Women in a super crisis

PORTFOLIO POINT: The super system is failing women … and many will retire with enough funds to last them just a few weeks into retirement.

As the warring political parties in Washington prepare to duke it out over America’s parlous financial situation, millions of Australians are facing their very own personal fiscal cliff.

Better medicine and improved lifestyles has allowed us to live longer. But hopelessly inadequate savings and a deeply flawed superannuation system that has provided windfall gains to our financial institutions could confine the bulk of retired Australians to live well below the poverty line.

The looming crisis is particularly apparent among women who outlive men but who earn less during their working years.

As our superannuation system is based upon earnings, that means women retire with woefully inadequate savings.

According to the Australian Human Rights Commission, half of all women aged between 45 and 59 have $8,000 or less in their superannuation accounts. And the average payout for women is a mere $37,000, just one-third the average amount paid to male workers, which itself is a staggeringly low $110,000.

Why the large gap? For starters women earn less. But they are also far more likely to move out of paid employment to care for family members, whether having children or looking after ageing parents.

In addition, women outnumber men when it comes to being employed part-time or casual.

The financial impact of that time out of the workforce snowballs over the years, as returns compound. A small gap in contributions between males and females during early years in the workforce compounds into a yawning chasm in later life.

That’s the case even if the absolute wage gap remains a constant and a woman remains in full-time paid employment. In reality, however, males advance quicker up the pay scale, so the gap widens over the years. So time out of the workforce can be financially catastrophic for retirement savings.

A Sydney company called DomaCom has built a computer model that calculates the effects of earnings, savings and spending patterns on superannuation.

Matthew Locke, who built the model and is the firm’s general manager of business systems, punched in a few numbers to demonstrate the effect on superannuation of time out of the workforce.

We chose a couple who start work at 25, both on $80,000 in today’s money and have a $250,000 mortgage with monthly repayments of $2,500. So we have no gender wage gap and a relatively low mortgage and, for the benefit of this exercise, we’ve assumed steady superannuation returns.

If the couple have no children and both continue to work, they will retire with almost $2.5 million in superannuation. That’s enough to last them through to the ripe old age of 110, assuming they spend $70,000 a year, the same they were spending when working.

But should they start a family, and one partner takes five years out of the workforce, the superannuation balance shrinks alarmingly. It drops to $1.4 million, enough to last them until they are 86. So five years out of the workforce costs the couple 24 years of superannuation savings.

Few Australians will finish their working lives with anywhere near $1.4 million, let alone $2.5 million. For women, and particularly single mothers, the superannuation system has been an abject failure.

Even for highly paid females, the system is discriminatory. Because the government has capped the amount an individual can pay in in any one year at $25,000, women can never recapture the lost superannuation income from time out of the workforce.

According to Locke, multiple factors come into play to drastically hit retirement savings when one partner has time out to raise a family.

There is the obvious loss of income. Then there are higher living costs involved in raising children. As a result even well-off couples tend to live off the drawdown facilities on a home loan so that, for many, a pile of debt remains on the mortgage when super becomes available on retirement.

“That just completely crunches the asset base, and the amount you have to live on,” he says.

According to the Association of Superannuation Funds of Australia, a couple needs $55,000 a year income while singles will need $40,000 to live on during retirement. That means around a half of all women within 15 years of retirement have enough superannuation to last about six weeks. The average woman retiring now has about enough to last until next September.