The Age Pension and its Effect on our CommunityTo be 65 or not to be?

Dr David KnoxWorldwide PartnerMercer

Agenda

• Trends in pension ages around the world• What should we do in Australia?• How does superannuation fit in (or not)?• Some implications for the labour force• Let’s adjust the system for long term benefits

Life expectancy at birth

0

15

30

45

60

75

90

1885

1892

1899

1906

1913

1920

1927

1934

1941

1948

1955

1962

1969

1976

1983

1990

1997

Year of measurement

life

expe

ctan

cy a

t bir

th

Males Females

But the cause of the increase is not uniform at all ages

Life expectancy at age 65

0

5

10

15

20

2518

85

1892

1899

1906

1913

1920

1927

1934

1941

1948

1955

1962

1969

1976

1983

1990

1997

Year of measurement

life

expe

ctan

cy a

t 65

Males Females

Note the rise since the 1960s

Mortality rates

At what age is the male mortality rate = 3%?

60

62

64

66

68

70

72

74

1905

1911

1917

1923

1929

1935

1941

1947

1953

1959

1965

1971

1977

1983

1989

1995

2001

Year

Age

A constant life expectancy of 12 for males

58

60

62

64

66

68

70

72

74

1905

1911

1917

1923

1929

1935

1941

1947

1953

1959

1965

1971

1977

1983

1989

1995

2001

Constant ratio of working life : retirement

01020304050607080

1905

1914

1923

1932

1941

1950

1959

1968

1977

1986

1995Year of life tables (interpolated)

Age

Life expectancy atage 20

Life expectancy atage 65

Proj. ret. age if 80%of exp. life from age20 is in workforce

Projected period ofretirement

Projected retirement age for 20%of the life expectancy at age 20

55.0

57.5

60.0

62.5

65.0

67.5

70.0

1905

1911

1917

1923

1929

1935

1941

1947

1953

1959

1965

1971

1977

1983

1989

1995

2001

Is it time to reconsider the pension age?• Pension ages are on the increase

– USA: increasing Social Security age from 65 to 66 (2009) and then to 67 (2027)

– UK: increasing State Pension age from 65 in 2024 to 68 in 2046

– Germany: increasing pension age from 65 in 2012 to 67 in 2029

– Denmark: increasing from 65 to 67 and then linking eligibility age to changes in life expectancy at age 60

– Japan: increasing access age to earnings-related component from 60 to 65

Some commentary

• “increasing pension eligibility ages will improve financial sustainability and retirement incentives”OECD

• “The American Academy of Actuaries believes that a financially sound Social Security system must accommodate future increases in longevity. … The time to enact this change is now.”

What is happening in Australia?

57.5

60

62.5

65

67.5

1933

1934

.519

3619

37.5

1939

1940

.519

4219

43.5

1945

1946

.519

4819

49.5

1951

1952

.5

Date of Birth

Pens

ion

Age

Female Pension Age Male Pension Age

What should we do in Australia?

Step 1 – announce a gradual increase to age 67

57.5

60

62.5

65

67.5

1933

1935

1937

1939

1941

1943

1945

1947

1949

1951

1953

1955

1957

Date of Birth

Pens

ion

Age

Female Pension Age Male Pension Age

What should we do in Australia?Step 2 – adjust the pension age with 50% of any change

in life expectancy

60

62.5

65

67.5

70

1946

1948

1950

1952

1954

1956

1958

1960

1962

1964

1966

1968

1970

Date of Birth

Pens

ion

Age

Female Pension Age Male Pension Age

Some effects of a higher pension age

• Age 65 would no longer be “the age”• A more dynamic approach to the concept of

retirement• Encourage later retirement• Improve the sustainability of our retirement

income system• Some net savings – approx $800 mill pa• An increase in the number of Disability Support

Pensioners

Superannuation• An integral part of our retirement “system”• What are the current rules?

– Preservation age increasing from 55 to 60 in 2024– Benefits are tax free after age 60– Contributions are permitted to age 65 w/o a work test– SG required for employees under age 70– Spouse contributions permitted if spouse under age

70, subject to the work test after 65– Co-contributions available if employee aged 70 or

less at end of FY– Contributions can be made up to age 75, subject to

the work test

Suggested improvements

• Permit all contributions and require SG contributions for – employees, employers and the self-employed– if they are no more than the 10 years older than the

(indexed) pension age• Preservation age of 60 remains• Gradually increase the tax free age from age 60

towards the pension age– Encourages later retirement– Improves sustainability– Retain $140,000 (indexed) tax free from age 60

How it might hang together?

50556065707580

2007

2010

2013

2016

2019

2022

2025

2028

2031

2034

2037

2040

2043

2046

Year

Age

Preservation Age Female Pension AgeMale Pension Age Tax free ageContribution limit age

Contributions permitted

access to super permitted

The population is changing now

% Change in population 2005-2015

0%

5%

10%

15%

20%

25%

30%

15-24 25-34 35-44 45-54 55-64

GEN Y GEN X Boomers

Implications for the economy

2002/03 to 2007/08

2007/08 to 2012/13

Population Growth 1.5% pa 1.4% pa

Labour Force Growth 1.7% pa 1.2% pa

Participation Rate Change +0.5% -0.7%

Government projections

The labour force is changing too!2007/08 to 2012/13

To conclude• Let’s increase the pension age • Let’s ensure that the super ages and regs provide

a clearer picture• The results will be:

– A more dynamic system– A clearer incentive to work later– The retirement income system will be more

sustainable– Super is more likely to provide adequate

retirement incomes due to deferral– Protection for those who are unable to work

And now …

• Let’s announce it now so that there is sufficient time for individual planning and community expectations

• The sooner we do it, the sooner behaviour by all stakeholders will change