The pension and the retirement age…

The recent suggestion by the Productivity Commission that the age of eligibility for the age pension be raised to 70 excited a good deal of interest. A lot of the concern has been greater than warranted. But there are some other important aspects of funding ‘retirement’ that we should think about.

What is ‘retirement’? For most of us it occurs when we cease working and thus earning an income.

Assuming we are able to work this is a financial decision that’s made in the light of what we want or need to spend on the one hand and the income that’s available to us from sources other than our own labour on the other.

Since the early 1990s when the current superannuation system was introduced we have been encouraged (and in the case of wage and salary earners forced) to put aside some of our current income to fund our old age when we no longer earn income by working. At what stage we stop working (‘retire’) is then a decision we make in the light of how much income we are able to generate from our ‘savings’.

Prior to the 1990s (unless we had made some voluntary arrangements or worked for the government) the principal source of income in our retirement was the age pension, subject of course to the age at which one became eligible to receive the pension. Because the pension was the principal source of income for most people the age of eligibility was a major determinant of the decision about what age to stop working. And this remains the case for many people today.

But it’s misleading to refer to the age of eligibility for the age pension as ‘the retirement age’.

Increasingly the decision to retire is being made independently of the age of eligibility for the age pension.

That said, the ‘age of eligibility’ for the pension will still exert a strong influence over the decision by some to cease work. So concern on the part of many over an increase in this age is thus understandable.

But the increase from 65 to 67 that was made in 2009 (the first increase in the century since the age pension was introduced despite an increase in life expectancy of over 20 years during this time) won’t take full effect until 2023. Furthermore any further increase, such as the modest 3-year increase suggested by the Productivity Commission – if implemented by the government – would only take full effect some years even later than this.

Therefore nearly everyone over 60 today will not be affected at all. This lets us take a more dispassionate view of the proposal.

Is it fair? What do younger people think?

They’ll be the ones affected. But then by the time the higher eligibility age kicks in most of them will have spent all of their working lives under the present private superannuation system (much of it in the time frame when a higher rate of compulsory contributions has taken effect) so they’ll ‘count themselves out’ anyway. And in the face of ever increasing life expectancy the prospect of working well into their 60’s isn’t the same horrible prospect it is to many older people today. Ask them what they think about resisting change and paying higher taxes to fund twenty or more years of retirement for older people.

However, there is an important aspect of funding income in older age, independent of the ‘age of eligibility’, that we need to discuss.

Some people need, or are forced, to ‘retire’ earlier than others. This may be because of ill health; the fact that if not in ‘ill health’ they cannot continue (or cannot be expected) to perform the physical work associated with their job; or because they cannot gain employment. Such circumstances are not uncommon for people in their 50s and 60s. Not only are they faced with the possible need to provide an income for themselves for more years but also their time working when they can accumulate superannuation is cut short.

We need to provide social security for these people, though in a way that doesn’t encourage ‘retirement’, at the expense of taxpayers, while they can still provide an income for themselves.

That this is difficult is illustrated by the reaction on the part of many in the community to the large increase in recent years in the number of people paid the Disability Support Pension. Those legitimately in receipt of the DSP are suffering from a strong resentment on the part of taxpayers that is engendered by the view that many claiming this pension are in fact able to work so they don’t need to rely on others funding their life. But do we need a new type of ‘forced retirement’ pension?

What do you think is the best way forward?

Should there be different types of support for people of different ages and capabilities?