We need to take action now to counter what is the most predictable threat to our prosperity over the next 20 to 30 years. 

Achieving the prosperity we desire requires planning and action at two levels: the national level and the personal level.  

For Australia, we need a healthy pool of national savings supporting national investment. We also need to ensure our future generations are unburdended by debt and there are lower levels of taxation.  

It's a society financially able to help those who need it, with older citizens enjoying well-funded, comfortable later years. For those older citizens, it's a retirement of independence and pride, of contribution and participation.  

For many it's financial freedom - and that means choice: choice of lifestyle, choice of care, choice about working after supposed "retirement". However, the harsh reality is that, for many Australians, financial freedom in retirement is a pipe dream, so the draw on the public purse will only increase as we inch closer to the demographic reality. 

This is something we can resolve, but only if we have reasoned public debate around the long-term affordability to the public purse of an ageing population. 

In 2006, the United Kingdom Pensions Commission published the simplest summary of options available to address the growing financial burden of an ageing population in that country. It concluded there are four options to either save more, work longer, increase taxes or be poorer.  

No one wants to be poorer, and no-one wants to pay more taxes, but it's inevitable if we don't make some tough calls. The other two options - saving more and working longer - should surely be the subject of more considered debate. 

Australia may be better off than most, but despite the fact we've been required to save nine per cent of our salaries via superannuation for more than 20 years, six in 10 retired Australians still draw the full age pension and eight in 10 still receive some pension support. 

To address this, our country needs to promote policy that incentivises people to save more, and encourages them to work longer and budget for an affordable income in retirement. We also need to help individuals save more and make the best use of what they have. 

Within our sector of the economy, it is critical that public policy around super and retirement savings encourages people to save more and draw down an appropriate income in retirement. 

At AMP, we strongly believe the regulatory changes introduced in the last three years across prudential regulation, across consumer protection regulation and across superannuation regulation will work. 

However, they need time to be implemented and time for their effectiveness to be assessed. We are strong supporters of this Government's approach to letting these changes bed down before embarking on any further disruption to the financial services sector. 

In addition to regulation and policy, we need to encourage Australians to save more for their retirement. The simple reality is that saving just 9.5 per cent of your earnings is not enough. While our superannuation system gives people choice, it also increases complexiy, which creates the need for financial advice.  

The provision of quality financial advice is a hot topic right now, yet very few people understand the true nature of financial advice and where its real value lies. 

High quality advice starts with discussing with a client their life goals - and for those nearing retirement - what they want to do when they stop work. Many advisers tell us, this can quickly become a process of marriage guidance as couples assess the prospect of life together after work. 

It then involves an assessment of the financial viability of achieving the clients' life goals and a process of rebudgeting and planning to achieve a suitable post-retirement income without having a negative impact on short-term spending. 

It may then progress to the clients' attitudes to risk in investing and possible risk mitigation strategies. Then it's about asset allocation and product category selection. This accounts for about 90 per cent of the process - and that's before arriving at product selection.  

There's a critical role quality financial advice plays in not only enhancing retirement incomes but also managing the key risks retirees face when the time comes for them to live off their super. Our industry needs to continue to work to improve the professionalism of its participants to ensure the highest confidence in financial advice.  

Australia has a world-class retirement savings system and is doing well - but complacency will turn today's strong position into a weak one tomorrow. All the key stakeholders in our industry need to train their focus on ensuring we're working together to manage the consequences of our ageing population. 

We do not want the option to be poorer to become our reality. 

This is an abridged version of a speech AMP's CEO Craig Meller, delivered by at a recent CEDA event.