Australia's Future Tax System

Retirement Income Consultation Paper

Appendix E: Assumptions used in this paper

The Treasury uses two models, RIMHYPO and RIMGROUP, to measure the outcomes of the retirement income system. The tables in this paper show replacement rates over time and for different income earners. All tables except Table 2.3 are calculated using RIMHYPO, while Table 2.3 is based on RIMGROUP.

The RIMHYPO model takes an individual or couple from workforce entry to death. All relevant combinations of life events, government policies and retirement income sources can be modelled. This model captures in detail the legislative structure defining the interactions between superannuation, taxation and social security legislation. Assumptions in RIMHYPO are:

  • current wages indexed at 4 per cent per annum;
  • fund earnings of 7 per cent;
  • inflation of 2.5 per cent;
  • male retiring in 2040 at age 65 years, with a 35 year working life beginning in 2005;
  • based on the average expenditure over the entire 23 year retirement period (being from retirement to life expectancy with death occurring on turning 88 years of age on the 1st of July 2063); and
  • the superannuation balance is completely invested in an allocated pension, which is drawn down half way between the minimum and maximum factors that existed in the Superannuation Industry (Supervision) Regulations 2004.

RIMGROUP is a comprehensive cohort projection model of the Australian population which starts with a population and labour force model, tracks the accumulation of superannuation in a specified set of account types, estimates non–superannuation savings, and calculates tax payments and expenditures, social security payments including pensions and the generation of other retirement incomes. These projections are done for each year of the projection period separately for each birth year gender decile cohort.

Table 1.1: Replacement rates for an individual aged 60, 40 and 20 in 2008 who retires at age 65 years

An individual age 20 years in 2008 will receive SG for 45 years, while an individual aged 40 years or 60 years in 2008 has received SG since 1992.

Table 1.2: The changing retirement income system

The cameos are for a male who retires at age 65 years who has received SG since 1992. The male retiring in 2040 began receiving SG in 1995 when he was 20 years old.

Table 2.1: Replacement rates based on income — using CPI discount

Various replacement measures for a single male with a 35 year working life, retiring in 2040. Only compulsory SG contributions are made for all hypothetical cases presented.

Table 2.2: Replacement rates based on income — using wages discount

As for Table 2.1, except the results are deflated by wages instead of CPI.

Table 2.3: Aggregate replacement rates

The rates are calculated on an average basis for this entire population. They also take into consideration the various retirement ages and workforce participation of individuals within this group.

Table 3.1: Effect of increasing compulsory saving on replacement rates

The figures shown in Section 3 are deflated by CPI. Table E.1 shows the results if deflated by wages.

Table E.1: Replacement rates deflated by wages

Saving rate AWOTE(a)
9 per cent SG 65 56 47 40
12 per cent SG 70 61 52 46
15 per cent SG 73 65 56 50
  1. AWOTE is approximately $1,150 a week.

Source: Australian Treasury projections.

Changes to assumptions

Replacement rates are sensitive to the assumptions used in their calculation. Table E.2 shows how changing the assumptions made on life expectancy, years in the workforce and investment returns change the projected replacement rate of 79 per cent (based on the standard assumptions) for an individual earning 75 per cent of AWOTE.

Table E.2: Effects on replacement rates using different assumptions

Change in assumption Replacement rate%
Life expectancy (-3 years) 81
Life expectancy (+3 years) 77
Working life (-5 years) 74
Working life (+5 years) 84
Investment returns (-1 per cent) 75
Investment returns (+1 per cent) 83

Source: Australian Treasury projections.

This analysis is based on a male who retires in 2040 at the age of 65 years. He earns 75 per cent of AWOTE each year and has a 35 year working life as the base case. The base life expectancy used is 87 years. Investment return differences apply in each year of both accumulation and retirement phases.