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Why growing old is a costly business

By Tony Negline.

This article may be out of date.

27th May 2009

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In 2005 the Productivity Commission published a report into the economic implications of population aging to Australia.  The report made very sobering reading.

It said that economic growth would slow over the next 40 years because of the aging population which would also cause deep deficits in government budgets over many years.

To counter these problems the Productivity Commission said the government would need to be proactive and quickly introduce measures to ensure that economic growth rates don’t decline.

The Productivity Commission was not asked to come up with possible policy solutions but back in 2005 various commentators predicted that the government would have to further restrict access to entitlements such as the age pension.

The Howard Government reacted to this report but not necessarily in a way that would have seemed obvious in 2005.

Costello's "Better Super" policy (which apparently only saw the light of day because Howard rejected the removal of the highest marginal tax rate) made it possible to save indefinitely inside the super system and also made the age pension more accessible by reducing the assets test taper from $3 per $1,000 of eligible assets above the various thresholds to $1.50 per $1,000 of assets.

This revised retirement incomes policy also changed how the super tax concessions were targeted.  The new system would limit the amount of money people could get into the system via contributions and other transfers but investors would be allowed to accumulate an unlimited amount of money in the super system.

By restricting the amount of money going into super the government was able to do away with Reasonable Benefit Limits.  In 2005 the ATO questioned the usefulness of the RBL system in its Annual Report when it said that, "the overall effort required to administer reasonable benefit limits appear[s] disproportionate to the number of individuals ultimately affected by the provisions".

The Howard Government did not seem to want to increase the age pension age even with a very long gestation period.  It seemed to believe that policy settings should encourage more people aged between fifty-five and sixty-five to stay in the workforce because at present only a small number of people in this age bracket are actually working.

The Rudd Government seems to have embarked on a slightly different tack.  It has decided to slowly increase the age pension age beginning in 2017.  In July 2023 the age pension age is due to reach age 67.  This will impact anyone who is currently 57 years or younger.

Where did age sixty-five come from?  According to Lester Wills, a financial services consultant, Otto van Bismarck, in 1889, first proposed age 70.

“Bismarck believed that those disabled from work by age or invalidity have a well-grounded claim to care from the state,” said Wills.  “He selected age 70 because at the time the average life expectancy was only 45 so very few were expected to qualify for the payment.  Thirty years after the Prussian empire introduced this policy, it reduced the age to sixty-five.”

Australia and the rest of the world simply followed the Prussian’s lead without too much research and for some reason the age has never been increased to any great extent in any country.

If we applied the same Prussian logic we would not be paying the aged pension until older Australians were in their nineties!

Thankfully at this point in time it's unlikely that any Government would consider introducing such a high age for pension qualification (even if it might fix most of the government budgetary problems caused by population aging).

However it should not surprise anyone if a Federal government further increased the minimum ages at which people can access the age pension beyond the Rudd Government's recent increases.

At the same time access to super benefits might also be further restricted prior to retirement thereby forcing older Australians to remain in the workforce even longer.  Perhaps the age pension age number will increase to 70 or even 75.

Another solution might be to leave the age pension age at younger ages but significantly toughen up its income and assets test eligibility rules.

In all likelihood there will come a time in the next thirty or forty years when public finances will become so perilous that these and other solutions, currently seen as excessively severe, will have to be introduced.

Right now it would appear that voters are not ready to accept these changes because by all accounts the Rudd Government's modest age pension changes are unpopular.

As T.S. Eliot once wrote, "most people can't stand too much reality".

If further increases in the minimum age pension age would the government alter the work test to stop investors accessing their super benefits after reaching age fifty-five as lump sums or pensions which can be converted into a lump sum.  Indeed the Henry Tax Review has proposed that superannuation should not be accessed before the age pension age.

The government says it hasn't considered this policy but will do so before the end of the year.

Superannuation investors aged between fifty-five and sixty-five are not forced to touch their super but are allowed full access if they can prove that they have retired.

They are also allowed to take a non-commutable Transition to Retirement pension.  The financial services industry have a number of acronyms for these products.  For example, TRAP ("Transition to Retirement Allocated Pension") or TRIS ("Transition to Retirement Income Stream").

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