Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 100

Do you plan to be a ‘have’ or a ‘have not’?

The latest Intergenerational Report (IGR) contains some scary statistics. Within 40 years the life expectancy of the average male will be 95.5 years, and for a female 96.6 years. The population will be almost 40 million and include more than 40,000 people aged over 100.

There is nothing really new in this. For more than 35 years, there have been warnings galore about the problems that will come when the baby boomers start to leave the workforce. These people, born between 1946 and 1964, are now aged between 69 and 51 - the oldest of them are either retired or thinking about it.

Their exit from the workforce will cause labour shortages, and put pressure on wages as employers compete for a dwindling number of workers. Furthermore, their increasing need for health services will cause immense challenges for an already stretched health sector.

Adversarial politics creates inaction

Governments of all persuasions have long been aware of this ticking time bomb, but thanks to the adversarial nature of politics, there has been a lot of talk but not much action. In 1997 the Howard Government tried to fix the crisis in the nursing home industry by introducing accommodation bonds. Labor ran such a successful scare campaign the scheme was dropped.

For example, in budget after budget there have been attempts to address the rising cost of the Pharmaceutical Benefits Scheme which in 2007/2008 delivered 170 million prescriptions at a cost of $6.6 billion. In 2006 the Howard Government laid out a four year reform package that was designed to save $3 billion over ten years, and in the 2008/2009 Budget the Rudd Government introduced new therapeutic groups aimed at driving down the cost of drugs. Still the costs escalate, and in 2013/2014 exceeded $9 billion.

The first IGR was included in the 2002/2003 budget, and a second report was released in 2007 and a third in 2010. Every time a new IGR is released we hear statements from the government of the day that we face massive problems in the future unless we make big changes to our tax and welfare system in the short to medium term. Unfortunately there is more talk than action.

The time to act is now

The good news from the latest IGR is that average annual income is expected to rise from $66,400 to $117,300, which will boost the property and share markets. The bad news is that there will be just 2.7 people aged between 15 and 64 — potential taxpayers — for every person aged 65 and over.

It is a wake-up call for every Australian. If you are under 40, you have time for compound interest to work its magic, which should enable you to build a decent portfolio if you start now and choose the right mix of growth assets. You will need this portfolio because you may well live to 100, at which time the age pension is certain to be severely restricted.

If you are between 40 and 65 you cannot afford to rely solely on employer-paid superannuation. The age at which you can access the age pension is being raised, and there are calls to also raise the superannuation age to 67 to match. The best strategy for you is to salary sacrifice to the maximum, and hone your skills so that you can work as long as possible. This will increase the power of compounding and make your money last longer, as it will delay the time you need to start making withdrawals.

Are you already over 65? Don’t panic. Any changes to the age pension will come in gradually, and are certain to be grandfathered. However, you need to be getting good financial advice to ensure your money works as hard as realistically possible. The alternative is to face the challenge of living longer than your money.

Where will the taxes come from?

The following case study illustrates the difficulty facing any government trying to get the budget back on track. Think about a single income couple with two children aged 8 and 10, where the primary breadwinner earns $75,000 a year. The income tax on this would be around $16,000, but the family's contribution to the national coffers would be just $9,000 after family payments of $7,000 a year are taken into account. If we assume the cost of the full age pension for a couple is $36,000 a year when healthcare concessions are factored in, it takes four such single income families (or eight adults of working age) to support one pensioner couple.

This imbalance will become worse as the ratio of dependants to workers grows over time. Our taxation system presents grave challenges too. Currently, 61% of personal income tax is received from a mere 11% of adults, leaving the bulk contributing very little. In addition, 87% of those aged 65 and over pay no personal income tax whatsoever.

NW Figure1 130315

NW Figure1 130315

Source: Philo Capital

A full review of our tax and welfare system is overdue, but the adversarial nature of politics does not make for optimism. Right now, the federal government reminds me of a dysfunctional family. Dad and Mum (the two major parties) spend all their time abusing each other and promising the world to their constituents (us, the children) while well-meaning but inexperienced relations (the minor parties) add to the turmoil by telling the kids that their parents don't know what they are talking about.

Unless you have more faith than I do that politicians of all parties will be able to solve these problems over the next 40 years, you should be making every effort to work as long as possible to accumulate as much as you possibly can for your retirement. Australia is moving inexorably to a society of haves and have nots. Despite a lot of rhetoric from our politicians, it will be the haves who will be first in line for medical care as the queues for health services grow.

 

Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance. His advice is general in nature and readers should seek their own professional advice before making any financial decisions. See www.noelwhittaker.com.au

5 Comments
AndrewH
March 17, 2015

An autocracy that was all about doing the right thing for the country and not just trying to get re elected to sty long enough to get the still overly generous parliamentary pension would be a good start but alas a pipedream,

If I remember rightly the justification for it's generosity was because of their limited tenure in the job. Guess what, I don't Know too many people who have jobs guarnateed. Bring the pollies back to the standard Super guarantee and they will soon work out a way to improve it for us all

The simple reality is that the super system has the potential to remove the need for most people to need access to a aged pension if it is used properly from when people first commence working and with appropriate contributions required from all parties involved. But we need to start now!

Quite franky I would be happy to have a increase in my tax (levy) if it went to my super account. (Can't trust them to spend it wisely so better come to me). We all know taxes will need to increase to support aging population. So why not start now at a lower increase and allow compounding etc.

I was not able to identify one negative out of the last budget for myself, Not even the proposed co payment as I have not been to a GP in 4 years, Yet if I was a low income earner I just got done over

Tortoise
March 16, 2015

Report after report but nothing is done. We almost need an autocracy to get the country moving forward rather than stand still.

John
March 13, 2015

Everyone ignores that in the early 1900s that taxes were increased to cater for old age pensions and the revenue from that increase was supposed to be for aged pensions but ended up being absorbed by other needs in consolidated revenue
Plus tax scales have decreased over the last 20 years esp. at the upper end

Mack Carson
November 28, 2019

Above.
Therein lies the problem.
UK and most of the Northern European country.s.
Holland,Sweden.Denmark etc.
Have a prepay pension system covered by voluntary payments from taxpayer. plus diverted assets from Gov't.Continually running, by generation after generation paying in/taking out.
Aust has same problem. Had. But stolen.
The main Problem is as above.
Keeping Whatever current governments sticky fingers out of the pie.
All materials coming out of the ground. Should belong to the people/Taxpayers.
and NO land or assets should be allowed to be sold Offshore.
Thank god us few War Babies left above the grass.
don't have too much longer to suffer this idiocy.
You can have it ALL to yourselves.

Jerome Lander
March 13, 2015

Nice summary article.

Globalisation and a knowledge economy really enable the informed, well educated and well informed to prosper legitimately to a greater degree than ever before. Government needs to do more to ensure that these fortunate people - such as many of those reading this article - do not also get ridiculously beneficial taxation arrangements! (such as is the case currently in retirement for large self-funded pensions).

Unfortunately, working longer will be particularly important for the less well to do. It is not entirely clear, however, whether despite an aging population there will be enough work for those of working age in the decades to come, as technology becomes capable of displacing so many of the jobs people do currently.

 

Leave a Comment:

     

RELATED ARTICLES

A super consensus needed before the demographic tsunami

Demographic destiny: a snapshot of Australia in 40 years

Turning point: the 2020s baby boom retirement surge

banner

Most viewed in recent weeks

How to enjoy your retirement

Amid thousands of comments, tips include developing interests to keep occupied, planning in advance to have enough money, staying connected with friends and communities ... should you defer retirement or just do it?

Results from our retirement experiences survey

Retirement is a good experience if you plan for it and manage your time, but freedom from money worries is key. Many retirees enjoy managing their money but SMSFs are not for everyone. Each retirement is different.

A tonic for turbulent times: my nine tips for investing

Investing is often portrayed as unapproachably complex. Can it be distilled into nine tips? An economist with 35 years of experience through numerous market cycles and events has given it a shot.

Rival standard for savings and incomes in retirement

A new standard argues the majority of Australians will never achieve the ASFA 'comfortable' level of retirement savings and it amounts to 'fearmongering' by vested interests. If comfortable is aspirational, so be it.

Dalio v Marks is common sense v uncommon sense

Billionaire fund manager standoff: Ray Dalio thinks investing is common sense and markets are simple, while Howard Marks says complex and convoluted 'second-level' thinking is needed for superior returns.

Fear is good if you are not part of the herd

If you feel fear when the market loses its head, you become part of the herd. Develop habits to embrace the fear. Identify the cause, decide if you need to take action and own the result without looking back. 

Latest Updates

Economy

The paradox of investment cycles

Now we're captivated by inflation and higher rates but only a year ago, investors were certain of the supremacy of US companies, the benign nature of inflation and the remoteness of tighter monetary policy.

Shares

Reporting Season will show cost control and pricing power

Companies have been slow to update guidance and we have yet to see the impact of inflation expectations in earnings and outlooks. Companies need to insulate costs from inflation while enjoying an uptick in revenue.

Shares

The early signals for August company earnings

Weaker share prices may have already discounted some bad news, but cost inflation is creating wide divergences inside and across sectors. Early results show some companies are strong enough to resist sector falls.

Property

The compelling 20-year flight of SYD into private hands

In 2002, the share price of the company that became Sydney Airport (SYD) hit 80 cents from the $2 IPO price. After 20 years of astute investment driving revenue increases, it sold to private hands for $8.75 in 2022.

Investment strategies

Ethical investing responding to some short-term challenges

There are significant differences in the sector weightings of an ethical fund versus an index, and while this has caused some short-term headwinds recently, the tailwinds are expected to blow over the long term.

Investment strategies

If you are new to investing, avoid these 10 common mistakes

Many new investors make common mistakes while learning about markets. Losses are inevitable. Newbies should read more and develop a long-term focus while avoiding big mistakes and not aiming to be brilliant.

Investment strategies

RMBS today: rising rate-linked income with capital preservation

Lenders use Residential Mortgage-Backed Securities to finance mortgages and RMBS are available to retail investors through fund structures. They come with many layers of protection beyond movements in house prices. 

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.