Replacing the Income Replacement Ratio

Transcription

1 Replacing the Income Replacement Ratio Joanna Legutko

2 IRR = INCOME POST INCOME PRE why talk about this?

3 Do you know your projected IRR? 1. YES 2. NO

4 What is your projected IRR? 1. <40% % % % 5. >100%

5 What IRR target is adequate? 1. 60% 2. 70% 3. 80% 4. 90% %

6 Why not target 100% IRR? TAX PRE INCOME = CONSUMPTION + SAVINGS + TAX SAVINGS PRE INCOME PRE CONSUMPTION PRE

7 Why not target 100% IRR? TAX PRE Reduction? Lower income, lower marginal tax bracket, higher tax rebate SAVINGS PRE TAX POST INCOME Reduction: No more retirement savings CONSUMPTION PRE I POST CONSUMPTION POST - Work expenses - Home production + Leisure + Health =? Retirement

8 Why not target 100% IRR? TAX PRE SAVINGS PRE TAX POST 70% CONSUMPTION PRE CONSUMPTION POST 75% 80% 100%? Retirement

9 Why not target 100% IRR? TAX PRE SAVINGS PRE TAX POST 70% CONSUMPTION PRE CONSUMPTION POST 75% 80% 100%? Retirement

10 CONSUMPTION POST CRR = CONSUMPTION PRE

11 I POST - T POST CRR = I PRE T PRE - S PRE

12 What CRR target is adequate? 1. 70% 2. 80% 3. 90% % 5. >100%

13 Why use CRRs instead of IRRs? More individualised ratio: Actual Savings change Actual Tax change More accurate communication of retirement adequacy

14 If IRRs are too simplistic, and CRRs are more accurate, how does changing from IRRs to CRRs affect actual fund members retirement outcomes?

15 We tried this for a real fund.

16 UCT Retirement Fund DC fund 4867 members Academics Admin Staff New insourced support staff 23% 51% 26%

17 Age

18 Past service

19 Average Salary

20 Average Pensionable Salary %

21 Pensionable Salary and Contributions Pensionable salary is 50% to 100% of Salary Contribution rate of 22.5% of Pensionable salary Additional Voluntary Contributions permitted o But rarely utilised Pensionable salary % recommendation based on Salary Lower Salaries = lower Pensionable salaries

22 Contribution % by member group 10.5% 13.7% 15.4%

23 Fund Value

24 % invested in High Risk Fund

25 Projecting RRs i = 1%, 3%, 5% or 4% real a 65 : Sanlam inflation linked annuity + mortality improvements If Married = Joint life annuity, 75% spouse Salary increases: 1% real + 1% promotional Tax increases: 1% real Pension tax: grossed up for 40 years service

26 UCTRF calculator UCTRF has a retirement calculator No mortality projections or promotional increases Available to members Soon to be included in benefit statements Changes to 72% when allowing for mortality improvements and promotional increases

27 Distribution of IRRs 30% average IRR 26 out of 4867 people are >75%

28 Distribution of IRRs 18% 32% 36%

29 Allowing for Tax TAX SAVINGS TAX CONSUMPTION CONSUMPTION Retirement

30 Change in IRR as a result of Tax Reduction in IRR for members with high salaries and pensions 9% average increase

31 Allowing for savings SAVINGS CONSUMPTION CONSUMPTION Retirement

32 Change in IRR as a result of savings 20% average increase

33 Overall change: IRR to CRR TAX SAVINGS TAX CONSUMPTION CONSUMPTION Retirement

34 Distribution of IRRs 30% average IRR 26 out of 4867 people are >75%

35 Distributions of CRRs vs IRRs 39% average CRR CRR 16 out of 4867 people are >100% CRR

36 Distributions of CRRs vs IRRs CRR

37 How do we measure the effect? CRR TARGET > IRR <> 100%? 75% TARGET

38 Change in CRR Projected Living Standard = 100% IRR 75% TARGET -1

39 Change in Projected Living Standard 75% IRR target too low 75% IRR target works Could target less than 75% IRR

40 Change in Projected Living Standard -9% 0% 0%

41 So everyone is doing badly. but those worst off are actually worse off than they think?

42 What if there was a universal SOAG? CRRSOAG = I POST T POST + SOAG I PRE T PRE - S PRE

43 Effect of SOAG 30% average IRR 39% average CRR 47% CRR with SOAG

44 Change in living standard with SOAG

45 Change in living standard with SOAG 11% 26% 91%

46 Conclusions 75% target IRR about right for white collar workers Higher IRR targets needed for low income workers CRR projections more accurate than IRR for everyone SOAG makes huge difference for low income workers And finally

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48 Thank you Questions?