Academic journal article The Economic and Labour Relations Review : ELRR

Retirement Incomes for an Ageing Australia

Academic journal article The Economic and Labour Relations Review : ELRR

Retirement Incomes for an Ageing Australia

Article excerpt

1. Introduction

Over the next few decades the structure of Australia's population will undergo a major change. The population is ageing because people are living longer and birth rates have declined over many years. The over 65 s, which accounted for 12.8% of the population in 2003, will increase to 26.1% by 2045, while the proportion of the oldest old (those aged 85 and over) will increase from 1.5% to 5.4% over this period (Productivity Commission 2004). As a result, there will be increasing numbers of old people to support and fewer people of working age to provide that support.

The combination of an ageing population and increased life expectancy will see an increase in government expenditure on age pensions, health and aged care. These issues have been considered by the government in the Tntergenerational Report' (Treasury 2002) and are currently the subject of a Productivity Commission research study (Productivity Commission 2004). These reports suggest that by 2045 there will be a gap of around 7% of GDP between total government revenue and expenditure. In large part this will be due to a projected increase in health expenditures from 4% to around 8% of GDP, in age care expenses from 0.7% to around 1.8% of GDP and age pension expenses from 3% to nearly 5% of GDP. (1)

Some preliminary policy responses have been canvassed in the Treasury paper 'A More Flexible and Adaptable Retirement Income System' (Treasury 2004b), including initiatives to extend the working life of Australians and increase the likelihood that superannuation benefits are used to fund retirement--both of which should reduce the potential pressures on Age Pension expenditures, However, there has been little real debate about impact of an ageing population on Australia's ability to fund future retirement incomes, or the role that retirement income policies can play to address the strains that an ageing population will place on future living standards.

This paper investigates the resilience of Australian retirement income policies to population ageing. It is set out as follows: the next section traces the evolution of Australia's retirement income policies. Current arrangements are then described in section 3 while section 4 highlights the policy challenges of adequacy, efficiency and the vulnerability of private retirement provision to scary markets. Section 5 discusses the resilience of these arrangements to demographic change and section 6 concludes.

2. Evolution of Australian Retirement Income Policies (2)

Retirement income provision in Australia dates back to the occupational superannuation schemes offered by banks and state governments in the 19th century. However the year 1909 marks the beginning of a coordinated retirement income policy with the introduction of the Age Pension. Since then retirement income provision has evolved into a multi-pillar arrangement comprising the means-tested Age Pension, mandatory and voluntary superannuation and other long term saving through property, shares and managed funds. With the introduction of the Superannuation Guarantee in 1992, Australia joined a growing group of countries which centre their retirement income policy on private mandatory retirement saving.

The Age Pension was introduced in 1909 as a general-revenue financed, means tested safety net payment for the retired. At that time it was subject to both an income test and a separate property (assets) test. Under the income test the annual rate of pension was reduced on a pound for pound basis once earnings exceeded a free area. The assets test reduced the pension amount by one pound for every ten pounds of the value of property (including the family home) above a threshold. In 1912 the family home was made exempt from the assets test, and remains so.

The Age Pension means tests then remained largely unchanged for nearly 60 years, when the income test withdrawal rate was reduced from 100% to 50% in 1969. …

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