Wednesday 10 October 2007

Retirement Age

There seems to be something afoot regarding the "retirement age" in Australia at the moment. On the news there was mention of a "push" towards increasing the retirement age, and in today's Sydney Morning Herald there was an article by Ross Gittins espousing the virtues of gradually increasing the age at which the aged pension becomes available from 65 to 67 (or 68). There is some validity to the argument that since people are living considerably longer than when the "normal" retirement age was set at 65, it could be increased somewhat. It's also true the people are generally healthier in their elder years - if 40 is the new 30, then 70 must be the new 60. And increasing the retirement age will certainly help reduce the impact of the aging population on overall workforce numbers and the ratio of tax payers to state funded retirees.

The question of equity doesn't seem to have received much attention - those who are in a position to become "self-funded" retirees would still be able to retire at 65, while those relying entirely on the aged pension will be unable to retire until they reach the official retirement age. However, I don't think this is a huge issue - while equity of opportunity is an important principle, this is often confused with equity of outcome. If person A saves diligently for their retirement while person B doesn't save, there's no reason person A shouldn't benefit from this "deferred gratification" when they get to 65. Anyhow, this issue already exists to some extent with the aged pension cutting in at 65 - affluent workers are often in a position to take "early retirement" before they reach that age. Then again, even those on modest wage will have accumulated a reasonable superannuation balance by the time they reach preservation age (currently 55 for those born before 1 July 1960, and increasing with DOB until it hits 60). This means that many workers of relatively modest means will be able to retire at age 60, and consume their superannuation savings by the time they reach 67 or 68 and can move onto the aged pension.

Copyright Enough Wealth 2007


JW said...

With my wife and I both being in our forties now with only $32k in retirement this is a very helpful post.

And, thank you also for your words of wisdom on our blog.


mOOm said...

The Australian age pension is so low, I've never understood people discussing the strategy of spending your super first and then getting onto the age pension.

Anonymous said...

My mother is nearly 60 and certainly won't be able to retire in the next 15 years! It really is a shame! said...

The maximum aged pension rate for a single is currently $537.70 per fortnight (slightly less per person for a couple). This is "only" $13.980.20 per annum. However, if you own your own home this can be sufficient to live off when you're in your eighties or nineties (since you'd also get free health care and almost free medicines).

Using the "standard" 4% sustainable income stream thrown off a retirement investment (eg. superannuation) this $13,980 pa is like having an extra $350,000 in your retirement account.

Some people with a modest superannuation balance might choose to use it to fund an early retirement at, say, 60. They figure they will take the world holiday and live it up while they're still fit and healthy enough to enjoy it. Once it's all gone they can live modestly on the aged pension, and there's no longevity risk (ie. it will still be there when you turn 103).