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.

About Ken Parish

Ken Parish is a legal academic, with research areas in public law (constitutional and administrative law), civil procedure and teaching & learning theory and practice. He has been a legal academic for almost 20 years. Before that he ran a legal practice in Darwin for 15 years and was a Member of the NT Legislative Assembly for almost 4 years in the early 1990s.
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NorthcoteKnob
2022 years ago

Good post, I’ve linked it from my site.

Even down to policies like the refusal of either party to tinker with the incentives for investment property buying, or to allow the economy natural movement on interest rates, the interests of the boomers are paramount. It is insidious.

Gens X and Y have a lot of incentive to leave the country and work in either a lower tax country or one where the taxes are not being siphoned off by the paisley generation.

Paul Watson
2022 years ago

Ken,

It’s actually the home ownership, not the superannuation disparity that vexes me most.

As for casual and short-term employment leading to occupational superannuation not being accumulated at all, I think that you (and NATSEM) overstate the case. While I’m not sure how widespread is the “contractor”

jen
jen
2022 years ago

The division between rich and poor.
There is nothing dignified about poverty in old age. It is a horror scenario that I see looming ahead of me and that will keep me working in a job I (fortunately) love and can continue to do for another 20 years.
What about those who wear themselves out long before they are 65? Who have worked a bit here and a bit there and have bits of super half-baked all over Australia? They’ve worn their bodies out and worked all their lives and what are they entitled to?
Poverty.
Why?
Because they didn’t know how to plan for when they couldn’t work and there is no extended family to sink into so that they can live life out with dignity. It brings grown tough men to tears. They already know all about the division between rich and poor.
I scraped it in by a whisker.

mark
2022 years ago

Surely, Shirley, as life expectancies increase, the age at which a person is healthy and able to work will also increase (albiet not at the same age). Would not higher life expectancies and an ageing population cut both ways?

Also, AIUI (could very well be wrong) birthrates have stabilised a little recently. It could be that, after a short, nasty period while the Boomers all do their dying off thing (sorry to see you go, Ken), things will start to improve a little. We will still be worse off than we were before the Boomers got old to begin with (it’s all your fault!), but not to the same extent as over the next few years.

Okay, there’ll be fewer people to pay for retirees, but there will be fewer retirees, too, if people keep working beyond current retirement age.

Niall
Niall
2022 years ago

a nice set of rants, but the reality is that none of us can choose the time we’re born into, nor what life dishes up to us, in general. Economies come and economies go, but time goes on forever.

jen
jen
2022 years ago

Some work is physically demanding, some lifestyles are less than healthy and have long term effects, some people recover from injury to have it debilitate them later. I was working on a farm almost 20 years ago and an old bloke 55 or so told me there was a time when the measure of a man was how hard he could work. A bloke earned respect by working hard. His working life was about physical strength and endurance and it identified him as socially valuable. Capitalism must have its victims – in Victorian England it ate up children. Now it demeans good blokes and women who have used their arms legs and torsos as their primary tools. No need for hard labour now. No value in it. And no value in the people who are now physically worn out – they should die. And quickly.

Ken Parish
Ken Parish
2022 years ago

Jen

I understand the background facts that led you to this opinion, but I have to say that I coudn’t disagree more profoundly. If people want to die and are in full possession of their faculties, they should have that right. But most don’t. Advances in medical science are such that males now have a life expectancy of around 80 and woman a bit more. Some will be mentally and physically debilitated well before then. They should be able to access euthanasia if they want. But if older people are still enjoying life and want to hang around, that’s their right too, and we should make every reasonable medical effort to assist them. Personally, I wouldn’t want to hang around if I had Alzheimer’s or a very physically debilitating condition, but as long as I remain reasonably healthy and compus mentus, I look forward to a long life, and I’ll feel very strongly negative towards anyone who reckons I should just die. In fact I find the bald sentiment “they should die, and quickly” really crude, cruel and insensitive. People who live a working life of hard physical labour don’t necessarily end up buggered as a result. It’s the grog and other forms of abuse that do that. There are plenty of mine workers, truck drivers and farm workers who retire healthy and have fulfilling retirements. Would you take that away from them? “Victims of capitalism”! What a load of woolly-minded crap.

mark
2022 years ago

I’m not sure what jen’s point was, Ken, but I’m pretty sure it wasn’t that. At least to these ears, she sounds like she’s being a tad ironic…

Ken Parish
Ken Parish
2022 years ago

I certainly hope so. It might have been ironic, but I have to confess that it was much too obscure for this humble soul.

Link
2022 years ago

I don’t think its woolly minded crap.

“No need for hard labour now. No value in it. And no value in the people who are now physically worn out – they should die. And quickly.”

I think this is mean’t in the spirit of facaetiousness, if that’s possible. I could be wrong. (of course)

Think twice before ever concluding that people with Oldtimers would rather be dead or would have wished to have ‘accessed euthanasia’. I sometimes think that people escape or retreat into senility and it doesn’t mean at all that they are ‘spiritually’ dead, possibly quite the contrary. When its time to go you need to wholly ready, you cannot leave it up to your so-called rational mind to make that decision for you. How rational are you ? really. I’m not being insulting. Look at the world, how rational is it out there? Personally I think that geriatric care should be modelled on Vetrinarian attitudes to the same. I’d also think twice, thrice and then again before putting my health entirely into the hands of our modern ‘health care professisonals’. No, much better to find yourself a compassionate vet, who won’t let you suffer and will advise kindly when it IS time to go!

And super hah! I’m about to cash my meagre pennies in and stand to lose a whopping 21% , which for the the poorest person you don’t really know, represents an enormous amount.

jen
jen
2022 years ago

parish

I don’t think I’m off the money when I say ours is not a culture that values the wisdom born of old age. It gets too inconvenient – like a sick child and you have to go to work – it gets impossible. My great grandmothers really did sit on the back verandahs. When moving around was easy they helped with the family and when that got hard they became a passive reference point. Papa’s mum ‘used to be sharp as a tack’. And Nana’s mother whose husband, Nana’s father, died when he was 87 – ‘and he smoked and drank every day of his life’ – you know that kinda thing. The family legends. Not so thick on the ground these days in our culture. Slow realisation, flow is unfamiliar. Try it and see and if you are not instantly happy return the product. we have a disposable culture Parish and the wisdom of years on earth, of ordinary living is not valued. It is heartbreaking. I am old enough to still value verandah oldies that I can’t properly understand – and it is in the value I/we give them that their dignity lies. Anything less belittles their contribution. But who am I to resist the current of capitalism that has irrevocably altered family structure. Old folk – Inclusion – How?

mark
2022 years ago

A point… Australians no longer respect basic family values, as Howard has often complained.

(So why won’t we listen to retired, doddering, “daquiri diplomats”?)

derrida derider
derrida derider
2022 years ago

This post perpetuates the myth that the age pension is somehow unaffordable in the future and anyway will be impossibly miserly. That’s garbage. The IGR has expenditure on age pension peaking at about 5.5% of GDP (from the current 4%). Even if we abolished the means test on the age pension, so all retirees get it, (IMO far the best way to encourage people to save for retirement) it would peak at just 6.5%.

To put this in perspective Germany currently spends 12% of GDP on age pensions, the US about 7% and the OECD average is about 8%. And Australian pension rates are linked to wages and hence productivity growth, so on the IGR projections its real value in 2042 will be about double today’s – hardly a recipe for destitution for those without savings.

And there is only one Australian generation which is being forced to save for its own retirement while being taxed to pay for its parent’s retirement – the baby boomers.

BTW the NATSEM wealth reults are overwhelmingly driven by the recent boom in house prices. I wouldn’t project these trends too far forward, as population aging (involving less household formation) should cause falls in real house prices over the long run.

Paul Watson
2022 years ago

“And there is only one Australian generation which is being forced to save for its own retirement while being taxed to pay for its parent’s retirement – the baby boomers”.

Rubbish – most 30-somethings’ parents are at, or very close to retirement. And 30-somethings pay just the same tax as baby boomers (although in fact they’ll pay *more*, if Howard’s mature age worker tax offset proposal is made law).

As far as the NATSEM wealth figures possibly being a temporary blip, I’ll believe it when I see it. An total collapse in big city house prices would be a welcome bonus for me (along with about 40% of my age group), but otherwise a poltical and economic disaster.

As Simon Castles writes today
http://www.theage.com.au/articles/2004/09/26/1096137097871.html it’s about time policy makers confronted the realities of GenX’s looming retirement, rather than pretend that they can’t see this particular elephant in the room.

trackback
2022 years ago

wrinkle wrinkle glum glum glum

Ken Parish has a blog on the economics of ageing which is lucid and, of course, frightening. But I’m glad I took a deep breath and read it….