Robert Merton on Australia’s Retirement System

Nobel laureate Professor Robert Merton is one of the world’s leading thinkers on retirement systems. 

Professor Merton has laid out a comprehensive proposal for how Australia’s superannuation industry might manage the adoption of Treasury’s new retirement income covenant.

Under the covenant, trustees must document a retirement strategy for their members. One that strikes a balance between maximising expected retirement income, managing risks to the sustainability and stability of that income, and ensuring members retain flexible access to their funds.

In this article, also published in The Australian Financial Review, Professor Merton says the answer is to adopt a liability-driven strategy, with the asset allocation dynamically adjusted based on each member’s age, future contributions and funded ratio.

“My view is the ideal solution would allow investors to invest toward retirement income over time and seek to protect those investments from inflation and market risks in low-cost, diversified strategies that offer meaningful engagement,” the professor writes.

The shift from a wealth accumulation to a retirement income goal requires a change in thinking on the measure of success. From the size of each member’s account balance to how much income the member’s lump sum buys toward their goal of an inflation-protected income for life.

The new framework also requires a change in how super funds communicate, with members asked just three simple questions:

1. Their income goal

2. How much they can contribute

3. How long they plan to work.

If they are falling short, they have three options:

1. Save more

2. Work longer

3. Take more risk

For the drawdown phase, Professor Merton suggests four component strategies that can be mixed and matched according to member needs and incorporating all assets, including housing.

The full article is available here.

Subscribers to the Australian Financial Review, can read the shorter version here.


Robert Merton provides consulting services to Dimensional Fund Advisors LP.

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