The Politics and Policy of Retiring
“Oh to be 70 again!” – Georges Clémenceau, French Prime Minister during WW1, on his 80th birthday.
Politicians constantly have to make tough choices. Inevitably, compromise occurs and some voters are left unhappy – it’s the nature of the beast – politics. The annual May Federal Budget is probably the apogee of this constant battle of tough choices. This year’s budget, cast in the light of a ‘budget emergency’, was bound to divide opinion on all sides.
With this in mind it’s worth examining the decisions the Government has made in recent times about how Australians are going to provide for themselves in retirement, and how these decisions stack-up with the Actuaries Institute’s stated views. I will also reflect on what other organisations like the Financial Services Council (FSC), the Grattan Institute and the Productivity Commission say.
It’s an important topic of debate for your profession to be engaged in because the challenge of how Australians are going to pay for their retirement is one that policy-makers are going to be wrestling with for some time. Actuaries have an important contribution to make by providing fact-based information to the community, opinion leaders and decision-makers.
But first, what is the Actuaries Institute’s stated position on certain aspects of the retirement policy?
On budget night we essentially reiterated our views of the past weeks and months and said that given budget constraints we supported the decision to increase the Age Pension eligibility age from 67 to 70 (previously we had said that the Government should consider increasing the Age Pension eligibility age), with the important caveat that more reform was required and that a safety net was required for those unable to continue working. With this position we are in step with the Productivity Commission which has also supported an eligibility age of 70 for the Age Pension.
The average 65 year old is already expected to live well into their late 80s. Within 50 years this is projected to increase to the mid-90s. Over the next 30 years in Australia it is estimated that there will be 7 million people aged over 65, double the current 3.5 million. Based on these projections there will be 2.7 people of working age for every over-65 (down from 4.2). Further, the over 85s population nearly triples from under 0.5 million to 1.4 million people which will significantly increase demand for acute health care and aged costs.
We justified our position on the Age Pension by saying the decision was an important step in ensuring our pension and health care systems remain sustainable. We added that if we didn’t take action now Australian taxpayers would find it difficult to support the ever increasing number of retirees, at the same level of benefit that retirees currently enjoy, particularly as our workforce was shrinking at the same time.
This problem is amply illustrated by considering that due to an ageing population, over the next 50 years it is expected that these three areas’ share of GDP will soar from 7.6% to 13.3%, which is clearly unsustainable.
Pulling the policy lever on the Age Pension age needs to be complemented by other changes. We acknowledge some people will be unable to work to age 70 and there should continue to be government support for them, as is the case now. We also support removing impediments that discourage older Australians to work, a prime example being the current age restriction of 75 on making superannuation contributions.
Providing incentives for retirees to take their retirement benefits predominantly as an income stream, and extending pre-retirement defaults in MySuper to retirees so they benefit from appropriate product selection in both their initial years of retirement and in later life, also need to be added to the policy mix.
The most contentious (and unresolved) issue that needs to be addressed is the preservation age – when you can access your superannuation. For people born before 1 July 1960 their preservation age is 55. It will gradually increase to 60 for those born after 30 June 1964. That it is likely to be the new battle ground is evidenced by the increasing commentary on the issue.
Our position is that the preservation age should be gradually increased so that it is no more than three to five years lower than the Age Pension eligibility – and there are a number of benefits that flow from this. Australians will be able to save more for their retirement, and because people are living longer, it will also help ensure people do not draw down on their superannuation too early.
It would also help to reduce the increasing pressure on the expense side of the budget and, it could be argued, that it would have broader benefits to the economy by having people participate in the workforce longer.
Unsurprisingly other organisations have also joined the debate. The National Commission of Audit’s recent report recognises the inter-relationship between different elements of the retirement system. It recommends increasing the preservation age to five years below the Age Pension age, extending the current phased increase in the preservation age by an extra four years so the preservation age reaches 62 by 2027, and increasing the preservation age in conjunction with the Commission’s proposed increases in the Age Pension age thereafter.
The Grattan Institute, a public policy think tank, said in its 2013 report ‘Balancing budgets: touch choices we need’ (Nov 2013), that access to both the Age Pension and Superannuation should be increased to 70 years, saying it could ultimately improve the budget bottom line by $12 billion a year in today’s terms. It would also produce a lift in economic activity of up to 2%of GDP. Balanced against this view is that “some who would prefer to stop working earlier will not be able to afford to do so.”
In April this year FSC’s CEO John Brogden articulated the FSC’s position in the Australian Financial Review saying: “Accessing superannuation at 60 is no longer viable,” and “A sustainable superannuation system goes hand in hand with a sustainable age pension system. Accessing superannuation at 60 when the pension is available at 67 encourages the wrong type of behaviour”. The FSC position is that the preservation age should be raised to at least 65 and Age Pension eligibility tightened to stop double-dipping.
The reason I have evidenced other organisations’ opinions, is that it demonstrates that the Institute is swimming with the mainstream on issues of retirement policy, though I would argue that we are taking a more balanced and holistic view in terms of other measures that need to be adopted, and through our recognition of the impacts on the community of changes made to the retirement system.
Watch this space, over the months and years to come there will continue to be debate and policy adjustment. The fact that there will continue to be an increase in tax revenue forgone from the superannuation system, combined with increased expenditure on the Age Pension, and the associated health and age care costs, makes that certain.
To help inform the Institute’s views on aspects of retirement policy, we plan to hold an Insights session later on in the year. It will cover the broad demographic challenges and solutions that are being considered under the Financial Systems Inquiry and other reviews. Using this process as well as our existing committees, we can determine whether our official position on any of these retirement-related issues need to be changed, developed or updated.
BANKING AND FINANCE OATH
On a more personal note, I am a member of the Banking and Finance Oath Board (chaired by Stephen Dunne CEO of AMP Capital).
Our aim is to encourage individuals working in banking and finance to agree to adopt ‘The Oath’ and apply its principles in their work.
The principles contained in The Oath are:
- Trust is the foundation of my profession
- I will serve all interests in good faith
- I will compete with honour
- I will pursue my ends with ethical restraint
- I will create a sustainable future
- I will help create a more just society
- I will speak out against wrongdoing and support others who do the same
- I will accept responsibility for my actions
- My word is my bond
If you would like more information please go to http://www.thebfo.org.
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