Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 50

Age pension reform and its consequences for financial plans

The Federal Government appears determined to reduce the budget deficit, and the age pension is one of many potential targets. Although pension reform would be highly unpopular with many voters, some sort of reform over the next 5 to 10 years is likely. This article outlines the issues at a high level and poses an important question for financial planners and those designing the default strategies for super funds.

Is the age pension fiscally sustainable?

The fiscal sustainability of the age pension system was explored in the Intergenerational Report (2010) in which Treasury calculations forecast that age pension expenditure will rise from 2.7% of GDP to 3.9% in 2050. This doesn’t sound like a big difference but that 1.2% represents nearly $20 billion per annum in today’s terms (Australia’s GDP is currently around $1.6 trillion). The potential for variation in these types of forecasts is huge as many economic factors need to be estimated. This projection takes into account two offsetting factors: the higher proportion of elderly people qualifying for the age pension, countered by a more mature superannuation system.

In fact, current annual expenditure on the age pension is similar to the amount of estimated superannuation concessions (approximately $38 billion and $32 billion respectively in the 2012/13 budget). It is important that any policy review takes account of both retirement savings policy and age pension policy in combination.

Past reviews

Australia hasn’t been short on financial reviews. Of the recent reviews which addressed the retirement savings and retirement income sector (‘Harmer’ Pension Review (released 2009), ‘Henry’ Australia’s Future Tax System Review (2009), and ‘Cooper’ Super System Review (2010)), only the Harmer Review looked at the age pension in-depth. None of the reviews looked at the combination of retirement income policies (super, drawdowns and age pension), meaning that none have considered retirement income policies from a lifecycle perspective.

The Henry Review looked at post-retirement income policies excluding the age pension. The Cooper Review looked predominantly at superannuation but highlighted the need for a whole of life focus from superannuation funds. The Harmer Review considered the age pension in detail under the principles of supporting a basic acceptable standard of living, being equitable across the population, targeting those who cannot support themselves, promoting workforce participation and self-provision, and a system which is sustainable.

The upcoming ‘Murray’ Financial System Inquiry may also consider retirement incomes policy.

Possible areas of reform

The obvious candidates for reform include:

  • age pension amount
  • indexing approach – the age pension is indexed on a triple-referencing basis against the greater of wage growth, inflation and a pensioner’s inflation measure. The referencing to wages (likely to be the fastest growing reference) represents a view in the Harmer Review to preserve a pensioner’s standing in society rather than a strict poverty aversion focus
  • age eligibility, particularly given increasing life expectancy
  • means testing (assets) – the current assets test which excludes the family residence
  • means testing (income) – while income means testing affects the size of age pension payments, the design of the income means test also impacts the incentives people have to work in retirement
  • form of retirement income – there has been debate about favouring income sourced from longevity risk hedging products such as life annuities when performing the age pension income means test, or making such products compulsory for a portion of one’s retirement savings.

The impact on financial plans

Any changes to the age pension will impact the outcomes of millions of Australians. It would also affect the advice provided by financial planners and the design of default options of superannuation funds. While a financial plan is personalised taking into account the situation of the individual, a default option is more like a mass financial plan for a large collection of people with different characteristics, each of whom the super fund knows little about. Both groups need to use the same toolkit.

The possibility of age pension reform should be reflected in the design of a financial plan or a default option. In designing a plan, we acknowledge that it is best practice to consider the range of possible outcomes from many important factors such as markets returns, mortality outcomes (including idiosyncratic and systemic effects), inflation, savings levels and real wage growth. We know we should consider different outcomes for these factors and assess whether the projected outcome is acceptable. The better practice groups go to great lengths to model different potential scenarios.

Hopefully the outcomes of a designed plan are robust to variability in these factors. The age pension structure itself should be one factor considered as part of this robustness test, especially when these plans often cover 30 years or more. The test could consider different age pension scenarios and assess what retirement financial outcomes would look like. It makes for a better, more robust design.

For many the age pension will be a major component of their retirement financial outcome, so if we model the variability in all these other factors but assume the age pension remains constant, aren’t we potentially ignoring the elephant in the room?


David Bell’s independent advisory business is St Davids Rd Advisory. In July 2014, David will cease consulting and become the Chief Investment Officer at AUSCOAL Super. He is also working towards a PhD at University of NSW.


Randall Kingsley
February 24, 2014

Setting aside for the moment the debatable size of the superannuation concessions popularly quoted at $32 billion-some putting this figure much lower at around $22 billion, we are yet to have a sensible discussion on the age when we can access super, or better, any discussion of a fiscal reason to change the age at which Australians can tap into their super savings.

In looking to revise upwards the age at which people can be eligible for a Government pension (65), policy makers need to remember that superannuation savings are mandatory, they do not belong to Government but belong to individual citizens who are the ones taking the investment risk (ie not the super fund trustees and fund managers). And Australians are risking foregone income over many years. Any ideas to change super access need to address social and cultural issues around working lives, re-education, types of work etc , not just longevity nor ideas to maintain or change any relationship between super access and Government pension eligibility.

David's article is correct to raise the potential candidates of age eligibility for the Government pension and means testing but somewhat condescending with questions around turning savings into compulsory pensions, even in part. This money does not belong to Government.

As the superannuation system matures further, it is reasonable to plan for less fiscal drag on the Government pension system as more of us realise that we can do a lot better than relying on the Government.

As for the impact on financial planning, yes there is a lot of improvement required as current thinking around asset allocation and markets is yet to come to grips with potential longevities. A lot of current thinking around reducing equity exposure from age 65 and to include more 'less risky” assets is mis-guided at best and likely to result in people running out of money early.

In all of this, the overarching planning idea should be that the Government pension should be more and more of a system backup and not a major component.

February 22, 2014

I used an ASIC calculator to project my retirement benefit. Along with my wife, we will retire comfortably on $85k a year. This included a large amount of social security benefit in the analysis. This is ridiculous! To think a government would support a couple like us is just vote buying. We won't need the extra funds and shouldn't be entitled to it.

Sonia Main
February 22, 2014

Well, David, with Joe Hockey warning about affordability of pensions yesterday, I'd say you got the timing of this article spot on.


Leave a Comment:



The 4% Rule for retirement withdrawals may be too high

Face up to aged care changes now or face higher costs

Facing the daunting prospect of residential aged care


Most viewed in recent weeks

10 reasons wealthy homeowners shouldn't receive welfare

The RBA Governor says rising house prices are due to "the design of our taxation and social security systems". The OECD says "the prolonged boom in house prices has inflated the wealth of many pensioners without impacting their pension eligibility." What's your view?

House prices surge but falls are common and coming

We tend to forget that house prices often fall. Direct lending controls are more effective than rate rises because macroprudential limits affect the volume of money for housing leaving business rates untouched.

Survey responses on pension eligibility for wealthy homeowners

The survey drew a fantastic 2,000 responses with over 1,000 comments and polar opposite views on what is good policy. Do most people believe the home should be in the age pension asset test, and what do they say?

100 Aussies: five charts on who earns, pays and owns

Any policy decision needs to recognise who is affected by a change. It pays to check the data on who pays taxes, who owns assets and who earns the income to ensure an equitable and efficient outcome.

Three good comments from the pension asset test article

With articles on the pensions assets test read about 40,000 times, 3,500 survey responses and thousands of comments, there was a lot of great reader participation. A few comments added extra insights.

The sorry saga of housing affordability and ownership

It is hard to think of any area of widespread public concern where the same policies have been pursued for so long, in the face of such incontrovertible evidence that they have failed to achieve their objectives.

Latest Updates


The 'Contrast Principle' used by super fund test failures

Rather than compare results against APRA's benchmark, large super funds which failed the YFYS performance test are using another measure such as a CPI+ target, with more favourable results to show their members.


RBA switched rate priority on house prices versus jobs

RBA Governor, Philip Lowe, says that surging house prices are not as important as full employment, but a previous Governor, Glenn Stevens, had other priorities, putting the "elevated level of house prices" first.

Investment strategies

Disruptive innovation and the Tesla valuation debate

Two prominent fund managers with strongly opposing views and techniques. Cathie Wood thinks Tesla is going to US$3,000, Rob Arnott says it's already a bubble at US$750. They debate valuing growth and disruption.


4 key materials for batteries and 9 companies that will benefit

Four key materials are required for battery production as we head towards 30X the number of electric cars. It opens exciting opportunities for Australian companies as the country aims to become a regional hub.


Why valuation multiples fail in an exponential world

Estimating the value of a company based on a multiple of earnings is a common investment analysis technique, but it is often useless. Multiples do a poor job of valuing the best growth businesses, like Microsoft.


Five value chains driving the ‘transition winners’

The ability to adapt to change makes a company more likely to sustain today’s profitability. There are five value chains plus a focus on cashflow and asset growth that the 'transition winners' are adopting.


Halving super drawdowns helps wealthy retirees most

At the start of COVID, the Government allowed early access to super, but in a strange twist, others were permitted to leave money in tax-advantaged super for another year. It helped the wealthy and should not be repeated.



© 2021 Morningstar, Inc. All rights reserved.

The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.