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Good policy maintains pension age at 67

One of Scott Morrison’s first decisions as Prime Minister was to abolish the plans to increase the eligibility requirements for the age pension (pension) to age 70, announced originally as part of the unpopular 2014 budget. At the time, then Treasurer Joe Hockey (Abbott Government) planned to lift the pension age from 67 to 70. The move back to 67 is good public policy. It reduces the pressure on vulnerable people who, through no fault of their own, do not have the physical capacity to continue to work up to the age of 70.

The working age problem and increases in life expectancy

A quarter of the total population in all advanced economies is expected to be aged over 65 by 2050. Australia is no different, with the number of people aged 65 to 84 expected to double, and the number of people aged 85 and older expected to quadruple, over the same period. At present, the cost of the pension is approximately 2.6% of Australia’s annual Gross Domestic Product (GDP), or $44 billion. It is predicted to remain relatively stable and is comparatively affordable when compared to an average of 3.9% of GDP among advanced economies.

To provide context, the age pension commenced in 1909 when eligibility was set at 65 for males and 60 for females. At the time, life expectancy at birth was 55.2 years for males and 58.8 years for females. Today, life expectancy for males is 80.4 years and for females 84.6 years.

To negate some of these impacts, Australian Governments (the former Labor and current Coalition) have attempted to gradually extend the working age. At present, the former Labor Government’s policy changes include the steady rise in eligibility age from 65 through to 67 by 2023. The Coalition’s scuppered plan was a gradual rise to 70 by 2035.

The question for future policy makers

If a future Government increases the pension age, will retirees look for alternative forms of Government assistance to maintain their expected income at the retirement date they had anticipated?

To extrapolate and make reasonable inferences about the future, it is important to consider the past. There could be a relationship between increasing the age requirements of the pension and people accessing the Disability Support Pension (DSP).

From 1995 until 2013, the pension qualifying age for women gradually increased from 60 to 65 years, while the requirement for men remained fixed at 65 years. Over this 18-year period, the overall percentage increase in women accessing the DSP increased 174%, compared to a 36% increase for men.

The monetary value of the Government assistance for the pension and DSP (including supplements) is identical for both genders, at $908 per fortnight for singles. It could be reasonably inferred that if the pension eligibility requirements are increased, some Australians may seek to apply for the DSP to maintain their expected retirement income and retire at the date they had originally anticipated.

Between 2001 to 2013, the percentage of female DSP recipients aged between 60 and 64 increased from 8% to 21.9%. This is a substantial increase and requires more analysis to accurately determine all the factors underpinning this outcome.

Nevertheless, in 2012, the then Labor Government overhauled the DSP eligibility requirements due to the exponential growth in DSP recipients. This policy change resulted in a comprehensive assessment of all new DSP applications, including a determination as to whether the applicant could undertake any form of work, as opposed to relying on a medical diagnosis. The Coalition Government has since made it even more difficult to qualify, with an individual now required to prove that their permanent disability prevents them from working more than 15 hours per week.

Source: Department of Social Service

Protection of vulnerable people

Australians who rely solely on the pension in retirement are among the most vulnerable members of our society. They are subject to regular variation of asset and income testing requirements from Governments of all persuasions.

Unfortunately, these Australians have not been able to accumulate substantial superannuation savings through the compulsory superannuation system. As the system was made mandatory in 1992, part way through their working lives and through an initial contribution rate of only 3%, many have not become financially independent in retirement. It is unfair to expect these Australians to work for longer periods of time, often in physically-demanding roles that their bodies are no longer strong enough to carry out.

Two-thirds of females who receive the DSP do not own a home, and 72% of females receiving the DSP are single, separated, divorced or widowed. Australia has a responsibility to support its vulnerable. The abandonment of the plan to increase pension age to 70 is not only good politics, but good public policy.

 

Adam Shultz is Executive Manager of Policy at Mine Super and a Councillor for Lake Macquarie City Council. He holds a Master of Public Policy from the University of Sydney. This article represents the personal views of the author and not those of his employer.

For more articles and papers from Mine Super, please click here.

13 Comments
Margaret
March 11, 2021

What doesnt seem to be taken into account is extra responsibilities to others for aged women. I left work because my work place did not keep me safe as an ageing woman with chronic illness when covid hit. At 65 i am supposed to look for work while im still covid vulnerable while immunisations are still in the future. I still dont feel safe. I care for a grandchild two days a week and am a support person and transport support to hospital and health appointments for my ex husband with heart and memory problems. On top of that i have my own health appointments. What employer is going to want someone who has to take time off for that? Im doing a community service but it would never be recognised as such. Living on new start is a joke. Pollies who get extraordinary perks and pensions have no brains or heart for those who dont. We assumed that working and paying taxes for 50 years ensured a pension at 65. Over 65s save gov billions in volunteer work, but all they talk about is how much we cost. Its all a farce. the emporers have no clothes and never acknowledge how naked and stupid they are. Or that noone believes their distorted views on caring for the aged population. Im not a retiree with stocks n bonds n negative gearing or shares etc. Being a woman who broke work to have children i have little super left to feel safe. I dont want to work while i am doing all my community service and trying to keep up my own health and why should I ? How dare people who rort the system to look after themselves abandon those of us who havent. They all disgust me.

Rahul
October 08, 2018

While it is difficult to get precise statistics, it is interesting that sometime ago, it was reported that the success rate for DSP was ~20%. As alluded to in the article above, it is getting more difficult to be on DSP. This presents a challenge to people who wish to retire prior to 67 and subject to means testing, intend to receive government payments.

http://www.abc.net.au/news/2016-06-24/rule-change-leads-to-plunge-in-disability-pension-claims/7538070

If eligibility for DSP is getting more difficult, then naturally, people are forced to go on Newstart Allowance, subject to means testing, with lower payments and an activity test.

I am not really sure what the solution is but I find it interesting how different countries deal with providing pensions for older citizens. UK with a contributory styled system and New Zealand with a non-means tested system and Australia with perhaps a hybrid model.

With 80% of the senior cohort being eligible for a part-pension (and 30% on full pension) by 2050, and the increased disparity in people in workforce than out of it, arguably there are some challenges for the Government in policy decisions.

https://www.ncoa.gov.au/report/phase-one/part-b/7-1-age-pension


I am not sure what the readers' opinion is. While the Age Pension assets tests means testing was tightened on 1 July 2017, stating that obvious, receiving the Age Pension is arguably only going to get harder, be it further tightening of means testing rules (including incentivising work) or increasing the qualifying age

Adam Shultz
October 10, 2018

Thank you Rahul for your feedback and comments. As you correctly point out access to the DSP is becoming increasingly difficult. In terms of reducing the reliance on the pension in the future. Perhaps policymakers need to look at incentives to increase the superannuation balances of low and middle income earners which should gradually reduce the final cost of the age pension in the years ahead. Legislating an objective for superannuation would be a good start. Increasing the SG rate up to 12% would also assist. https://www.aph.gov.au/Parliamentary_Business/Bills_Legislation/bd/bd1617a/17bd069
All the best, Adam.

Richard Lyon
October 06, 2018

Is it good policy to make the Age Pension available to everyone above a certain age because some will find it hard or impossible to work? If so, why is 67 the right age?

Assuming that longevity continues to increase (by no means a given, but a good bet), the present value of each $1 of pension will increase if the starting age does not go up. With increasing proportions of the population above a given age (e.g. 67), this means that the Age Pension's share of GDP will increase quite rapidly unless remedial action is taken. This is clear from Chart 2.14 of the 2015 Intergenerational Report (IGR) that shows Age and Service pensions rising from 2.9% of GDP in 2014-15 to 3.6% in 2054-55 with the eligibility age capped at 67. And all of that increase happens after 2023, when the eligibility age stops rising.

0.7% of GDP may not sound like a lot, but it was $12 billion in the year to June 2017, based on GDP reported by the ABS at $1.69 trillion.

To keep a lid on pension costs while capping the eligibility age in the face of longevity increases, we would need to pay everyone a smaller pension and/or reduce the proportion receiving the pension - especially the full pension. Is this going to be acceptable?

And this pension will not address the barriers to work for some of those below age 67, which feels like a very arbitrary cut-off age.

If, instead, we increased the eligibility age so as to maintain a broadly constant national retired life expectancy, we would be able to focus separately on those below the eligibility age who cannot continue working. Perhaps it requires a payment with a different name - such as Early Retirement Pension - to recognise that it's serving a different purpose from the Disability Support Pension.

Overall, it is surely better policy to target support at those who need it than to provide it to all just so that the minority in need are protected.

Adam Shultz
October 09, 2018

Thanks for your feedback Richard. It is a very informed contribution. Life expectancy may be increasing with medical advancement. However, is an individuals’ quality of life over a certain age increasing? ie Is there a higher proportion of those that are living longer engaged in the community? Are they volunteering and actively participating in society? This would be a good study to undertake and review. It may provide evidence to support your contribution. Perhaps the superannuation contribution caps need to be skewed to assist the poor and middle class to become financially independent in retirement. These are all ideas and decisions that policy makers will need to grapple with in the future. All the best, Adam.

Richard Lyon
October 11, 2018

Good question, Adam!
My impression is that much of the extra lifespan is healthy (or at least not so unhealthy as to be seriously limiting). For example, see Chapter 6.9 of Australia's health 2014 (AIHW). And that fits with all those older-age competitors in all kinds of sport.
So there should be a benefit to the community - or at least the opportunity for one. (A separate question is how much benefit the community actually gets from the active retired, especially if they're in ghettos - retirement villages - instead of being embedded in the community where they can more easily provide face-to-face services such as teaching.)
But of course, if the extra years are actually mostly unhealthy, then there will be a higher drain on the public purse. Fortunately for this particular discussion, that support would largely fall into Aged Care, which is a separate topic.
Richard

Adam Shultz
October 12, 2018

Thanks for providing a reference to Chapter 6.9 of the AIHW Richard. A link is provided for others wanting to review it.https://www.aihw.gov.au/getmedia/19dbc591-b1ef-4485-80ce-029ff66d6930/6_9-health-ageing.pdf.aspx
It refers to disability and disability-free life expectancy. The ABS data from 2012 indicates that 53% of Australians aged 65 and over had a disability. Figure 6.28 refers to the number of years that those aged over 65 can expect to life 'free of disability'. For men in 1998 it was 7.1 years, increasing to 8.7 years by 2012. For women in 1998 it was 8.7 years, increasing to 9.5 years by 2012. The increase for men over this period is 1.6 years and 0.8 years for women. This increase in disability-free life expectancy isn't as significant as one would expect and should be considered by policymakers when they consider raising the pension age. Thanks again Richard for your research and input. Adam

Michael2
October 06, 2018

Hi Adam

Do we not have to move the pension age up to 70 at some stage?

Michael2

Adam Shultz
October 09, 2018

Thanks for your question Michael. The article is trying to inform the reader about the potential ripple effects of changing the current age eligibility requirements for the pension. Replacing one form of government assistance with another is not a good outcome.The pension is a safety net and I believe the age requirements shouldn’t be increased at this stage.

Susan Bryant
October 04, 2018

Well said Adam, older women over 55 are at alarmingly increased risk of homelessness. Being able to access some form of government financial support is often the difference between having a home and sleeping in your car. These women are indeed some of the most vulnerable in our community and through no fault of their own, falling between the cracks of being wives and mothers, denied equal opportunity in the workforce, denied access to super and then often kicked to the kerb as the spouse reaches maximum earning capacity or dies. Society's expectations of women has changed ( that's another article) but while real life catches up we should collectively think about the cost and not just in dollars, of turning our backs on the hands that rocked the cradles.

Adam Shultz
October 05, 2018

Thanks for your feedback Susan. As you point out, simply replacing one form of government assistance with another is not the answer. It would likely exacerbate existing issues for vulnerable people. All the best, Adam.

Malcolm Wilson
October 04, 2018

The article errs in that it does not take account of the role of public policy in setting expectations. It also does not take account in the likely increase in longevity by 2035.
Increasing the retirement age to 70 sets up an expectation across all people that work continues till 70. This is very feasible for people in office work and many skilled professions.
That some people in physically demanding roles cannot sustain the tempo of work does not mean that all workers can't. Nor does it mean that they cannot work part time or learn new roles. Also with additional equipment such as robotics physically demanding work is becoming less physical.
It is bad public policy not to adapt to what the future predictably brings. A retirement age of 70 makes sense.

Adam Shultz
October 05, 2018

Thanks for your feedback Malcolm. Leaving the pension age at 67 doesn't stop people in office work or those in skilled professions that have the capacity from continuing to work. It simply provides a safety net for vulnerable people who don't have the capacity to continue to work. It also minimises the prospect of people potentially shifting onto the disability support pension as outlined in the article. All the best, Adam.

 

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