The superannuation industry must start focusing on generating the right levels of income per year for retirees if it is to address the challenge of achieving adequate retirement funding, according to a Nobel Laureate professor.
When examining the issue of adequacy the industry around the world is considering the problem from an overall wealth perspective which is an incorrect measure, MIT School of Management professor of financial Robert Merton said.
Merton said the reasoning behind this is the goal that should be set for superannuants from the beginning of their working life.
“The goal is to get a stream of income in retirement for life that protects a person’s standard of living against inflation,” he told delegates at a Finsia presentation.
However the current elements used to define the standard of living is where the discussion begins to lose its way, he said.
“When we define the standard of living and put a financial [measure] on it we tend to say ‘so much per year’ not ‘I have $1,322,000 and that’s my standard of living’,” Merton explained.
“That’s very important because it means the goal, the fundamental goal, to which all of this is to optimised is an income goal and not a wealth goal.
“Income goals and wealth goals are not the same, they’re not even approximately the same. And if someone says to you ‘well I know it’s an income goal but if I get you $1,322,000 more or less you’ll be okay’ that’s not true.”
Once the focus of properly funding retirement switches to income several other elements in a framework need to be factored in, Merton said.
These elements include the need for cost effectiveness, measuring risk by goal achievement rather than a traditional yardstick like standard deviation, be effective for members who will never be engaged, and integrating all assets a person has allocated to funding their retirement.
