The gender retirement savings gap

Strategies

Tuesday 22 December 2015

In August this year, the Senate Standing Committee on Economics (the Committee) was tasked with examining economic security for women in retirement. The Committee, which is due to report to the Government in March 2016, will consider a range of areas impacting retirement outcomes for women including; the adequacy of retirement savings, the gender retirement income gap, impediments in the superannuation system that impact the savings gap and measures to provide women with adequate retirement incomes.

..despite an increasing number of women participating in the workforce, there are still significant differences between men and women in terms of pay and superannuation balances at retirement.

The Committee’s specific focus is on the economic security of women, as despite an increasing number of women participating in the workforce, there are still significant differences between men and women in terms of pay and superannuation balances at retirement.

The statistics

A report published by the Government’s Workplace Gender Equality Agency on the status of gender equality in Australian workplaces indicates that, of the nearly 4 million employees covered by the survey, there is a gender pay gap across all industries and a concentration of women in lower-paying occupations.

The gender pay gap, defined in the report as the difference between the average male full-time earnings and the average female full-time earnings expressed as a percentage of male earnings, was around 19 per cent of full-time base salary and 24 per cent of full-time total remuneration in 2014/15. This equates to an average annual base salary difference of $17,243, increasing to $27,254 for total remuneration which includes bonuses and superannuation1.

Data from the Australian Bureau of Statistics2 also indicates that women generally have lower average superannuation balances than men in all age groups. While the gap is initially quite small (just over $5,000 in 2013/14 for those aged 25 to 34), this gap widens significantly for those approaching retirement (ie those aged between 55 and 64). In this age group, the average superannuation balance in 2013/14 was approximately $322,000 for men, compared with approximately $180,000 for women – a difference of around $142,000.

The impact of the gender pay gap on superannuation savings is illustrated in the following example.

Example 1: Impact of pay gap on super benefits

Kate and Tom, both age 30, work full time earning $73,000 and $90,000 respectively (ie roughly the average salaries for females and males based on the Workplace Gender Equality Agency data). Kate has $25,000 in accumulated superannuation benefits, while Tom has a superannuation balance of $30,000 - again these are average superannuation balances based on the Australia Bureau of Statistics data.

Their respective employers each make mandatory superannuation guarantee contributions on their behalf and they both plan to work continuously until age 65. If they do not make any other superannuation contributions, at retirement Kate will have approximately $648,000 in superannuation benefits, while Tom will have more than $795,000 in superannuation. That’s a difference of $147,000 in superannuation, just based on salary alone.

The difference is illustrated in the chart below – see Appendix for assumptions used in these calculations.

The superannuation system

The Australian superannuation system is designed to encourage both men and women to save for their retirement. The amount of concessionally taxed superannuation benefits an individual can receive is based on the assumption that superannuation contributions are made gradually over the course of their life. However, as superannuation contributions are largely linked to employment or business income, those who have lower income, work part-time, or have time out of the workforce, will typically have a reduced capacity to accumulate superannuation benefits for retirement.

The Committee is focused on the adequacy of women’s retirement superannuation savings, as generally women are likely to earn less than men, work part-time and be the primary carers for children or other relatives. However, the issues raised relating to the adequacy of retirement savings could apply to anyone who has a low income or broken periods of employment.

The impact of part-time work and time out of the workforce on superannuation savings is illustrated in the example below.

Example 2: Impact of part-time work and time out of the workforce

Kate would like to start a family in the next few years. She plans to have two children and take one year of maternity leave for each child. Her employer does not provide paid parental leave, but she will most likely be eligible for the Government’s Parental Leave Pay. When she returns to work, she expects that she would work part-time (three days per week) until her youngest child starts school.

By taking two years out of the workforce and working part-time for six years, Kate’s super balance is reduced to approximately $558,000 at retirement. That’s $90,000 less than if she worked full time continuously until age 65 and $237,000 less than Tom’s superannuation balance at retirement (see Example 1 above).

The difference in Kate’s superannuation balance is illustrated in the chart below – see Appendix for assumptions used in these calculations.

Submissions to the Committee canvas a range of superannuation-related measures that aim to address the adequacy of women’s retirement savings, including:

  • Retaining the Low Income Superannuation Contribution (LISC), which is designed to compensate low income earners (ie those with adjusted taxable income of less than $37,000 per annum) for the fund tax payable on concessional contributions. The LISC is currently legislated to be removed with effect from 1 July 2017.
  • Extending Superannuation Guarantee (SG) contributions to paid parental leave. Currently, salary or wages paid to an employee for a period of parental leave are excluded from being ordinary time earnings for SG purposes. SG contributions are also not paid as part of the Government’s Parental Leave Pay.
  • Removing the minimum income threshold for SG contributions to require employers to make SG contributions for all employees, including those who earn less than $450 per month.
  • Implementing lifetime contribution caps, rather than annual caps, to provide flexibility for those with broken periods of employment.
  • Rebalancing superannuation tax concessions, so that tax on contributions is based on an individual’s income, rather than the current flat rate of tax that applied to concessional contributions.

While the proposed measures are not specifically targeted at women, measures such as retaining LISC and removing the SG income threshold are potentially of greater benefit to women than men, as a large proportion of low income earners3 and part-time employees4 are female.

The suggested measures would, at least in part, assist in increasing superannuation balances at retirement for some women. However, on their own, they do not completely address the gap in superannuation benefits. For example, in Kate’s situation, having SG contributions paid in addition to the Government’s Parental Leave Pay would provide her with just over $7,000 extra in superannuation benefits at retirement. However, she would not benefit from the removal of the income threshold for SG contributions or the retention of the LISC, as these measures are more targeted at lower income earners.

The advice opportunity

While income and time in the workforce also play a large part in the ability to accumulate superannuation benefits, there is an opportunity for advisers to assist their female clients in understanding the importance of saving for their own retirement. As with anyone, the earlier women start contributing to superannuation, the longer they will have to take advantage of the tax concessions associated with the superannuation environment.

As illustrated in the example below, a little extra contributed to superannuation now, can make a big difference at retirement.

Example 3: Saving inside superannuation

Kate is concerned about the impact taking maternity leave and working part-time will have on her retirement savings. She begins contributing $150 per month ($1,800 per annum) to superannuation via a salary sacrifice arrangement with her employer.

If Kate starts making salary sacrifice contributions at age 30 and continues this in each year she is working, she will have around $668,000 in superannuation benefits at retirement. That’s $110,000 more than in Example 2, and about $20,000 more than in Example 1 where she works full time until age 65.

The difference in Kate’s superannuation balance is illustrated in the chart below – see Appendix for assumptions used in these calculations.

Next steps

The Committee has received more than 80 submissions from interested organisations and private individuals, which put forward a range of suggestions on how to improve the financial security for women in retirement. The submissions included a number of superannuation-related measures that would, at least partly, assist in improving the retirement savings for women. However, these measures alone are unlikely to completely address the superannuation gap and advisers can play an important role in assisting their clients develop strategies to save for retirement.

Further information

Senate Standing Committee on Economics, Economic security for women in retirement, August 2015

Workplace Gender Equality Agency, Australia’s gender equality scorecard – Key Findings from the Workplace Gender Equality Agency’s 2014-15 reporting data, November 2015

Australian Bureau of Statistics, 4125.0 Gender Indicators Australia, August 2015

Appendix

Assumptions

The following assumptions are used in each of the examples above:

  • Earnings rate in each case is 7.36 per cent (before tax and net of fees)
  • Earnings are made up of 38 per cent income (27 per cent of which is fully franked dividends) and 62 per cent capital growth
  • Income is taxed at 15 per cent inside super
  • Capital gains qualify for the capital gains tax (CGT) discount (of 33 1/3 per cent inside super)
  • All figures are in today’s dollars (assuming the Consumer Price Index (CPI) increases at the rate of 2.5 per cent per annum)
  • Contributions are made evenly throughout each year

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1 Workplace Gender Equality Agency, Australia’s gender equality scorecard – Key Findings from the Workplace Gender Equality Agency’s 2014-15 reporting data, November 2015

2 Australian Bureau of Statistics, 4125.0 Gender Indicators Australia - Table 25 Superannuation balance at, or approaching preservation age, 55-64 years 2003-04 to 2013-14, August 2015

3 Australian Bureau of Statistics, 4102.0 - Australian Social Trends, July 2008

4 Australian Bureau of Statistics, 6202.0 Labour Force Australia - Table 1 Labour force status by Sex, Australia – Trend, Seasonally Adjusted and Original, November 2015

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