Stephen Lunn, social affairs writer | May 15, 2009
LONGER lives mean more years at work.
IN two brief sentences in his budget speech on Tuesday night, Wayne Swan drew a line under 100 years of Australian history. "I am ... announcing some major structural savings to support the longer term sustainability of our pension system, and the budget more broadly," the Treasurer said midway through his address.
"Central to this has been a review of the qualifying age for the age pension, which will be progressively increased to 67 years by 2023, reflecting increases in life expectancy and consistent with international trends."
Since 1909, the eligible age to receive the pension has been 65. As a consequence, the number has long been associated with the end of one's working life, for better or worse depending on one's personal circumstances.
But now - soon anyway - it's going to change. Just as in the US, Britain, Germany, Denmark, Norway and Iceland, the pension age is being increased. To reflect the scale of the shift on the Australian psyche, it will be rejigged incrementally starting in 2017 and finishing in 2023.
The reason for the change is uncomplicated. Just like those other countries, Australia faces a demographic triple-whammy: a greater proportion of people reaching retirement age; those retirees living longer due to health and medical advances; and a decline in the fertility rate through the 1970s, '80s and '90s leaving relatively fewer taxpayers able to pay for the ageing baby boomers in retirement.
The Treasury's second Intergenerational Report, published in 2007, noted this demographic change, driven by lower birth rates and increased life expectancies, demanded a rethink on policy across a raft of portfolios.
IGR2 estimated that by 2047 about 7.2million Australians will be aged over 65, representing 25 per cent of the population, almost double the 2007 proportion of 13 per cent.
More people drawing on the pension for longer, paid for by comparatively fewer taxpayers. Something had to give.
Treasury secretary Ken Henry agreed, recommending an increase to 67 years for the pension age and the age at which Australians can begin drawing on their superannuation. In his report on the retirement system, published by the Government alongside the budget on Tuesday, and used to support its policy shift, Henry notes the growing pressure demographic trends are placing on the economy.
"The long-term costs of providing the age pension to an ever-growing proportion of the population are substantial," the report, titled Australia's Future Tax System: The Retirement Income System, notes.
The second Intergenerational Report found that the ratio of working-age people to those aged 65 and older will fall from 5:1 in 2007 to 2.4:1 by 2047. "An age pension that continues to provide more years of payment, and at higher rates, places a growing burden on working generations," it says.
Henry's report says Australia was a vastly different place when the original pension age was introduced. "In 1909 the average male life expectancy at birth was 55 years. Age pension age was set 10 years above the average male life expectancy at birth," it says. "Until the 1970s, the amount of time a person aged 65 years could expect to spend on the age pension remained fairly constant, at about 12 years. "Since 1970, longevity has increased by about 50 per cent the length of time a person aged 65 might expect to spend on the age pension." About 19 years in other words.
The problem with life expectancy is that it doesn't reflect quality of life. How many of those post-retirement years will be active and how many will be hobbled by illness or disability? Henry's case for changing the pension age takes this into account.
"A number of studies find that health expectancies (the number of years spent in good health) have increased at a slower rate than life expectancy, indicating that the increase in the period that the average person could be expected to participate in the workforce would have grown at a slower rate than the growth in life expectancy," his report says. "The panel's recommended increase in the age pension is consistent with these findings, as it only increases the age pension age by two years compared to a 10-year increase in life expectancy since 1970."
Swan's case for changing the age pension age is supported not just by Henry but also by Jeff Harmer, head of the Department of Housing, Families, Community Services and Indigenous Affairs, whose review of the pension system was released on budget night.
Harmer says two other factors play a big part in reducing the ability of taxpayers to fund the future pension requirements of the nation.
"There has been a trend towards early retirement and withdrawal from the workforce," the Pension Review report notes. "(And) increasing levels of educational participation, including time spent in higher education, has delayed entry into the workforce.
"As a consequence the actual proportion of people's pre-retirement age spent in employment is reducing, and the time they spend in their retirement has increased dramatically. This has very significant implications for the retirement income system as a whole and for the age pension in particular."
While the Government mounts a strong case for change based on its departmental advice, and the Coalition says the only thing it would do differently would be to ring the changes earlier than 2017, others worry about the psychological impact on the public.
Independent senator Nick Xenophon says while the numbers stack up, the public should have been consulted about such a fundamental societal change: "There needs to be a national conversation about this ... that is what has taken people by surprise. The Government needs to take people into its confidence rather than simply relying on forecasts by Treasury and making those assumptions."
Fellow independent senator Steve Fielding says many people are ready to stop working by 65. "These Australians have worked very, very hard for many, many years and they were looking forward to retirement at 65," he says. "Those that can work, maybe they should work, but you can't force people to continue to work until 67."
Labour market economist Bob Gregory, now at the Australian National University and Victoria University, also has reservations. He argues the change won't do much to bolster taxation revenues to help pay the growing pension bill. The best it will do, says Gregory, a professor of economics, is to lower the welfare bill.
"Among those men who go on to the full OAP (age pension) at 65, 95 per cent are coming off a disability pension or unemployment benefits. For them it is just affecting the name of their income support," he says. "And among those men who go on to a part pension, about two-thirds come off another pension."
Gregory says the notion there will be masses of people forced to work another two years full-time after age 65 is not correct. "If you take men aged between 60 and 64, only about 45 per cent have a full-time job. That's the average, so the number at 64 would be much lower," he says.
"The average retirement age has fallen for decades to around 58 and only in the last few years has it turned around slightly. It would still be under 60."
Hugh O'Connor, 61, lives in Sydney and has been unemployed for the past four years. Despite postgraduate qualifications in economics and a varied career ranging from publishing to oil company analyst to farming work to publican, he has little to no superannuation, and lives on the Job Seeker's allowance. He expects to transition to the age pension in four years, and is just a little too old for it to be delayed.
"Given the way this country treats older workers, the only thing I can see coming out of this is more older people being unemployed in that time between 65 and 67," O'Connor says. "I can understand the need to change the pension age. People are better able to continue working to a greater age than in previous generations. But it seems like the world has become such a youth-oriented culture that once you get over 50 and lose your job, the chances of getting another one are close tozero."
Retirement expert David Knox applauds the change to the pension age, but proposes a more radical step. He wants the pension age to be uncoupled from the political process and linked directly with the life expectancy of Australians. "I note the Henry tax review concludes that the proposed age pension age of 67 needs to be reviewed on an ongoing basis, and I endorse that," says Knox, a worldwide partner for consultants Mercer. "But I would go further and suggest an automatic adjustment to the age-pension age as life expectancy goes up. This would take it out of the political scenario. And if for some reason we all started dying earlier, say through obesity, then it could come back the other way."
One of the more difficult issues is the relationship between the age pension and retirement. Current policy, when fully implemented by 2024, will stop people dipping into superannuation savings until they are 60, but concerns have been raised this will create two classes of citizen: one having to wait until 67for benefits while the other can get at their own funds earlier.
"On average, approximately a third of superannuation savings are being drawn down before age 65 years," the Henry report notes. It suggests the preservation age should eventually be aligned with the age pension, meaning people can't access their super until 67 years of age. The Government has confirmed it is actively considering this proposal to effectively create a universal retirement age.
Knox says attempting to marry access to superannuation with the pension age is dangerous: "You should have some access to superannuation before reaching the pension age. There are all sorts of reasons why people need to retire before the pension age. What if a partner falls ill and you need to look after them? You need to have some flexibility."