Before the last century, age pensions in Australia didn’t even exist. Social security was the domain of charitable organisations, with the sparing help of some government grants. After Federation some states introduced pensions, but it wasn’t until 1909 that the Federal Government legislated for a nationally based age pension.
In those early days only a small proportion of the population qualified for an age pension, given that life expectancy at birth was only 55 and pension eligibility kicked in at 65 for men and 60 for women. Today we know that life expectancy has improved markedly, while pension qualification ages are only just beginning to creep up. This means that a much larger proportion of the population are able to receive benefits and they will continue to enjoy them for a longer period.
The latest statistics on life expectancy show that after reaching age 65, men will live an average of 19.2 years and women an average of 22.1*. At the same time as life expectancy is increasing, the ratio of working age people to over 65s is decreasing. In 2013 there were around 5 working-age persons for every person 65 and over. By 2033 it will be 3 to 1 and by 2063 around 2.5 to 1^.
The tide is turning
With all these demographic changes, it’s no wonder that the government has the age pension under the spotlight. Eligibility ages are already set to move up to age 67 by the year 2023 and further increases to this are likely, if and when the political climate allows it to happen.
Another sign that the pension is under pressure is the tightening of the assets test from 1 January 2017. This move will see an increase in the assets test taper rate, which will have the effect of increasing the number of retirees who will no longer qualify for a part pension.
So what does the age pension actually cost?
The 2016/17 budget allocated around $45 billion dollars toward age pensions, which represents around 10% of the total budget and is the largest component of the social security spend. Age Pension expenditure is expected to continue to increase largely as a result of an ageing population, increased life expectancies and the linking of benefits to increases in cost of living.
A report by the National Commission of Audit in 2014 stated that despite the increase in the country’s superannuation assets, there is unlikely to be an increase in the proportion of individuals who are completely self-sufficient and not reliant on the Age Pension to some extent. While the proportion of people receiving the full pension is projected to fall steadily over the next 30 years, this is offset by a steady increase in the number who will receive a part pension. The net effect is that the number of Australians eligible for some degree of age pension will remain constant at around 80 per cent of the potentially eligible population.
What does all this mean for you?
The core message for those of us approaching retirement or already in retirement is to take the initiative and be pro-active about retirement planning. We can’t change the demographic dynamics or government reactions, but we can take positive steps to maximise our situation through superannuation planning and careful navigation of the social security system. Having a financial planner ‘in your corner’ can help you take control of your situation and ensure you make the most of opportunities available to enhance your retirement income and lifestyle.
*Australian Bureau of Statistics: Gender Indicators, Australia, Feb 2015.
^Australian Bureau of Statistics: Australian Social Trends, 2014.
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