The argument for changing the age pension doesn’t stack up

People are justified in spending more time out of the workforce. Image sourced from www.shutterstock.com

The National Commission of Audit recommends a number of changes to the age pension that boil down to smaller increases over time, older eligibility and tighter means-testing. It’s all based on the claim that we can no longer afford to support so many older Australians spending their increasing longevity in idle retirement on a generous public pension. This is not justified.

Yes, it is true that when the public pension eligibility age of 65 was introduced in Australia in 1909, male life expectancy at age 65 was 77 years compared with 83 today, so men for example can expect to spend more years on the age pension today than they could have in 1909. But I want to argue here that people are justified in spending more of their lifetime out of the paid workforce than they did in 1909, and that future pension costs are affordable.

First, an important point is that average life expectancy of people at age 65 is not a good guide to the number of years spent on the age pension, simply because poor people have lower life expectancy. In fact Australians in the lowest income quintile at age 60 live about 5 years less than those in the highest quintile, according to a recent study.

Also, while a lot has changed since 1909, some things haven’t. Most measures of living standards and wellbeing have increased enormously, but not leisure time. Private consumption per person has increased by roughly two and a half times after inflation. House sizes have approximately doubled per occupant. The enormous improvements in quality of health, education, transport and social amenities are obvious.

Yet when it comes to leisure, meaning (here) time out of paid employment, the story is different. Our weekly work hours have changed very little since 1909.

The eight hour day was established nationally in Australia by the 1920s and since then very little change has occurred. In 2009, the Fair Work Act established maximum weekly hours of 38 hours – a reduction of two hours a week over the past 100 years. And leisure among older people is not increasing as much as the increased longevity might suggest.

People are planning to retire later, according to a Australian Bureau of Statistics (ABS) survey of retirement intentions in December last year. Two thirds of workers surveyed aged over 45 intended to retire at or over 65 years of age. Similar ABS surveys over time have found that people are tending to stay in the workforce longer than they had planned, due partly to better opportunities to transition more gradually out of the paid workforce.

Further evidence on leisure is available from the ABS Time Use Surveys. The latest survey in 2006 found that Australians had less “free time” than they did a decade earlier. Specifically they were spending only 22% of their time on “free time” activities compared with 20.5% in 1997. Men were spending the same amount of time on employment-related activities but women were spending 12% more time on such activities since the first survey in 1992.

This is not a picture of an increasingly indolent society, nor hardly an increasingly impoverished one. In fact consumption of leisure has not increased much, if at all. Economists measure consumption of leisure not by how much we spend on holidays, sport or entertainment – this is all consumption of services - but rather how much income we sacrifice through not working. It is not sensible (“rational”) for consumption of leisure to remain constant in the face of the massive increase in consumption of other goods and services that has occurred in society since the public pension was introduced in 1909.

If people can have higher consumption of all other goods and services, from housing and health to cars and computers, why shouldn’t they also want more leisure? So requiring older Australians to work longer hours or retire later is unreasonable.

The argument that we will not be able to afford the public pension does not stack up. Age-related pension spending is projected to increase by about 1.2% of GDP over the next 40 years from their current level of 2.7% of GDP. This is a small increase, amounting to an average 0.03% per year over 40 years, and from a small base. Our current pension spending is less than half of the OECD average and the projected growth rate to 2050 is also about half the OECD average.

Our pension spending is dwarfed by government health spending for example, which is expected to grow by 3.1% over the same period from a base of 4.0% of GDP.

National income per person has increased by at least 1% per year in Australia, in real terms, over each of the past 4 decades. This may slow down over the next 40 years due to slowing productivity growth. Let’s be pessimistic and assume we get half the growth in income per capita.

Then a 1.2% of GDP increase in pension costs would amount to about two years worth of income growth out of the 40 years. It would be like an income freeze for all Australians for just two years of the next 40 in order to pay for the increase in public pensions. Is that pessimistic scenario affordable? I think so.

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