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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.

 

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