Climate change will cost Australian close to 20 per cent of their retirement savings, according to estimates in an Actuaries Institute paper published last week.
For a worker on median earnings, exposure to the negative long-term return implications of climate change could be expected to lower the accumulated superannuation balance, at age 67, by 18 per cent and retirement income by 5 per cent.
For government, lower investment returns on superannuation savings could translate into higher fiscal expenditure on the Age Pension. A 1 per cent per annum fall in superannuation investment returns over a working life would require an additional $30,000 of Age Pension payments.
At a personal level, severe weather-related events induced by a changing climate expose communities to the threat of unusually high incidence of mortality or morbidity, including both physical and mental health disorders.
The paper, The Impact of Climate Change on Mortality and Retirement Incomes In Australia. was written by Ramona Meyricke, a senior actuary at TAL, and Rafal Chomik, a senior research fellow at the Centre of excellence in Population Ageing Research.
It says that in Australia, climate change is likely to drive longer, harsher and more frequent droughts. The main impact of climate change on mortality arises from heat-related mortality, with heatwaves killing more Australians than any other natural hazard.
It is also expected to exacerbate the health impacts of air pollution. Death and illness from vector borne disease is expected to increase.
At the level of investment returns, physical damage from more frequent and intense natural disasters and risks associated with the transition to a low carbon economy pose risks to economic growth and investment returns.
“The empirical literature shows mixed results but recent meta-analyses suggest that the effect of natural disasters on GDP her been negative, and increasingly so,” the report says.
Natural disasters destroy productive capital. On the other hand, disasters can stimulate an economy by accelerating capital stock upgrades.
“While the recovery spending effect means that moderate disasters can have a growth effect in some sectors, research shows that severe disasters do not lead to higher long-term growth. As natural disasters become more frequent and more intense, some economies may struggle to rebound.”
Deloitte Access Economics estimated the tangible cost of natural disasters in Australia was $9 billion in 2015, rising to $23 billion a year in 2050.
A review by Schroders in 2016 estimated that the impact of climate change on the global economy could be a 1 percentage point reduction in GDP growth per year. Lower growth is being caused by greater damage to property and infrastructure, lost productivity, mass migration and security threats.
These impacts will flow through to investment returns. Mercer has forecast that under a scenario where global temperature rise by 2 degrees this century, the average reduction in S&P/ASX 200 returns would be around 0.7 per cent a year out to 2050.
The negative long-term return implications of climate change for investment returns have the potential to negatively impact retirement incomes. A greater number or severity of such shocks can compound and reduce individuals’ accumulated superannuation savings.
Under one scenario modelled in the report, annual income is $75,000 and the individual starts work at age 20. The impact of climate change is to reduce the annual return on a superannuation account from 4.8 per cent (ASIC’s default return assumption for a balanced portfolio option) to 3.8 per cent. This would lead to a $313,000 reduction in total super accumulation at age 67 – an 18 per cent fall. Retirement income would fall by 5 per cent a year under this scenario.
“Insurers, superannuation funds and institutional investors should embed climate change as a core business issue and continue to build their financial resilience to climate change,” the report says.