You may have read this so apologises if it is the caseLet’s get...

You may have read this so apologises if it is the case




Let’s get real about retirement

JOHN DALEY |
The Australian |
March 01, 2014 12:00AM


JOE Hockey has suggested that if we are “fair dinkum” about getting the budget back into the black, we need to look at raising the age at which people can qualify for the age pension. He’s right, but such a reform will be a lot more effective if we also raise the age at which people can start drawing down their superannuation.

Many will be worried about how this double change might affect them. But most of these worries are unfounded. Given the importance of this reform, more facts are needed.

And facts are vital: this is perhaps the most important single reform for our time. Increasing the age at which you can access the age pension and superannuation is one of the few reforms that is a big positive for both economic growth and the budget.

Grattan Institute’s Game-changers report in 2012 found that raising the pension and super ages to 70 would add $25 billion a year to economic output - almost 2 per cent of GDP - in the medium term. Undertaking this huge reform to increase economic growth would create more resources to pay for all the things we would like to improve about our lives - not least, improving health care.

Raising the pension and super ages would also improve the commonwealth budget balance by about $12bn a year over the medium term. It’s a double gift for the budget, both increasing income tax receipts and reducing welfare. It has more impact on the budget than any almost any other measure that Grattan Institute could identify in its Balancing Budgets report last year. The only plausible alternatives this big are raising income tax rates by more than 2 per cent across the board, or raising the GST to 12.5 per cent.

The reform would also have a big impact on budget sustainability. It’s much easier to keep budgets in balance with fewer people dependent on government compared to the number working and paying taxes. As the population ages, this dependency ratio will increase if nothing else changes. But if pension and super ages increase, dependency ratios could continue to get better for more than 30 years.

The pension age was set in 1908 at 65 for men, when a 15-year-old could expect to live until 64. Today, life expectancy for a 15-year-old boy is 80, but the pension age was only changed in 2009, when government legislated to raise the pension age by two years to 67 by 2023. In the 14 years in between, life expectancy is likely to rise by another three years above the pension age.

So this is a pretty obvious reform. It hasn’t happened because of deep community concerns - most of which are based on myths and half-truths.

Some are concerned about jobs: people won’t be able to work past 65; they won’t be able to find a job; or they will take away the jobs of young people.

Some people are concerned about whether older people can work. About 9 per cent of people between 65 and 69 have a severe disability, only slightly more than people between 60 and 64. The existing disability benefit - which pays the same amount as the age pension - is aimed at this minority who can’t work. There is a good argument that people in this situation should be able to draw on their superannuation. But the average 65-year-old Australian can expect to be 74 before they have any disability, is more than capable of working, and has no need to draw down their superannuation.

Others worry about whether older people can find work. This too is an issue for a minority. About 11 per cent of people who are retired between 65 and 69 struggle to find work. But most vast majority of people over the age of 65 retired because they “reached retirement age”. Doubtless we can do more to encourage employers to hire and retain older workers. But most older people who aren’t working have chosen not to.

Some people worry that if older people work for longer, there will be fewer jobs for young people. This is known as the “lump of labour fallacy” the belief that there are only a fixed number of jobs to go round in any economy. The history of the 20th century shows how wrong it is. Massive increases in women’s workforce participation didn’t put millions of young people out of work. Nor did the substantial increase in older workforce participation in Australia over the past decade. We now know that in the medium run, if more people work, more is produced, and living standards rise.

Another concern is that raising pension and superannuation ages will mean that older people volunteer less, or are less able to look after their grandchildren. Yet Grattan Institute analysis of ABS surveys and the census shows that employment has no impact on volunteering levels. Nor is it likely to affect grandparenting. Nearly one in five Australians aged between 65 and 69 voluntarily look after children in an average fortnight. It’s almost exactly the same percentage regardless of whether they have a job.

It is vital that any increase in pension age be matched by an increase in the age of access to superannuation. The Harmer review found that a third of superannuation balances are drawn down before people qualify for the age pension. We provide lavish tax concessions for superannuation on the basis that government will then pay less for age pensions. But if the super is spent before age pension age, the concessions do nothing to reduce government liabilities.

Drawing down on superannuation before age pension age really only benefits the well-off. The vast majority of those who draw on their superannuation before 65 are in the top half of income earners. Only about 5 per cent of people in the bottom half of income earners draw down their super early - they have little choice but to work to age pension age. Wealthy people who save enough to retire early should be able to do so. But they shouldn’t get a tax break to help.

Ironically, those who object most vociferously to increasing retirement ages are often retired already. Yet these people would benefit most. Those who are already retired are hoping that government will continue to pay for their pensions and healthcare. Age pensions already consume almost 10 per cent of the commonwealth budget - the largest single line item. Pressures on these outlays - as well as rising health and aged care spending - are likely to increase as the population ages and modern medicine finds more ways to keep us healthy for longer. It will be easier to resist the temptation to cut back if pension and superannuation ages increase, and governments have more money to spend.

Increasing the age at which you qualify for age pension and superannuation is the most important economic and budgetary reform of our time. It is indeed a litmus test of whether the government is fair dinkum about Australia’s future.

John Daley is chief executive of Grattan Institute.