Monday, 2 April 2007

Demographic Disaster or Hype and Hysteria?

The Australian Treasurer today released an updated "Intergenerational Report", five years after the first report made official the looming demographic disaster facing government finances as the aging Baby Boomer generation reached retirement age, stopped paying taxes and starting drawing on the aged pension. The most interesting aspect from my point of view was the radical change in the projected situation in 40 years time (which is based on expected trends in life expectancy, fertility rates, retirement ages and workforce participation) compared to the previous report. Instead of a projected 50 Billion dollars a year (5% of GDP) budget deficit in 40 years time, the latest projection is for a more modest $35 Billion dollar a year shortfall - a reduction of 40%. This decrease was largely due to a slight increase in the fertility rate (whereas the original report expected the downward trend in fertility to persevere) and a slight increase in the participation rate, especially of older male full-time employees. It makes me wonder what situation will arise if, as is likely, the participation rate increases further. As there is apparently a large proportion of the Baby Boomer generation that has insufficient funds socked away for their retirement, it seems inevitable that more of them will have to continue working beyond their planned retirement age. Perhaps this will end up being a non-event. I'll see what comes out in the next update 5 years from now.

Enough Wealth


mOOm said...

Due to the superannuation system, the low level of the age pension, immigration, and a fairly efficient medical system, Australia is probably better prepared for this than any other developed economy. In the US, the political class is just burying their heads in the sand... said...

I heard a guest on radio national this morning discussing this very question. Aparently, if the Australian workforce participation increased to one comparable to the "best" rate experienced in the OECD countries the projected deficit would disappear entirely.

The other thought that crossed my mind while watching the Treasurer's speech to the press club, was "whatever happened to the increase in the superannuation preservation age?" A few years ago the Federal government introduced a phasing-in of an increase in the age at which superannuation can be accessed. The old preservation age used to be 55. It is now;
55 for those born before 1/7/1960
56 for those born in the '61 FY (1/7/1960 - 30/6/1961)
57 for those born in the '62 FY
58 for those born in the '63 FY
59 for those born in the '64 FY
and 60 for everyone born after 30/6/1964

This was introduced in July 1999. I would have thought that it would have been a good idea to raise the preservation age further as part of the introduction of "simple super" - compared to the boon of getting all super payments tax free, a phased in retirement age increase wouldn't have caused much outcry. For example,
61 for those born in '66 - '68
62 for those born in '69 - '71
63 for those born in '72 - '74
64 for those born in '75 - '77
65 for all those born after 1/1/1978
would seem quite equitable as the increase in the retirement age would parallel the continuing increase in the life expectancy.

The Treasurer at one stage appeared to be on the verge on talking about this (when he mentioned thinking of working age as "years before death" rather than chronological age), but there was nothing concrete laid out. Perhaps it will appear in the May Budget when the final version of simple super that has now been legislated is sure to be mentioned?

ps. If anyone is interested in reading the entire Intergenerational Report #2 it's available free online.

The Bull said...

You want me to work to 65? That's a bit rough!

The younger generation should be much better prepared for retirement given the Compulsory super contributions we will receive most of our working life (although many believe 9% isn't enough).

In my opinion Gen X & Y have been screwed over enough by "simpler super" without forcing them to work another 5 years before preservation age.

I think, rather than increasing preservation age, things like restricting super payments to pension only with a certain annual maximum balance withdrawal (like the old allocated pension factors prior to 'simpler super') would make more sense. Ensuring super is preserved for longer, but also allowing an income to be drawn from it. I would be quite happy if i was restricted from accessing my super as a lump sum to 'buy my winnebago'. In my opinion, this is part of the problem with the current rules.

I have also read studies that life expectancies will plateau out due to the poor lifestyle choices of many of these younger people. Who knows though, someone might develop a vaccine for obesity and heart disease?