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Pension reform and the ‘budget crisis’: a less than mature debate

Treasurer Joe Hockey last night stepped up his rhetoric on the the need for heavy government spending cuts, singling out the A$40 billion age pension cost as “much more than we spend on defence, or hospitals…

Treasurer Joe Hockey has his sights set on the age pension. Daniel Munoz/AAP

Treasurer Joe Hockey last night stepped up his rhetoric on the the need for heavy government spending cuts, singling out the A$40 billion age pension cost as “much more than we spend on defence, or hospitals, or schools each year”.

Some reports have suggested the pension eligibility age is to be lifted to 70 for everyone born after 1 January 1959, taking effect by 2029, in next month’s budget. Whatever the detail of the measure, it looks as if the rise in the pension eligibility age is a done deal.

So what happened to the “mature debate” that the treasurer called for just a few weeks ago? Because a mature debate on the question of retirement incomes - of which the age pension is one dimension - is certainly needed.

The population is ageing rapidly and it is quite right that the implications for public policy and public financing are thoroughly interrogated and options explored.

Several options are on the table

It may be that the government considers the recent Productivity Commission and Grattan Institute recommendations are sufficient. Both institutions support a pension eligibility age of 70, and the Grattan Institute a superannuation preservation age of 70. In addition, John Daley, CEO of the Grattan Institute, in March published a strong defence of the increased pension age policy particularly focusing on the benefits to the budget and the labour market.

Daley argues that increasing both the pension and superannuation preservation ages is the best option for achieving a budget balance. Other tax reform possibilities are largely ruled out, although in the Grattan Institute paper on balancing budgets, a GST increase to 12.5% is advocated in addition to wider retirement income reforms including reduced superannuation tax concessions and widening the pension assets test to include the family home.

But the focus on expenditure measures for solving the “budget crisis” by the Grattan Institute in its March policy brief Increasing the Age Pension age – busting the myths stands in contrast to other perspectives on fiscal sustainability, such as that of the Treasury Secretary Martin Parkinson, who canvassed more broadly both the revenue and expenditure options to boost productivity and innovation in a recent speech - and for that matter, the Grattan Institute’s own broad suite of ideas in its Balancing Budgets report.*

Nice in theory…

Whether the increased pension eligibility age will be effective in achieving a balanced budget will depend on whether older people will be able to obtain and maintain employment until 70.

In the Grattan Institute’s recent policy brief, Daley points to ABS data showing that most people over 65 who are not working have chosen not to - because they have reached retirement age and are eligible for a pension or superannuation.

But this glosses over the substantial other factors that have contributed to retirement decisions. For retired people who have held a job in the last 20 years (using the same ABS data, table 6), 13% were no longer working because they had lost a job, a temporary job had finished, or they could not find a job. A further 23% had retired because of own sickness, illness or disability with 4.5% retired to care for someone ill, disabled or elderly. These factors account for around 40% of retirement or leaving the workforce decisions.

They relate to two major challenges for the older workforce. The first is obtaining and maintaining employment in later life. The data suggests that regaining a job is difficult for many if a job is lost, precipitating a decision to retire. Age discrimination barriers are more significant than either the Productivity Commission or the Grattan Institute acknowledge in their reports.

The second challenge relates to capacity for work. The argument most often posited is that life expectancy is now much longer than it was when the age pension was introduced over 100 years ago, with an eligibility age of 65 for men and 60 for women. So the logic goes that it makes sense to lift the eligibility age. Daley calls this a “pretty obvious reform”.

Harsh realities

But life expectancy (mortality) is not the only consideration. Health status (morbidity) is also important. We can look to two professions, nursing and teaching, as examples where we would think working to 70 would be quite possible but clearly this will be a serious challenge based on the current experience.

People working in occupations requiring physical inputs (see ABS table on occupations with highest injury/illness) will struggle to keep working until 70, but we cannot discount the stresses and strains in other occupations such as teaching where work has become very demanding.

Work-life balance issues become more sharply defined with age. We might be living longer but this doesn’t mean we are the same at 65 or 70 as we were at 35 or 40. Work intensification stemming from increased productivity requirements may pose a real barrier for many older workers regardless of overall health status.

With large numbers of workers not being able to access a pension until 70, the outcomes will be more reliance on other pensions and benefits. The default for some will be the disability support pension as suggested by both the Grattan Institute and Productivity Commission. This adds adds a layer of an eligibility requirement of “impairment” for income support on to the pension income and assets test. A long-term project of governments is to reduce reliance on this payment and again a new round of review of eligibility is under way.

The later pension eligibility age will mean many older workers in their sixties will be forced on to unemployment payments – the low Newstart allowance at a mere $A250 per week. This will widen older age penury and heighten the risk of homelessness.

The government and the institutions advocating for a later retirement age have largely not engaged with these difficult and complex factors that are relevant to public financing for an ageing population. As such, the logic for raising the pension eligibility age as a solution to the “budget crisis” is deeply flawed and is setting up future governments for other social and economic “crises” down the track. It is a shame that the “mature debate” is over before it even began.

*The wording in this paragraph was amended post publication.