Estimation of retirement adequacy targets for one- and two-adult households from official South African data
Date
2012-02-23
Authors
Butler, Megan
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Abstract
Retirement adequacy targets provide an indication as to how much wealth is needed at retirement
to provide for an adequate retirement income. These targets have design and strategy
implications for social security systems and retirement funds and can be used by individuals to
assess their preparedness for retirement. The primary aim of this research was to estimate
retirement adequacy targets for one- and two-adult households from Statistics South Africa’s
Income and Expenditure Survey 2005/2006. Retirement adequacy targets were expressed as
wealth-earnings ratios, defined as the multiple of salary at retirement required for a comfortably
adequate retirement. The targets would be sufficient to provide for the higher of the preretirement
lifestyle or subsistence living. An important subsidiary aim was to examine
consumption behaviour at and in retirement. Non-healthcare consumption was not found to
change at retirement if income levels remained at pre-retirement levels. For certain households,
healthcare expenditure may increase on retirement and may be funded from the contributions to
retirement savings that are no longer required in retirement. The retirement adequacy targets
decreased with retirement age but there was not a clear relationship between retirement savings
rates and the targets. Retirement adequacy targets decreased with income but were complex
functions of household composition, sex of the head of the household, type of settlement, age,
home ownership and the retirement savings rate. Where household members retired at different
times, the earnings of the younger person during the semi-retirement phase reduced the targets
substantially. The retirement adequacy targets estimated implied that the replacement ratio
targets used by retirement funds and those suggested in the literature would not provide an
adequate retirement income for most households. The results may thus have a significant impact
on retirement planning in the future.
Description
M.Sc., Faculty of Science, University of the Witwatersrand, 2011
Keywords
Pensions, Social security, Wealth, Retirement