Analysing Australia’s place in the Global Retirement Index

Lightly edited transcript

Louise Watson: Hello and welcome to Navigating the Noise, a podcast by Natixis Investment Managers Australia, where we bring you insights from our global collective of experts to help you make better investment decisions. I'm Louise Watson, Head of Country for Natixis Investment Managers in Australia and New Zealand. And today I'm joined by Dave Goodsell, the Executive Director of the Natixis Centre for Investor Insight, a research program which analyses and reports on financial and investment trends. As part of this role, Dave leads a series of global research programs, including the very highly regarded Global Retirement Index, which is what we're here to talk about today as the 2024 version has just been released. Dave, welcome to the podcast.

Dave Goodsell: Thanks for having me, Louise.

Louise: Now, Dave, I know you're from Massachusetts, and before we get into the retirement index, I'd like to start with something a little bit more personal. And I know the music scene is really big on the east coast of the U.S. and I know that you love music, and in fact, I heard you play in a band. Can you tell us a little bit more about that?

Dave: I do. I actually am playing in a cover band, in a bar band, that plays around Cape Cod in the summer. And the funny part of the story is I stopped playing after college. A drummer I know stopped playing after college, and so did a guitar player. We all started playing again during COVID and got together after that, and so we've had a band. And now we've brought it in where my brother's a singer and guitar player, and our drummer's daughter, who is half our age, is our lead singer.

Louise: I love it. Well, I'm definitely making a special visit to Cape Cod just to see that cover band. Now, for those who aren't familiar with the Global Retirement Index, can you tell us what it's all about? Why do we do this piece of research and why is it important?

Dave: Well, sure. Retirement is a universal concern for people. We all work through our lives. We're all trying to ensure that we can live, some people would say with dignity, others would say in security, but this idea of we all work towards that goal. How do we know where the factors are best aligned to ensure that we have that security at the end? I always stress this. It's not a best place to live in retirement type of place, and it's not the best pension systems. We really try to look at the factors that are going to determine if people can have a secure retirement or not.

Louise: And these factors you talk about, they're part of the index where you measure four sub-indices: finances, health, quality of life, and material well-being. Why do you choose these measurements, and broadly, what measures sit within each of these?

Dave: Well, I think the interesting part is if we translate those indices, they represent some very serious questions for individuals. It's, can I afford to retire when we think about the finances in retirement? Is the economy strong and is it going to support my retirement? That's that question around material well-being. Will I have a healthy lifestyle? Will I get the healthcare I need as I get older? And then finally, what kind of life am I going to have? So, we really thought about this and looked at 17 different factors out there. We won't list them all, but when we think about finances and retirement, we're thinking about things like interest rates, inflation, we're thinking about taxes.

And then when we look at things like material, well-being, we're looking at things like unemployment, and a lot of people might question why unemployment is important to a retirement survey. Well, think of it first, it's a representation of the economy and how strong it is. And second, for retirees, long-term, they need to be worried about the amount of funds that are flowing into pay-as-you-go systems. Here in the States, for example, it's a payroll tax that funds retirement benefits, so making sure it's there. And of course, with healthcare, we're looking at uninsured and insured health expenditures. How much is that going on? And then finally, quality of life is a really interesting topic to us because you look at things as ranging as air quality, water and sanitation, and then the happiness index. Because really, it comes down to this. Are you going to be secure? Are you going to be happy in retirement?

Louise: I want to know if I'm going to be happy in retirement, Dave, no question, so take us through the headline results for the year. Who are the big movers in the index and why?

Dave: Well, what's interesting to me is I went through, and thinking about this, there's not a ton of movement in terms of countries moving in and out of the top 10. There's a lot of moving in between. That's a good thing actually, because that tells us that the countries are all hitting the right notes. When you think of all of those four sub-indices, all of those indices underneath it, what it tells you is there's a good balance across that, and that tends to be the top performers.

Louise: And looking at those results now for Australia, we've maintained the same rank this year, staying at seventh, but some parts of its overall score have changed. In the health index, Australia's been steadily improving. It was in 11th spot in 2014 and is now in fourth place. Why is our health ranking improving in Australia, both on a relative and absolute basis?

Dave: Sure. When we think about that, I would put it in terms of what's happening for people's lives. And it's a lagging indicator too if we think about this. We have to collect this data from third parties. It suggests to our analysts that this is the result of a really strong policy around COVID during the pandemic and trying to crack down and make sure that people were healthy throughout that. So, you see that the lifespan of people, their life expectancy, is good in here. I'd say conversely, in the U.S., we're seeing a declining life expectancy, and we see three reasons here why it's declined by about a year and a half. First, you had COVID. Second, you have accidents. Huge populations, accidents have an impact on that. And third is things like the opioid crisis that we've experienced. They're all having an impact on it, and they all eventually have an impact on what people will experience in retirement.

Louise: And earlier you mentioned the material well-being sub-indices. Unlike health, Australia's doing worse, down to 16th this year from 13th last year. What are the main contributing factors on this one?

Dave: Well, it's interesting in terms of material well-being, we see the numbers around things like income inequality, which the developed world, we tend to score lower on that. The larger the economy, the lower the score tends to be. The other part of it too is this idea of unemployment, and we talked about that. How does that affect retirement security? Unemployment's a drag on the performance for Australia this year. Remember, it was higher, a two-year high, at the beginning of the year. It's since moderated, but that is something that will impact that whole material well-being piece of it.

Louise: Dave, the Australian superannuation system is seen as world-leading, and you reference it in your research quite often. It includes 30 years of mandatory employer contributions, which is now at 11.5% of an employee's salary. If the super system really is super, why is Australia not ranked higher than number seven? What other factors are taken into account? And why do they drive positive retirement outcomes for countries like Switzerland, Norway, and Iceland, which sit at the top of the table?

Dave: Well, and this is the critical point, we're not looking at the pension systems in different countries. We're not looking at the savings vehicles. What we try to look at is really, is that environment that people are living in, that economic and social environment, is it leaning towards providing security in retirement? And I think, by the way, number seven is an excellent finish. It's very strong in there. The movement that happens in that top 10 is by small changes in these sub-indices. Australia's performance has historically been very strong.

Louise: There's a section in the report on the retirement savings gap which I found fascinating. Can you explain what this is and why it is particularly acute in some countries?

Dave: Oh, sure. Well, the retirement savings gap is a pretty simple premise. It's thinking about the amount that people have saved for retirement and the amount they're going to need to fund their retirement, and that gap continually grows. I think we see globally in 2015, that gap was about $70 trillion, all the countries considered in this. By 2050, it's expected to be somewhere around $400 trillion. So, you think about it, people aren't saving enough for retirement. Their costs are going to go up, their expectations have to be managed, and somewhere in there, this gauge helps us understand how big the problem is. In the US, we've seen that as one of the big challenges too. It's the fact that savings are not as strong as we'd like to see. There's 25% of people who are nearing retirement who have nothing saved for retirement. We don't have mandates. We have voluntary participation. And don't forget, one third of our country doesn't have access to a D.C. plan.

Louise: Another statistic I found startling in the report was that despite Australia's excellent superannuation system, that 62% of Australians who are 70 years of age and older, which is nearly 1.7 million people, do not have any superannuation at all. The Australian government has introduced new legislation over the last few years after extensive lobbying by super advocacy groups such as Women in Super and ASFA. And these have included the removal of the $450-per-month threshold, which saw many low-income earners never benefit from employer super contributions. And next year, we'll see the introduction of super on paid parental leave. Super funds are also taking proactive steps to reduce the gap, and we've recently seen Australia's second-largest super fund, Australian Retirement Trust, announce that it will move all of its members under 50 years of age into its high-growth option by default as a way of boosting their super balances. How far do you think these types of initiatives go to solve the issue? And how are you seeing other countries around the world try to boost the savings of their retirees?

Dave: I think it's some of the pieces that we just talked about there, but some are looking at the structural changes that need to happen. In Chile, for example, that's the model they have. It's a mandated contribution plan. 10% of your income goes in no matter what. It's the model that covers all of Latin America. They've all borrowed from it. But they're looking at how do we enhance that model? They may increase their mandatory contributions another 6%. They're using that 6% to perhaps fund benefits for people who are underfunded for retirement as well, so a little more maybe like social security in the U.S. I think what it takes is creativity. It takes this idea, we've got a problem that is major, that has to be addressed, and no idea is a bad idea. Just put it on the table and vet it out. A lot of people have to go through these motions of understanding what's in front of them.

The other part I always stress is education. Most people don't know what's available to them in any plan, in what they're doing. In the U.S., participant education is one of the biggest issues we face, and another is advice. Now, the supers are a little different where you're buying in, you don't necessarily need advice on it. In the U.S., people are left to their own device, literally. They have to figure how they're going to do their allocation. I always say it's like we give people the keys to a Ferrari and then don't tell them how to drive.

Louise: Wow, that's pretty dangerous.

Dave: Yes.

Louise: Another aspect that really drives the outcome on retirement savings is demographics, and you discuss in the report how the aging population in many countries is causing difficulties as there are fewer people working to pay for the pensions of those in retirement. And we covered in an earlier podcast with an Australian demographer, Simon Kuestenmacher, how these demographic shifts are incredibly difficult to change, but one partial solution for countries like Australia seems to be immigration. Do you think this is a useful solution to pursue, and are we likely to enter a global war for young people to help ease the burden of our aging societies?

Dave: I'm going to preface this by being in the United States in an election year, I don't really have an opinion on immigration, as it were. But what we have seen is its huge issue facing a lot of countries. How do we do this? And I think there's an example, and I don't remember the specifics. We wrote about Australia's immigration policy probably about five or six years ago as a positive to try and bring younger workers in. I think you can contrast that with Japan, where they have highly restrictive immigration. They've got an aging population, and if you think about the old age dependency ratio, that's the key thing to be thinking about. That measures how many people are over the age of retirement, age 65, and how many people are paying for them to have retirement benefits. So, for example, old age dependency in Japan was 50. That meant there's 50 people over 65 and 50 people paying into the system. By 2050, they anticipate it's going to be 79 people over 65, the remaining 21% putting into the system to support them. That's a crisis in the making.

Louise: While all of this is happening, what are the risks to achieving security in retirement?

Dave: Well, it's interesting. There are a lot of long-range risks that we're all facing, and they really pop up at different times. And really, I think the biggest risk we're seeing this year is we think about it in terms of ourselves. There's an old saying, "We've met the enemy, and it is us," and we really have to learn as investors to be a little more smart about how we think about things. We see that people generally have very high return expectations, a little too high to really do that. They match that with not defining risk in the way that they may need to. A great example is we asked people to define risk last year. 6% of people thought having too much in cash was a risk versus 23% who thought about volatility.

 And really, the other thing I'd say on that is people forget of what the purpose of investing is. They think that risk is volatility. They think it's losing their assets. We ask financial advisors the same thing. They'll say, "Yes, those are risks." They're twice as likely to say the biggest risk is missing your goals. So really setting up a logical framework for how we look at investments, keeping ourselves in check in terms of what we expect, what we'll do, and the risk we're willing to take to get there.

Louise: Thank you, Dave. It has been so great to have you on the podcast and get your insights into Natixis Global Retirement Index, which is always of great interest in Australia. If you enjoyed the episode, please follow us on your favorite podcast platform to be notified of future episodes, and tune in again to hear more from our global collective of experts