Musing about retirement policy

Sometimes I just can’t resist rising to the bait when Paul Watson posts one of his very frequent mad, paranoid anti-babyboomer rants. That’s because he actually raises some important issues, even though they’re usually well hidden among all the self-pitying whimpering.

Paul’s latest rant deals with a particularly silly article in The Age where the journo focused on recent research by the National Centre for Social and Economic Modelling. What rightly roused Paul’s ire was that the journo’s angle was that politicians should beware of the political consequences of failing to pander to the demands of the retiring babyboomer generation, while blithely ignoring the fact that pandering to those boomer demands would result in patent unfairness to younger generations expected to shoulder a greatly increased tax burden (not to mention various other negative consequences). This extract gives a fair idea of The Age article’s blinkered focus:

The centre’s data also reveals that between 1986 and 2001, the over-40 group almost doubled its wealth. Generations X (aged 23 to 29) and Y (aged 22 and younger) struggled to maintain their share. The surge in wealth has been attributed to the property boom, raising concerns that the boomers are relying on capital growth to fund their retirement, instead of saving.

Certainly, the boomers’ favourite activity is to SKI – Spend their Kids Inheritance – and that includes spending what they inherit from their own parents. “There’s no doubt that they will leave them assets; it just won’t be in hard and fast cash,” Mr Cormack said.

Not only does all this have implications for future generations – a study from British research group Demos suggests there’s trouble ahead for politicians. They risk a backlash if they fail to meet the demands of people planning to grow old disgracefully and in a different way from their predecessors.

As Paul Watson rightly points out, it’s far more likely that we’ll see a backlash from future generations of working age Australians when they’re asked to pay much higher taxes to fund the retirements of older people who’ve failed to save enough, and deliberately squandered what little they did manage to save on an early retirement spending binge in order to qualify for the age pension.

However, governments are well aware of this potential inequity, even if The Age’s journo isn’t. Reserve Bank chief Ian McFarlane recently said:

If we are not careful, there is potential for conflict between the generations. The young may resent the tax burden imposed on them to pay for pension and health expenditure on the old. This will particularly be the case if they see the old owning most of the community’s assets.

Even the politicians know it’s a problem (although you won’t hear any of them talking about it during the election campaign, because they don’t want to antagonise any substantial voting bloc if they can avoid it). Treasurer Peter Costello recently said:

As our retirement income system matures, is it fair to allow those with superannuation assets to retire early, run down their assets and then rely on taxpayers to fund the major part of their retirement? This is an important issue that we will need to consider very carefully.

But Paul’s hypothesis involves its own peculiar blinkered focus. The misconception Paul retails is, ironically, shared by The Age article he pillories: the image of a spoiled, rich babyboomer generation irresponsibly having a jolly good time and expecting younger generations to subsidise it. Although that caricature contains an element of truth in relation to a minority, it’s drastically misleading. The real facts about over 65s are that:

• Their average income is just $264 per week;
• 82% of them have incomes below $400 per week;
• Although their average total wealth is double that of younger Australians, it’s still only $264,000.

Moreover, this picture is only going to change marginally as the early babyboomers start to retire. They mostly have seriously inadequate amounts of superannuation (because they haven’t been contributing for very long), and even those with substantial wealth mostly have it tied up excusively in a non-income-producing family home. And the wealth distribution is drastically skewed. Those who own their own homes in Sydney, Melbourne and Brisbane have significant total wealth, almost solely because of the current property bubble in those places. But those who don’t own their own homes, and to a lesser extent homeowners outside Sydney-Melbourne-Brisbane, have much less wealth. Hence the surprisingly low average retiree wealth of $264,000.

So Paul Watson’s (and The Age’s) envious caricature of the spoiled, spendthrift babyboomer retiree is laughably inaccurate. Most babyboomers are facing retirement from a very unenviable situation. Nevertheless, Australia is facing a very real and serious problem, and it requires significant policy responses now in order to avoid serious, socially-destabilising intergenerational tensions in about 20 years time. As this excellent NATSEM journal article by Simon Kelly and Anne Harding explains:

After World War II the number of births per woman rose above 3.0 and remained there until 1965. The peak of 3.6 was reached in 1961. Since 1961, falling birth rates and longer life spans have combined to produce a steadily ageing population. Women today are bearing around 1.75 children on average, a substantial fall from the three children produced by women in the 1950s. An Australian man born in 1920 could expect to live until the age of 59 years, while a woman could expect to live until age 63 years. Today, the average man can expect to live until 77 years and the average woman until 82 years (ABS, 2002). Australians retiring in their 50s and 60s can now expect to spend two to three decades in retirement.

These trends mean that the proportion of the population who are aged 65 years and over will roughly double over the next 40 years, to almost one in every four Australians by 2042. At the same time, there will be almost zero growth in the number of Australians of workforce age. As a result, the elderly dependency ratio ¢â¬â people aged 65 years or more to the of working age (15-64 years) population ¢â¬â is projected to increase from 18 per cent in 2000 to over 37 per cent in 2050. In other words, in the future there will be fewer workers to support each retired person. The increasing elderly dependency ratio for Australia is not as severe as in some other countries (notably Italy, Germany and Japan) but it is still significant and the economic aspects are a major issue. …

In Australia, the combination of rising health care costs and higher demands on retirement pensions are projected to cause living standards to fall by 27 per cent below where they would otherwise be (ASFA, 2004). The same ASFA report forecasts that as the baby boomers move to retirement, higher federal taxes, lower federal spending and higher state taxes will transfer an additional $38 billion per year to Australian households. In addition, a further cost of $22 billion will be required from households through higher privately incurred health costs and disincentive effects from higher taxes. …

The Intergenerational Report found that spending on health and aged care would account for much of the projected rise in Commonwealth spending over the next four decades. The projected growth in health and aged care spending was particularly strong, rising from 4.7 per cent in 2001-02 to 9.9 per cent of gross domestic product in 2041-42.

The Intergenerational Report projected that Commonwealth spending would exceed the amount raised in taxes by around 5 per cent of gross domestic product by 2041-42, with the Commonwealth budget starting to slip into the red from around 2017 onwards.

To put this into perspective, if we had a budget deficit of around 5 per cent of GDP today, then we would have a deficit of around $40 billion instead of the forecast surplus of 4.6 billion. “¦ The sorts of expenditure cuts required to achieve a 5 per cent reduction of GDP could include the entire amount allocated to health (Treasury, 2004:25-26).

The ASFA-Access Economics 2004 Intergenerational Report (ASFA, 2004) paints a gloomier picture. It modelled the impact on State governments in addition to the Commonwealth government and found that the shortfall increased from 5 to 7 per cent of GDP when the State-level impacts were included.

In a very real sense the picture is even gloomier and more difficult to solve than Paul Watson’s simplistic caricatured image of pampered, spendthrift babyboomers suggests. There’s a real and serious looming budgetary problem for governments flowing from longer life expectancy and lower fertility, but it can’t be solved by simply telling retirees to fend for themselves. Most of them simply can’t. Nor can it be solved by just raising taxes paid by working Australians, because there won’t be enough of them.

Fortunately, for many Gen Xers and even younger workers, it won’t be as big a problem as it seems, but again we’ll be dealing with a sharp disparity between the “haves” and “have nots”:

For subsequent generations, the Superannuation Guarantee will assist many to have adequate retirement incomes but others face a different issue. While those coming after the baby boomers may well have 40 years of Superannuation Guarantee contributions during their working life and the minimum age at which they can withdraw funds (the ‘preservation’ age) has been increased to 60, changing labour force patterns may impact on their superannuation. Recent labour force trends show growth in part-time, contract and casual employment and little growth in full-time employment. These trends could see future generations of workers spending less time as employees and more time in positions where superannuation contributions are not compulsory. The shorter periods of Superannuation Guarantee contributions may reduce their superannuation savings.

It’s this disparity that vexes Paul Watson most, because he seems to have been one of those “have not” GenXers spending substantial periods in casual and short-term employment where occupational superannuation isn’t accumulated (although whether that’s a result of deliberate avoidable choices on his part is another question).

The real issue is what governments and individuals should do about it. Certainly individuals would be very unwise to assume that a viable old age pension will continue to be available irrespective of the effort they make to provide for their own retirements. It’s almost certain that the rules will be tougher, government spending on health will be more tightly administered, and taxes will be higher. I reckon governments will need to do several of the following (in addition to raising taxes to some extent and tighter control of health expenditure):

• Raising the ‘preservation age’ for superannuation to 65 (except for people over 50 made involuntarily redundant – they have Buckley’s chance of ever getting another job and are going to need their super just to survive);
• Requiring retirees to utilise reverse mortgages on their family homes, or selling them and ‘trading down’, to support themselves in retirement before being permitted to access the age pension;
• Requiring retirees to take superannuation as an annuity or pension rather than taking it as a lump sum and then squandering it so as to qualify for the age pension. But there will need to be some flexibility to account for people (like me) who have planned to use superannuation lump sums to pay out mortgages on investment properties so we never have to rely on the age pension at all;
• Introducing regulations to ensure that casual and short-term employees and ‘independent’ contractors (created by neoliberal outsourcing) either receive employer-funded superannuation or make adequate self-provision for retirement (e.g. voluntary superannuation or property or share investment portfolios). It will need to be made crystal clear to younger Australians that simply taking the higher hourly rates that many employers currently make available to ‘independent contractors’ in order to sidestep their superannuation, worker’s compo and other obligations; and then failing to make provision for their own retirement and expecting future taxpayers to pick up the tab by providing a generous age pension; just isn’t going to be an option in future.

  If they simply take the money and live well now without making retirement self-provision, then life at 65 will involve surviving on dog food in a dingy bedsit in some depressing, ‘arsehole of the earth’ suburb. The trouble is that any amount of publicity about these realities is inevitably going to fall on deaf ears a lot of the time, espcially among the less well-educated. It leaves us with a very real question as to whether we think it’s worth continuing to pander to neoliberal notions of freedom of contract, when we know the future consequence is going to be gross disparities of wealth where large numbers of stupid, short-sighted, or simply unfortunate people endure a miserable, poverty-stricken old age.