Federal Treasurer Joe Hockey sparked headlines recently when he backed moves by the British Government to raise the state pension age to 70 for people currently under 30 years old, suggesting that Australia should consider doing the same.
This follows a Productivity Commission Report which recommended raising taxes, lifting the retirement age, and taking a slice of a pensioners’ home equity to pay for Australia’s ageing population.
In Australia, there are around four million Baby Boomers, born between 1946 and 1961, who are reaching the age of retirement. Exactly how to fund the Baby Boomers in retirement presents a looming economic challenge for the government, which is rapidly gaining a sense of urgency.
A critical issue for Australia is the share of the population that is working and paying tax, and the proportion that is being supported by the taxpayer because they are too old or too young to work. With the sudden drop in participation rate when the Baby Boomers retire, there will be an increasing number of dependents on the working population.
Australia’s ‘old age dependency ratio’ – which compares the number of people over 65 to those of working age – will jump by a quarter between 2010 and 2020 and keep rising thereafter, according to Standard & Poor’s.*
This isn’t a problem unique to Australia, most big western economies are facing the same challenge, nevertheless, there are no clear solutions.
Hockey said that failure to balance the budget – of which raising the pension age could be a part – was “intragenerational theft.”
Australia’s pension payments are growing strongly not only due to the ageing of the Baby Boomers, but also an indexation linked to wages rather than the Consumer Price Index, and the one-off increases in the pension.
Ninety percent of the growth in welfare expenditure is attributable to aged and disability welfare.
Principal research fellow, Ben Phillips, from the University of Canberra’s National Centre for Social and Economic Modelling said aged and disability pension costs grew strongly over the past decade because of the ageing population and large increases in the payment rate.
Mr Phillips said the aged pension, including supplements, amounted to $827 per fortnight, nearly double the rate in 2002 of $430 per fortnight.
The increase in the pension age to 70 is yet to materialise as government policy, however, a change introduced by the former Labor government will see the age pension eligibility increase to 67 in July 2023.
The age pension age is the time at which you can claim this pension from the government. Currently, women born before 1 January 1949 reach qualifying age at 64 and a half, and women born between 1 January 1949 and 30 June 1952 reach it at age 65. Qualifying age for men born before 1 July 1952 is age 65.
From 1 July 2017, the qualifying age for the age pension will increase from 65 years to 65 and a half years. The qualifying age will then rise by six months every two years, reaching 67 by 1 July 2023.
This 67-year cut off will only affect those born from January 1957 onwards as the table below shows.
Date of birth Qualifying at
1 July 1952 to 31 December 1953 – 65 years and 6 months
1 January 1954 to 30 June 1955 – 66 years
1 July 1955 to 31 December 1956 – 66 years and 6 months
From 1 January 1957 – 67 years
Source: Department of Human Services
The age pension eligibility is separate to the Superannuation Preservation age, which is the age that you can access your preserved super benefits. Although this will also increase under previously announced plans, so that those born before 1 July 1960 can access their preserved super from 55, but the eligibility gradually increases to peak at 60 for those born after 30 June 1964.
All superannuation contributions made by or on behalf of a member, and all earnings since 30 June 1999, are classified as preserved benefits.
If the government does raise the pension age and the superannuation preservation age further, the outcome will be that Australian workers have to support themselves for longer before accessing these benefits, either by working or living off other savings and income.
Supporting the vast number of Baby Boomers who are due to retire, and balancing the books in a time of increasing welfare obligations, will require a multi pronged approach. In order to sustain the economy, there are almost certainly changes ahead surrounding retirement ages and pension eligibilities.
Published in The Australian.
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