- If you’re in your 40s or early 50s, expect to retire at age 70
- Is the government too harsh trying to lift Age Pension age to 70?
- Will Australia run out of money?
- Europe increases pension age
- How is Australia tackling the costs of living longer?
- Major policy gap in Australia’s super system
- What would your Age Pension age be under the unsuccessful Liberal government proposals?
The capacity of developed 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.
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 (see SuperGuide articles Retirementgate: Government’s Age Pension debacle hits middle Australia and Age Pension: 300,000 Australians lost entitlements on 1 January 2017).
The current Coalition government has 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 is still current for the Liberals, and if they win the next election with a clear majority, expect the Age Pension age to be increased. We outline their plans, and the timeframe, 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 (since July 2017)).
If you’re in your 40s or early 50s, 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 have 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 plans 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. They would need to win the next election, and secure a clear majority to enable them to increase Age Pension age to 70 years.
The push beyond 67 years for the Age Pension age has received heavy opposition and the Liberal government has not yet been successful in extending the Age Pension age beyond 67 years (see table at end of this article for the Liberal government’s plans to increase the Age Pension age, and for more information see SuperGuide article Age Pension age increasing to 67 years).
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.
Is the government too harsh trying to lift Age Pension age to 70?
Right now, I believe the federal government is 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 will 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.
So, what is the federal government’s rationale for pushing for an Age Pension age of 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 (see SuperGuide article Medicare Levy increase will help pay for 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.
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.
A case study: Italy
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.
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!
How is Australia tackling the costs of living longer?
In many ways, Australia is fortunate that it has relatively developed retirement policies. Australia’s Retirement Income Policy has four limbs that the Federal Government hopes can raise everyone’s standard of living beyond relying solely on the Age Pension:
- Safety net. The Age Pension provides a taxpayer-funded basic retirement income for those people who can’t fully support themselves. The single rate Age Pension is set to at least 27.7 per cent of Male Total Average Weekly Earnings. The Age Pension age is currently age 65.5 years for men and women, and is increasing in six-month increments to age 67 for those born after a certain date. For more information see the article Age Pension age increasing to 67 years.
- Super for everyone (SG). Superannuation Guarantee (SG) is the official term for compulsory super contributions made by employers on behalf of their employees. More than 90 per cent of employees receive SG, which is considered a minimum level of super and not necessarily enough to provide a comfortable retirement, especially if you enjoy the good life. Your employer must contribute the equivalent of 9.5 per cent of your salary, although SG started at 3 per cent of salary in 1992 and rose to 9 per cent from 1 July 2002, and then 9.25 per cent for the 2013/2014 year and 9.5 per cent from 1 July 2014. The SG rate that SG is set to increase to 12% by July 2025 (for more information about the SG increase, and the SG rules, see the SuperGuide articles Superannuation and employees: 10 facts about your super entitlements and Employer super contributions: SG rate 9.5% for 2017/2018 year).
- Top-up option with voluntary savings. You can make voluntary super contributions or have savings outside of super, to boost your retirement kitty. Super is a tax-effective option for most Australians because the government taxes super at a concessional rate and you pay a rate of tax that is less than what you would ordinarily pay on income you receive during the year. The government gives self-employed people and others the opportunity to claim tax deductions when they make contributions (for more information, see SuperGuide articles Super concessional (before-tax) contributions: 2017/2018 survival guide and Your 2017/2018 guide to non-concessional (after-tax) contributions.
- Tax-free co-contributions from the government. In 2003, the government introduced one of its more innovative policies called the super co-contribution scheme. The government puts extra money in your super account if you make voluntary super contributions. For more information about the co-contribution scheme see the SuperGuide article Cashing in on the co-contribution rules (2017/2018 year).
Australia’s four-tiered retirement income system is often described as international best practice. Australia has a safety net for those unable to, or who have chosen not to, save for their retirement. We have a compulsory superannuation system that eventually will take some pressure off the taxpayer-funded Age Pension, and the message is slowly getting through that the easiest way to a financially stress-free retirement is saving more; either in your super or outside of your super.
Major policy gap in Australia’s super system
Australia is better placed than many other countries to support its citizens in retirement but a glaring omission from Australia’s retirement income policy is the complete lack of focus on outcomes – specifically, Australians need a tailored ‘target’ retirement income, and in turn a target lump sum to be saving towards, and a product or other type of mechanism that can deliver Australians a regular income in retirement.
The only healthy private pension ‘market’ in Australia exists in the self-managed super fund (SMSF) world. The private sector (read all super funds and financial organisations) have dropped the ball in this area, and the government and other policy makers don’t appear to have the knowledge, skills or experience to help Australians make the transition from working life to retired life in a financially fit state. The country is relying on financial advisers to deliver this outcome and 80% of these advisers are paid by selling products rather than by providing financial advice.
In the most part, the superannuation and broader financial services industry, along with the politicians, are strangely silent on the demographic issues facing Australia, I believe there are four main reasons for this glaring lack of strategic policy (and implementation) in such an important area:
- Key decision-makers receive guaranteed pensions. Nearly all senior public servants and parliamentarians are members of a defined benefit super scheme (guaranteed income stream for life) and they personally don’t have to worry about funding their own retirement via a pension product, a SMSF, or via non-super investments. In turn, the issue of running out of retirement savings only becomes an issue for politicians and policy-makers in a political rather than personal sense; if it means more Australians end up claiming the Age Pension.
- Super funds focused on marketing not retirement plans. For the past 25 years or so, Australian super funds have only been focused on securing market share (read attracting more members) and trumpeting investment returns and why they’re better than the other super funds. Until relatively recently, virtually no public offer super funds had seriously thought about how fund members will convert retirement savings into a primary or secondary source of income when they finish work. Pension products have been an afterthought, and continue to be an afterthought, although the recently introduced account-based pension (introduced in 2007) is a reasonably flexible product, which many super funds now offer to members, but few funds help members through the maze of combining super payments with Age Pension entitlements. More recently, the federal government has opened up the super rules to provide concessional treatment for deferred lifetime annuity products (see SuperGuide articles Deferred lifetime annuities: Why does the Government want you to use them? and Peace of mind, at a cost: 10 things to know about annuities.
- Industry ignores the compelling features of SMSF pensions. The pathological hatred of SMSFs by some sectors of the superannuation industry has blinded those sectors as to what attracts individuals to SMSFs. The SMSF sector has the most sophisticated pension offering in the market because each SMSF pension is completely tailored to the unique needs of the individual fund member.
- Super industry is full of specialists rather than retirement planners. The super industry is full of very talented specialists but very few industry players have a grasp on the total general picture for super fund members – investment, tax, Age Pension, longevity, estate planning, risk management and income generation techniques. The most significant flaw in the composition of the superannuation industry is that very few individuals are investors (fund managers are traders, not investors) and as a consequence, the super industry doesn’t appreciate the issues facing retirees when trying to manage investments and deliver an income when they stop working.
This skill-based and experiential flaw within the super industry has become more obvious in the aftermath of the GFC. Since the GFC, there has been a renewed interest in creating a retirement product that offers a guaranteed income for the life of the investor/retiree. Historically, this product is known as an annuity but due to the cost of such products they have experienced limited take-up. Financial organisations however are now developing more flexible annuity-style products, and the government is supporting the development of new annuity-style products. I explain annuities in the SuperGuide article Peace of mind, at a cost: 10 things to know about annuities. Annuities have a role but such products are not the solution because we need to tackle the problem from the start rather than from the end of the process.
The biggest challenge for the government and for Australia’s future financial health is to encourage Aussies to bite the bullet and have a go at some retirement planning many years before they retire. For articles and tips on how you can create your retirement lifestyle, check out the ‘how much super is enough?’ link on the right-hand side of this website, or click on the articles below:
- Financial freedom: Retirement planning in six steps
- How much super do you need to retire comfortably?
- Setting a retirement target: Living on more than $60,000 a year
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 increasing to 67 years , 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.