Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 60

Pension eligibility age: the devil in the detail

Continuing my review of possible areas of pension reform I explore the potential for the pension eligibility age to be increased. The mainstream press reports that an increase in the pension eligibility age to 70 is likely. The obvious desires of such a policy are to increase workforce participation levels amongst the elderly and reduce government spending on the age pension. The real sting in such a policy would be if it were accompanied by an increase in the preservation age for accessing superannuation. Once again complexity reigns. I try to present a balanced argument of the reasons for and against an increase in the eligibility age.

See Cuffelinks for my previous articles on age pension indexing and income test tapering.

Reasons to increase the eligibility age

The most obvious argument for increasing the pension eligibility age is fiscal sustainability. Such a change would partially redress the increasing dependency rate. By increasing the pension eligibility age people are encouraged to work for longer. This view is most strongly worded by the Productivity Commission’s 2013 paper An Ageing Australia: Preparing for the Future where it states that older Australians “are characteristically neither infirm nor inept”. The modelling suggests that through to 2060 increasing the pension eligibility age would save about $150 billion in today’s terms. Interestingly, the Productivity Commission is silent on superannuation preservation age.

The Harmer Review points to productivity benefits noting that longer periods in employment would contribute to higher national levels of production while providing employers with greater access to an experienced workforce.

Harmer makes a perhaps optimistic case that increasing the pension eligibility age would actually result in higher standards of living. The logic is that older people will earn a higher income for longer, save more and not draw down on superannuation thereby having more to spend in retirement. There is a major assumption here that these people choose and can find work. This type of argument is purely an economic one which puts no value on leisure time, caring duties etc.

It is in the Henry Tax Review that reference emerges to aligning (gradually) the superannuation preservation age with an increased pension eligibility age. Henry notes a somewhat surprising statistic that approximately one third of superannuation savings are being drawn down before a person reaches age 65. In Henry’s words:

Allowing these savings to finance early retirement detracts from the sustainability of the system in two ways — by increasing the length of retirement and reducing the amount of savings available to fund retirement. Only compulsory savings that are carried through to retirement take pressure off pension expenditures, through the pension means test. Arrangements that encourage shorter working lives also reduce participation rates and place a greater tax burden on those who work.”

In short, Henry suggests that increasing the pension eligibility age is only a partial solution which has its own fiscal and social issues (the wealthy are more likely to be able to self-fund retirement from superannuation while others cannot). If the aims of any policy change are to increase participation amongst elderly and reduce age pension expenditure then a solution which combines an increase in both the pension eligibility age and the superannuation preservation age is more likely to succeed.

Reasons to leave the eligibility age unchanged

While the arguments for increasing the pension eligibility age are primarily economic, the arguments against are more social.

A commonly cited argument is the inability of elderly people to be active workforce participants. The Henry Review is cognisant of this noting that:

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.”

However a fair argument can be made that increasing the retirement age to 70 is still appropriate – indeed we are playing catch up with large increases in life expectancy compared to a pension eligibility age which, aside from an increase to 67 by 2020 (announced in 2010), had remained stagnant at 65 for 100 years!

There are nationwide social issues with employing the elderly. Sometimes there appears an expectation that people will retire, or at least scale back their hours, prior to retirement age. Some express a view that older workers are keeping jobs from the young.

There are also more nuanced social and structural issues regarding employment. For instance workers in hazardous and arduous industries may find themselves becoming unsuitable for those roles. Another issue will be dealing with workers whose cognitive abilities are in decline (cognitive abilities tend to decline from age 65). Employers may need to develop more workplace flexibility to accommodate the elderly and there are concerns around the ability of the elderly to successfully retrain given existing support programs.

Finally it needs to be acknowledged that many retired people continue to work and contribute, often through volunteer work or through caring for their parents or their grandchildren. Sometimes it is difficult for economists (and politicians) to place a value on these contributions.

So what did all the Reviews have to say?

The Harmer Pension Review was supportive of an increase in the pension eligibility age by between 2 to 4 years by 2050 (noting the pension eligibility age was 65 at the time of the Review). Harmer suggested that it may be appropriate to match the superannuation preservation age to the pension eligibility age but left further analysis on this issue to the Henry Tax Review (which was being undertaken in parallel). Harmer also outlined the need for Government attention to be directed to the training and retraining needs of older workers.

The Henry Review formalised the recommendation of aligning the superannuation preservation age with the pension eligibility age, but over a lengthy period of time (the two would align at 67 in 2024 and an additional review of the issue in 2020 to see if further age increases are required). The Henry Review highlighted the need for any changes to be implemented slowly as people may begin developing a retirement plan quite early in life.

The Productivity Commission focused primarily on increasing the pension eligibility age.

Summary

It is likely that the pension eligibility age will increase at some point in the near future, but it is the details that matter. For instance:

  • Will the superannuation preservation age be aligned with the pension eligibility age? If yes then these changes will affect a much larger part of the population
  • Over what timeframe will the changes be implemented? Hopefully a decent length (more than ten years) to allow people to adapt their retirement plans accordingly
  • Will the Government commit expenditure to programmes that assist and champion the role of older people in the workplace?

It is easy to get caught up in the emotions of a single headline such as ‘Pension eligibility age to become 70’. It is the full details of any changes which will determine if it is good policy or not.

 

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.

 

RELATED ARTICLES

Why Australia is crying out for a National Longevity Strategy

Time to build a super system fit for retirement

Longevity awareness and the three pillars

banner

Most viewed in recent weeks

Lessons when a fund manager of the year is down 25%

Every successful fund manager suffers periods of underperformance, and investors who jump from fund to fund chasing results are likely to do badly. Selecting a manager is a long-term decision but what else?

2022 election survey results: disillusion and disappointment

In almost 1,000 responses, our readers differ in voting intentions versus polling of the general population, but they have little doubt who will win and there is widespread disappointment with our politics.

Now you can earn 5% on bonds but stay with quality

Conservative investors who want the greater capital security of bonds can now lock in 5% but they should stay at the higher end of credit quality. Rises in rates and defaults mean it's not as easy as it looks.

30 ETFs in one ecosystem but is there a favourite?

In the last decade, ETFs have become a mainstay of many portfolios, with broad market access to most asset types, as well as a wide array of sectors and themes. Is there a favourite of a CEO who oversees 30 funds?

Betting markets as election predictors

Believe it or not, betting agencies are in the business of making money, not predicting outcomes. Is there anything we can learn from the current odds on the election results?

Meg on SMSFs – More on future-proofing your fund

Single-member SMSFs face challenges where the eventual beneficiaries (or support team in the event of incapacity) will be the member’s adult children. Even worse, what happens if one or more of the children live overseas?

Latest Updates

Superannuation

'It’s your money' schemes transfer super from young to old

Policy proposals allow young people to access their super for a home bought from older people who put the money back into super. It helps some first buyers into a home earlier but it may push up prices.

Investment strategies

Rising recession risk and what it means for your portfolio

In this environment, safe-haven assets like Government bonds act as a diversifier given the uncorrelated nature to equities during periods of risk-off, while offering a yield above term deposit rates.

Investment strategies

‘Multidiscipline’: the secret of Bezos' and Buffett’s wild success

A key attribute of great investors is the ability to abstract away the specifics of a particular domain, leaving only the important underlying principles upon which great investments can be made.

Superannuation

Keep mandatory super pension drawdowns halved

The Transfer Balance Cap limits the tax concessions available in super pension funds, removing the need for large, compulsory drawdowns. Plus there are no requirements to draw money out of an accumulation fund.

Shares

Confession season is upon us: What’s next for equity markets

Companies tend to pre-position weak results ahead of 30 June, leading to earnings downgrades. The next two months will be critical for investors as a shift from ‘great expectations’ to ‘clear explanations’ gets underway.

Economy

Australia, the Lucky Country again?

We may have been extremely unlucky with the unforgiving weather plaguing the East Coast of Australia this year. However, on the economic front we are by many measures in a strong position relative to the rest of the world.

Exchange traded products

LIC discounts widening with the market sell-off

Discounts on LICs and LITs vary with market conditions, and many prominent managers have seen the value of their assets fall as well as discount widen. There may be opportunities for gains if discounts narrow.

Sponsors

Alliances

© 2022 Morningstar, Inc. All rights reserved.

Disclaimer
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.