Goalposts may need to move for age pension

Goalposts may need to move for age pension

A team led by Professor Hanlin Shang from the Department of Actuarial Studies and Business Analytics has undertaken modelling suggesting Australia's optimal pension age should rise gradually to 68 by 2030, 69 by 2036, and 70 by 2050.

Although any policy changes related to age pension eligibility would inevitably be unpopular, gradual change is expected to be better tolerated than a sudden jump. The need for change is underpinned by important demographic changes.

This includes a growing proportion of the population expecting to receive a government-funded pension compared to a shrinking taxpayer base, while Australians are also living longer and generally experiencing better health as they age.

Combined with existing caps on migration and lower birth rates, the pension system is at risk. Change of some kind needs to be considered, unless taxes are also increased, another unpopular choice. Alternatively, incentives could be introduced to encourage people to have more children, Professor Shang says.

“If the fertility rate stays at the current rate, which is below replacement rate, and migration is capped, then the alternative option is to increase the pension age,” he says.  

The research, which focused on maintaining the old-age dependency ratio (OADR) at 23% and just above 2018 levels, was conducted by Professor Shang, along with Monash University Professors Rob J. Hyndman and Yijun Zeng. It found a rapid increase to 70 years by 2035 would be too abrupt, when it considered mortality, fertility, and net migration factors.

Their analysis indicates that a slower trajectory to increase pension age access is necessary to avoid social upheaval – as was seen in France after a more modest, but abrupt, increase from age 62 to 64 was introduced and led to widespread demonstrations.

Australia is one of the few countries to consider increasing age pension eligibility. China has also moved in this direction, and other countries have tackled the same problem using different strategies.

“In Singapore, cash incentives encourage families to have more children, and in Canada, childcare costs are capped at $10 a day to broaden the taxpayer base. Changes to migration caps can also widen the taxpayer base, but this can put pressure on housing and infrastructure such as schools and healthcare,” Professor Shang says.

Gradual adoption of the higher pension ages suggested by Professor Shang would ensure the sustainability of the Australian age pension system while also considering social acceptability of the changes. It considers modelling based on mortality, fertility, and net migration.

If this approach was adopted, those aged 43 currently in the workforce would need to work to 2050 to receive an age pension and become the first cohort to work until age 70.

Professor Shang says the research doesn’t specifically address whether raising the age universally is acceptable in all parts of Australia, but this also needs to be considered. While residents of the ACT have the highest life expectancy, those in the Northern Territory have the lowest of about 77 years, with an average of 10 years to enjoy a pension at the eligibility level that comes into effect in 2025.

For blue-collar workers, there are also issues of capacity for continued heavy work at older ages. Disability support eligibility criteria would also need to be modified where medical conditions prevent ongoing employment.

But overall life expectancy is on the rise — reaching 85.69 years for women and 81.63 years for men in 2020 — and an increasing number of centenarians. The Australian Federal Government Treasury reports that the number of centenarians is expected to soar from 3700 in 2021 to 50,000 by 2050; posing a significant longevity risk to the pension system.

This is in tandem with a sharp fall in fertility rates in recent decades. The total birth rate was 1.58 babies per woman in 2020, compared to 3.5 in 1961, curtailing the taxpayer base in future years without other measures to compensate.