Tuesday 18 April 2023

What is the Age Pension worth?

There is a lot of focus on how much superannuation people save up to fund their own retirement (to a greater or lesser extent). And quite a bit of angst around the fact that high income individuals get more benefit from superannuation tax breaks than lower income individuals, and that, on average, females have lower superannuation balances than males of the same age (although, as with the 'wage gap', this disparity largely disappears once all relevant factors of personal choice are adjusted for e.g. time spent in full-time employment, type of employment etc. e.g. a female mine worker than has worker full-time since age 18 will end up with a higher super balance than a male 'home-maker' that decided it made sense for him to work a casual job three days a week while his partner worked full-time).

Anyhow, for many people their retirement income will not only be provided by their superannuation balances, but will also include a partial or full Age Pension income stream. For a single person, the full amount of Age Pension (excluding minor additional payments that might also be received) is $971.50 per fortnight ($25,259 per year). The maximum amount might be reduced (to a 'partial pension' amount) if the thresholds for assets or income are exceeded.

For a single homeowner, the assets threshold to receive a full Age Pension from age 67 is $634,750. And for a single non-homeowner the assets threshold is $859,250. Since the average superannuation balance of Australians aged 60-64 in 2016 was $214,897 most Australians reaching retirement with only their home and superannuation balance would receive the full Age Pension.

So, how much is the Age Pension worth as an asset for retirement? Currently the life expectancy at age 67 (when Age Pension commences for those born after 31 Dec 1956) is 16.5 years for a male and 18.9 years for a female (so there is gender-based 'life expectancy gap' of 14.5% that is not due to any 'lifestyle choices' -- but no-one seems to care about that gender discrimination). So, for the average male entitled to receive the full Age Pension from age 67 he will receive $416,773 if he lives to average lifespan. As the Age Pension is generally indexed to CPI increases, this can be taken as a rough 'present value'. For the average female, the total value of Age Pension received will end up being $477,395.

So entitlement to receive the full Age Pension is roughly equivalent to a lump sum payment at retirement of around $416K - $477K. Not too shabby compared to the average superannuation balance at retirement.

To purchase a lifetime annuity providing the same amount of income as the Age Pension would cost around $536,626 for a female aged 65, or $504,575 for a male aged 65.

So, whichever way you look at it, the full Age Pension has a value of approximately half a million dollars.

Aside from the assets test, there is also an income test applicable to eligibility for the Age Pension. Unearned income of up to $4.940 is allowed before the Age Pension will start to be reduced (by 50c for every extra dollar of income per fortnight). For the 2023FY this was temporarily boosted by an additional ~$4K to $7,800. In addition, income from 'personal exertion' (e.g. casual work) of up to $11,960 pa is not counted towards the income test.

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