Russia has just raised the pension age for men to 65 years (from 60 years) and for women to 60 years (from 55 years). The original plan was to raise pension age for women to 63 years, but after national uproar, Vladimir Putin relented and only increased pension age for women to 60 years but still raised male pension age to 65 years. Compared to Australia (increasing Age Pension to 67 years by 2023), Russia’s rules may seem like a good deal for retirees, but Russia has much lower life expectancies than Australia for its citizens, especially for its men.
Putin’s rationale for raising pension ages was that average life expectancies had increased significantly, and the economy could not sustain the lower pension ages. Yes, average life expectancy had increased to 72 years in Russia, but it appears that was mainly due to increases in female average life expectancy (77 years), while male average life expectancy is only 66 years. And since we’re dealing with averages, roughly half of Russia’s men won’t live long enough to claim the government pension. I have also read that a quarter of Russian men die before the age of 55.
Life expectancies can be measured at different times, at different ages, but noting that in the mid-1990s, Russia’s average life expectancy was only 64 years (when taking into account both men and women).
The Liberal party’s measure to raise Age Pension age to 70 years by 2035 was similarly unpopular with the electorate, especially after the harsh changes to the Age Pension assets test, that then federal treasurer (and now Prime Minister), Scott Morrison introduced in January 2017 (for background information, see SuperGuide articles Age Pension: 300,000 Australians lost entitlements on 1 January 2017 and Retirementgate: Government’s Age Pension debacle hits middle Australia).
Although I word it harshly, Russia has now adopted what I call the ‘natural attrition’ policy for dealing with its economic problem of supporting older Russians – expect many to die before they can claim the pension.
The Liberal party in Australia was attempting to introduce a milder version of the ‘natural attrition’ policy. After committing to raising the Age Pension to 70 years (since 2014 Federal Budget), after promising before the 2013 Federal Election that they would never introduce such a policy, the Liberal party, in September 2018, has now dropped this measure from its policy platform. More on this policy later.
Living longer and better
The capacity of developed nations (and developing nations) around the world to provide a decent taxpayer-funded old Age Pension is being tested constantly with increasing life expectancies, escalating health costs, mind-boggling energy costs, and in many cases, shrinking populations.
Although Australia is fortunate (in economic terms) to have a growing population, the demographics of Australia still point towards a greying nation, with fewer workers over time supporting an increasing number of Age Pensioners. I have mentioned before, that Australia is now starting to experience two generations receiving the Age Pension, as Aussies enter their late eighties and nineties, and their children enter their sixties and sometimes seventies.
In my view, any discussion about increasing Age Pension age should not affect those currently in retirement, or those Australians within 10 years of retirement, and should be planned over decades, not years. Unlike the unfair and ill-timed harsh January 2017 changes to the Age Pension assets test that hit current retirees and they were in no position to adapt their financial situation to cope with the changes (for background, refer again to SuperGuide articles Retirementgate: Government’s Age Pension debacle hits middle Australia and Age Pension: 300,000 Australians lost entitlements on 1 January 2017). Unfairly, the Australians hardest hit by the Age Pension changes, were also the Australians hardest hit by the Global Financial Crisis nearly a decade earlier (for background on the GFC, see SuperGuide article Ten years on: Four lessons from the GFC (Grab-For-Cash)).
The current Coalition government had a policy commitment to increase the Age Pension age to 70 years, but could not get it through the previous parliament, and has not attempted to push it through this parliament. The policy was still current for the Liberals until September 2018, and based on their broken promise before the 2013 Federal Election, there is no guarantee they will not re-introduce increasing Age Pension age to 70 years if they win the next election with a clear majority. We outline the proposed timeframe for an Age Pension age of 70 years, at the end of this article.
Tip: If you want to discover your Age Pension age (based on your date of birth), check out SuperGuide’s Retirement Age Reckoner: see Retirement Age Reckoner: Discover your preservation age and Age Pension age, or see SuperGuide article Age Pension age now 65.5 years (66 years from July 2019)).
Was the government too harsh trying to lift Age Pension age to 70?
Right now, I believe the federal government was being too harsh to compel workers currently in their 50s and 60s, to work until the age of 70, before they can claim the Age Pension. The average life expectancies for older Australians are just that, an average, and many Australians don’t reach those lofty 80s and 90s, and many Australians carry disabilities in their 50s and 60s, and for some of those Australians, an Age Pension age of 65 or 67 is probably too high.
In the 1960s, the average period for receiving a government Age Pension was six years, among OECD (Organisation for Economic Co-operation and Development) countries, reflecting lower life expectancies. In the future, the average period for claiming a government age pension is expected to be between 30 and 40 years, which will place huge financial pressure on a country’s finances. OECD members are predominantly European nations, although Australia, Japan, Korea, Mexico and the United States of America are also members.
The average life expectancy for Australians at age 65 is just over 22 years for a female, and just over 19 years for a male. The longer you live the better your average life expectancy becomes. For example, if you reach the average life expectancy that you had at 65, that is, you reach the age of 87 for a female, and 84 years for a male, then you can expect to live another 6 or so years. The average life expectancy for an Australian female aged 87 is 6.11 years (reaching the age of 93), and for a male aged 84 years, roughly 6.5 years (reaching the age of 90.5). If you retire before the age of 65, and many Australians do, then you can expect a potential retirement of more than 30 years. I provide the average life expectancy for all ages in the SuperGuide article Life expectancy: Will you outlive your retirement savings?
In my view, lifting the Age Pension age to 67 makes perfect sense with most of us enjoying long and reasonably healthy lives. Pushing the Age Pension beyond age 67 and out to age 70 is more problematic however since the capacity to work up to this age depends on the type of work that you do, and also in many cases the genetic lottery of whether you will be prone to age-related conditions earlier than most.
Although, under the Liberal’s plans, the Age Pension age of 70 would have only be applicable to those currently under the age of 53 or so (born on or after 1 January 1966), the question of whether the average human body is up to full-time work, in particular, manual work, up to age 70 is debateable.
A further unknown is whether employers will employ older workers up to this age.
At this time, I consider Australia is not ready for an Age Pension age of 70 years, due to ageist employment policies, and a time-disconnect between superannuation access rules and the Age Pension rules. For Australians in their 40s (and possibly for those in their early 50s) however, an increase in Age Pension age is inevitable if average life expectancies continue to improve and Age Pensioners increasingly live into their nineties, with the associated health costs that ageing require.
So, what was the federal government’s rationale for pushing for an Age Pension age of 70 years?
If you’re in your 30s or 40s, expect to retire at age 70
Are you planning to support yourself over a 30-year or even 40-year retirement or do you think Australia can afford to finance your retirement? The superannuation industry and the federal government continues to grapple with this issue, that is, whether Australia will continue to be in a position to look after its citizens or whether we will all need to modify our expectations.
Successive federal governments have made it clear that the Age Pension will always be available (with the exception of the current Liberal government who had recklessly hinted at the possibility of removing the Age Pension entirely from middle Australia).
An ageing and growing population however means that Australia cannot continue supporting Australians at the same level without reviewing and altering the country’s revenue base, or reducing spending.
In response to this intention, the former ALP government increased the Age Pension age to age 67 for those born on or after 1 January 1957. The current Liberal government had planned to increase further the Age Pension age to 70 years for those born on or after 1 January 1966, and raise it to at least 67.5 years for those born on or after 1 July 1958, but not in this parliament, and apparently not ever, if you believe it. If they re-introduce the policy of increasing Age Pension age to 70 years, they would need to win the next election (due in 2019), and secure a clear majority to enable them to increase Age Pension age to 70 years.
Will Australia run out of money?
Around one third of all federal government spending is devoted to Centrelink payments such as unemployment benefits, parenting payments and the Age Pension. According to the Department of Treasury, the increased demand for health and aged care spending by an ageing population, and more specifically, the increasing demand for the latest medical technology and procedures, plus other public spending demands such as Centrelink payments, means that Australia could run out of financial steam within 40 years, if we continue on our merry way.
According to Treasury’s 2015 Intergenerational Report (IGR), more than half (55%) of Australian government spending is directed to health, NDIS, aged care, pensions, payments to individuals (mainly, disability support pension and family tax benefit) and education. Unless action is taken, according to the IGR, you can expect the following outcomes:
- Health costs to double over next 40 years, and aged care costs set to double.The Australian government contributes around 41% of total health costs, the state and local governments contribute 27% and private contributions represent 32%. Real health expenditure per person is projected to more than double over the next 40 years. Today, health spending per person costs around $2,800 and is projected to increase to around $6,500 in 40 years’ time. Spending on those 85 years and older is 4 times the amount spent on the average person across all ages. Today, government-funded health costs represent 4.2% of GDP, and are projected to increase to 5.5% of GDP in 40 years’ time (2054-55), assuming the government’s proposed policies are put in place. If no changes to policy are made, then health costs will represent 7.1% of GDP in 40 years’ time. Expenditure on aged care has quadrupled since the 1970s, and is set to double as a share of the economy by 2055, according to the 2015 IGR. This growth is due to the increase in the number of people over the age of 70. Per person, the amount will grow from $620 today, to $2,000 in real terms, per person.
- Age Pension costs will stabilise, assuming Age Pension eligibility age is increased, and changes to indexation made.Neither of these changes got through parliament, but instead the federal government made radical changes to the Age Pension income test deeming rules, and the Age Pension assets test. According to the IGR, Age and Service Pension payments are equal to 2.9% of GDP, and if the indexation and Age Pension age changes had been made, these payments would represent 2.7% of GDP in 40 years’ time (2054-55). The IGR claims that since those changed were not made, these payments will represent 3.6% of GDP by 2054-55. We have no figures for what impact the other Age Pension changes have on GDP over the same period (for information on deeming changes and assets test changes, see SuperGuide articles Income test changes (January 2015) mean less Age Pension forever and Retirementgate: Government’s Age Pension debacle hits middle Australia).
- Aged care costs set to double.National Disability Insurance Scheme spending to increase to 1.1% of GDP. In 2015, less than 0.1% of GDP is devoted to the NDIS, but by 2019-2020, the expenditure will increase to 1.1% and remain at that level through to 2054-55. Note that in May 2013, the Labor government announced an increase in the Medicare Levy by 0.5% (to 1.5%) to fund just over half of the NDIS, and in May 2017, the Liberal government announced an increase in the Medicare Levy by 0.5% (to 2%) to offset the other 40% of the NDIS costs, but then changed its mind (see SuperGuide article Medicare levy will not increase to further support NDIS).
The hard fact that we all have to face is that the proportion of Australia’s population of traditional working age will nearly halve within 40 years which means there will be fewer workers financing the Age Pension and health costs of the retired and other non-working Australians. According to the IGR, the number of people of working age to support every person aged 65 years and over is projected to decline to 2.7 people by 2055 (compared with 4.5 people now, and 7.3 in 1975).
Note: For more information on the IGR, see SuperGuide article 2015 Intergenerational Report: 30 interesting facts. The next IGR will be released in 2020.
Europe increases pension age
Funding an ageing population is clearly not only an Australian dilemma. In 2007, Germany raised the pension age from 65 to 67 years. The GFC (or the Great Recession as it is known in Europe) has forced the hand of many European nations in tackling the funding dilemma caused by an ageing population. For example, France lifted the minimum pension age from 60 to 62 (although political pressure meant they dropped it again to 60 years), and pension age for receiving full entitlements is increasing from 65 to 67 years.
The United Kingdom’s pension age is currently age 65, but will raise its pension age to 66 by 2020, and then 67 by 2028, and to 68 years by 2039. There are discussions to raise it further to 70 years.
The Italian pension system apparently costs the country about 15 per cent of gross domestic product, which is set to increase even more with an ageing population and longer life expectancies. By 2040, Italy could have 96 pensioners for every 100 workers! In October 2003, millions of Italians went on strike for half a day protesting the Italian government’s plans to increase the retirement age to ease the financial pressure on Italy’s pension system. At the time, an Italian worker must have paid into the country’s pension system for 35 years before retiring at a minimum age of 57. The strike was to no avail. The Italian government lifted the age for entitlement to a full pension to 60 rather than 57 (effective from 2008), and increased the years of contributing to the system to 40 years, from 35. The age for entitlement under the contribution rules has since increased to 62, and from 2050 will rise to 65 years and 4 months. Note that other Italians workers who had not contributed for 35 years (and now 40 years), had a minimum pension age of 65 years (for women) and 66 years (for men), and increased to 66 years for women by 2018, provided they have contributed for at least 20 years. Anyone who has contributed for 40 years can retire at any age. The pension age is moving to 67 years by 2021.
What would your Age Pension age be under the unsuccessful Liberal government proposals?
|Commencement date||Age Pension age||Affects people born|
|65 years||Born before July 1952|
|From 1 July 2017||65.5 years||From 1 July 1952 to 31 December 1953|
|From 1 July 2019||66 years||From 1 January 1954 to 30 June 1955|
|From 1 July 2021||66.5 years||From 1 July 1955 to 31 December 1956|
|From 1 July 2023||67 years||From 1 January 1957 to 30 June 1958|
|From 1 July 2025||67.5 years||From 1 July 1958 to 31 December 1959|
|From 1 July 2027||68 years||From 1 January 1960 to 30 June 1961|
|From 1 July 2029||68.5 years||From 1 July 1961 to 31 December 1962|
|From 1 July 2031||69 years||From 1 January 1963 to 30 June 1964|
|From 1 July 2033||69.5 years||From 1 July 1964 to 30 December 1965|
|From 1 July 2035||70 years||From 1 January 1966 onwards|
Source: Table is the copyright of Trish Power and cannot be reproduced without express permission of SuperGuide and Trish Power. Table created from media transcripts, 2014 Federal Budget and some information published on Centrelink website (www.centrelink.gov.au).
Tip: For information on the current Age Pension age rules, see SuperGuide article Age Pension age now 65.5 years (66 years from July 2019) and if you want a quick way to discover your Age Pension age, check out SuperGuide’s Retirement Age Reckoner Retirement Age Reckoner: Discover your preservation age and Age Pension age.