Rich, retiring and raring to go, but are we ready?

Despite its best efforts, the baby boom generation is growing old. The implications are dramatic. The largest group of people in history is moving into the traditional retirement age. We need to start thinking, and acting, now.

Ageing populations are of concern because of potential large-scale loss of productive taxpayers and the increase in the number of retirees requiring financial support.

Through the developed world, policies have been crafted to mitigate some of the risks of this ageing boom. The focus has been on pre-retirement planning and accumulation to ensure there is enough money to fund the boomers.

In Australia, we've handled this well. The Australian system is as good, if not better, than most systems around the world.

We are in the best place to begin dealing with the next major issue facing industry and governments. That is managing the liquidation phase, the way pensions are drawn down, so as to ensure a dependable flow of income.

In almost every industrialised country, there are two significant demographic trends and a major lifestyle trend converging to create a retirement crunch for governments and communities.

The first demographic change is the rapid ageing of populations with the total number of people aged 60 and above tripling by 2030.The second is people are living longer than they ever have before. Over the past 50 years average life expectancies have increased from 46 to 66 years.

The major lifestyle trend is that people are retiring earlier with the average retirement age steadily falling in almost every OECD country over the past 20-30 years.

People are choosing to take some of their increased wealth in the form of more years of leisure, aggravating the retirement financing problem.

As a rough rule of thumb if all employees in a country retired a year earlier, GDP would decline two per cent and pension contributions to pay as you go schemes by the remaining workers would rise by seven per cent.

The end result is a large and growing pool of retirees, a shrinking workforce, and a nagging question of who is going to pay for these long retirements by these masses of people?

Getting funding in place for the boomers is one thing. But how do you ensure that it's enough to last?

Australia has the potential to provide some answers. Our boomers will start moving past the age of 55 from 2001, also the age at which they can access their superannuation and consider retirement.

In 1993, there were 5.3 workers to support each non-working Australian. By 2031, this will be halved to 2.6.

Australia's boomers will have access to $140 billionin superannuation payouts over the next decade alone, from a total current asset base of about $470 billion.

The big questions now are: Is it enough? And how can we make it last? What happens when the owners of these funds start to draw on their capital to support retirements?

Governments tend to shy away from the challenge of volatile equity-based investments, and instead use tax incentives to push people into 'safe' investments, like retirement savings accounts or fixed-income based annuities.

But anyone retiring at 55 may have 30 years or more to go. They don't need a safe place to invest; they need a place to invest for growth. They may live as long on their retirement earnings as they did on their salaries.

There is a tremendous opportunity for Australia to get this draw-down phase right. We have a solid base, with both an age pension system and a privately managed superannuation system creating retirement financing for the majority of the population.

We now need to develop the next stage of our retirement financing program or risk losing everything we have assembled so far.

Governments, the industry and the community must learn how to move along the maturity curve, from asset accumulation to asset management over the long term to deliver dependable, ongoing returns.

In broad terms, the Government should:

- review the development of the payout phase of its retirement incomes policy.

- ensure that incentives for income streams are further enhanced as part of this policy development.

- ensure that these incentives are integrated with age pension incentives.

- consider disentangling age pension income streams from health care benefits.

- educate potential retirees about the benefits of the income stream approach.

If workers stay longer in their jobs, it would be a win for individuals, employers and the nation. An increase by as little as 10 per cent in workforce participation by Australians aged 55-60 could largely cancel out any negative effects of an ageing population.

The challenge for the private sector is to continue developing the sort of products and services the boomers need, particularly the income stream options, and to help educate the market about why they need them.

The ideal offering could be an income product with longevity and inflation insurance properties. This does not cut into immediate consumption too deeply and leaves the retiree with some capital discretion to cope with contingencies such as health expenses.

If Governments, the community and the private sector get their acts together, there are benefits for all.

Taxpayers will be better off because they are not being called upon to fund 'double-dippers' and because the huge retirement funds built up are being managed skilfully, adding to the nation's wealth instead of dissipating it

Governments will avoid major funding problems and potentially ugly inter-generational disputes and retirees will be better positioned; investing with institutions skilled in managing assets over the long term.

Australian superannuation funds are projected to reach $1700 billion in the next 20 years.That's a powerful amount of money. It can be managed wisely to deliver long term benefits to its owners and underpin strong economic growth in this country; or it could be one of the greatest capital squanderings in economic history.

Managing this skilfully is going to be one of the foundations for Australia to be a successful economy over the next 20 years. Countries that get this wrong will have to deal with political and economic instability for years.

There are big economic and social gains to be earned by managing this second stage properly. Australia could show the rest of the world how to do it.

This is an edited speech given by Andrew Mohl, managing director of AMP Financial Services and chair of IFSA at an IFSA lunch in April.