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It’s been the foundation of Australia’s retirement system for more than one hundred years, and the Age Pension has undergone major policy reforms over the years to provide an income for retirees.
The Age Pension was introduced in Australia in 1909 and it paid $1 per week, equivalent to $65 today, to men over 65 and women over 60 who were ‘of good character’ and passed a means test.
Today the Age Pension is one of the so-called “three pillars” of Australia’s retirement income system, along with compulsory superannuation contributions and voluntary savings, and incorporates both income and asset testing that act to exclude the most affluent from the benefit, rather than to simply target the poor.
The Centre of Excellence in Population Ageing Research (CEPAR) published a research brief in November 2018 titled ‘Retirement Income in Australia’ as an in-depth study into trends in retirement income for Australians. It looks at the current state of, and projected future of, retirement income and the system that shapes it.
The CEPAR report also presented research which examined the key design features of the Age Pension and its flaws, and how well it serve its objectives.
Who is a typical Age Pensioner?
Around 10% of the population is made up of Age Pensioners. They also represent 14% of voters, and nearly 70% of people aged 65 and over.
In 1990, 70% of pensioners were women compared with 55% today. This decreasing trend is due to the narrowing of various gender gaps. Men’s life expectancies are catching up to women and women’s retirement resources are catching up to those of men and eligibility policies are applied more uniformly.
As at 2018, around 66% of those over Age Pension age receives an Age Pension, with 41% on a full pension and 25% on a part pension. Recent projections suggest that as Australians become wealthier the share receiving full or any pension will decline.
Recipients as percentage of eligible population
As the first pillar of the retirement income system, a key function of the Age Pension is to alleviate poverty. CEPAR asks the question: how well does it achieve this? The common perception is: not very well. Indeed, old age poverty is often quoted to be high in Australia. But CEPAR says the reality is more complicated.
International comparisons by the OECD show Australia’s rate of old age poverty to be higher than that of almost all other developed nations.
The OECD defines the old age poverty rate as the share of the population aged 65 and over that has household disposable incomes below 50% of the population-wide median. But these poverty figures should be interpreted carefully, CEPAR warns. The high rates are largely due to design features of the Australian retirement income system and because the commonly quoted poverty rates exclude housing from the analysis.
The role of housing in the Age Pension
The most important factor is home ownership. OECD poverty rates focus solely on cash income, ignoring whether individuals own their home (although the OECD acknowledges this). And a lot of older Australians, roughly 86%, do own their home, which is no trivial matter in a country with high housing costs.
Concerns about pensioner poverty are not entirely groundless but CEPAR reasons they are misplaced.
Problems arise from a pension framework whose adequacy relies on an assumption that retirees own their home. Older renters solely reliant on the pension have high poverty rates based on the OECD-defined poverty line. But when housing is included in the analysis, up to half are poor.
And when you look at only older renters who live alone, between 60% and 70% are in poverty.
Percentage in poverty – including housing cost and imputed rent
Renters made up 12% of those aged 65 and over in 2016. Single renters, the majority of whom are women, made up 5% and about 18% of the Age Pensioner population.
Home ownership is high among pensioners at 74%, although it is lower than for all people aged 65 and over at 86%.
Partnered home owners are the most common pensioner type (47%), followed by single home owners (27%), single renters (19%) and couple renters (8%). This indicates that single pensioners are more likely to rent than couples.
Around 62% receive the maximum pension. Among part pensioners, a third have too much assessable wealth and two thirds have too much income to receive the full pension.
In most cases, the income thresholds are exceeded due to income from foreign pensions, property, or financial or business investments. Only about 4% of pensioners have wage earnings.
Also, only 17% receive regular, superannuation-type income streams.
Around 54% have assessable assets below $50,000. As with older people in general, most pensioners’ wealth is stored in their home and excluded from means testing.
However, in 2016, about 6% of pensioners lived in owner-occupied homes worth over $1 million, according to the Australian Bureau of Statistics (ABS).
Historic old age poverty rates
Absolute poverty among older Australians has declined over the past four decades. But relative poverty, measured as below either 50% or 60% of the median income, has been volatile and is sensitive to small changes in both the maximum rate of the Age Pension and wages at the middle of the income distribution.
The exclusion of the family home from the asset test means renters and owners with the same net worth are treated differently. CEPAR says another inequity is that financial assets are deemed in the income test, while non-income producing land of the same value is only counted in the asset test.
How do Australian pensioners respond to the means tests?
Australians must pass an assets test and an income test to qualify for the Age Pension. Research shows that Australians tend to hold on to their assessable asset balances and under-consume in retirement, even if it means receiving a smaller pension.
Median drawdown was only around 10% over an eight-year period and many see their financial assets grow in retirement, particularly couples and home owners.
The result is that the median pensioner left bequests, mainly financial, equivalent to 90% of the assets recorded at first observation.
A potential reason may relate to precautionary savings because households can’t insure against investment or expenditure shocks.
Some commentators expect that households receiving the Age Pension and facing a more stringent means test would spend their assets to receive more pension. This was the argument against increasing the asset test taper in 2017.
But CEPAR identified research that showed that rather than running down assets to access higher aged pensions, Australian pensioners generally maintain their assessable asset balances and appear to ‘under-consume’, holding on to assets, well into their later years.
The analysis was based on administrative data that tracked the assets and incomes of full and part age pensioners between 1999 and 2007. They found that over eight years, most pensioner households drawdown very little of their financial assets (median drawdown was around 10% over eight years) and many leave possibly unintended bequests.
Increasing the pension age
In the 2014 Federal Budget the then Treasurer Joe Hockey announced the age pension age would be to 70, but this was officially scrapped by Prime Minister Scott Morrison in September 2018. CEPAR speculates that Australia’s attempt to increase the pension age further was before its time. Several countries have increased the pension age to as high as 67, and are planning to increase it further to 68.
The Czech Republic was set to increase it by two months per year, thus reaching age 70 in the late 2060s, but that plan has been abandoned.
Some have pegged future pension ages to life expectancy including Denmark, France, Netherlands, and the UK, thus taking the debate out of the political sphere. For example, based on life expectancy projections, the Netherlands could have a pension age of about 71 years by 2060. By such measures, the Australian pension was set to reach age 70 about 20 years earlier than elsewhere.