Everyone wants a free lunch on ageing

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By Leith van Onselen

Fairfax’s Tim Colebatch has written a timely piece on the need for the public to confront the economic realities of an ageing population and the necessary adjustment that must be made to retirement policy:

They say a country gets the leaders it deserves. If so, what does this lot say about us?

Frankly, it’s no compliment. It suggests that we prefer politicians who tell us what we want to hear, and pander to our prejudices, rather than those who try to get us to confront reality when it doesn’t fit with what we would like to believe…

Take ageing. This month the Bureau of Statistics updated its estimates of life expectancy. In just eight years, average life expectancy across all ages up to 70 has risen by 1.6 years for males, and 1.2 years for females. That continues a long-term trend which has seen the life expectancy of 60-year-old Australians rise at the rate of nine years every half-century. It is an astonishing transformation.

In 1908, when Alfred Deakin’s government introduced a pension of 10 shillings a week for workers aged 65, the average 65-year-old male had only 11 years to live. Today, on the bureau’s conservative methodology, the average male at 65 will live another 18 years, the average female another 21. If life expectancy keeps increasing like this, the 65-year-olds of 2035 will have twice as many years ahead as their great-great-grandparents had in 1908.

That’s the reality. What are we going to do with those extra years? The Productivity Commission, sensibly, suggested we should split them between work and retirement. Yet interest groups united to oppose it, and even Joe Hockey, who last year warned us that the age of entitlement is over, backed away from it. But it’s a no-brainer.

If we are to spend twice as long in retirement, who is going to pay for it? The Grattan Institute estimates that just four policies of the Labor and Abbott governments between them will add $100 billion a year to the prospective deficits by 2023, the year by which Abbott has pledged to deliver a surplus of $25 billion. If the baby boomers keep retiring in their 60s, that will reduce potential revenue and add billions to potential spending. Something’s got to give.

Why don’t we the public see this? Well, we’re all busy, and we don’t have time to think much about big public issues, particularly when the politicians focus us on short-term issues and try to score points off each other.

It’s a similar theme taken up last night on ABC’s The Business (video above). There, we had the Grattan Institute’s John Daly Everyand Melbourne University’s John Freebairn explaining in detail the Budget emergency facing Australia as the baby boomers retire, the workforce shrinks, and health and age-related expenditures balloon (see below chart).

ScreenHunter_401 Nov. 26 09.21

And yet despite these inalienable truths, social service groups are opposing broadening the GST and the superannuation industry – a key ingredient to the expected Budget blow-out – are opposing any reforms to superannuation that will act to curb concessional contributions by higher income earners.

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So we are left with a situation whereby everyone is expecting a free lunch paid for by someone else. But in reality, that “someone else” is the shrinking proportion of workers who, without fundamental reform to the retirement system, will be required to pay ever increasing amounts of taxes to subsidise the growing army of retirees – many of whom are in a stronger financial position than those who are working.

The situation developing in Australia is clearly both unsustainable and inequitable, and those that are primarily responsible for the pending Budget emergency – the aged (see left chart above) – must scale-back their expectations and accept some reduction in their entitlements.

It is blatantly unfair for the aged to expect the biggest asset most households retiree with – the family home – to be excluded from their capacity to fund their retirement, and then turn around and expect younger generations, who are already struggling under the weight of expensive housing and high mortgage debts (fostered onto them by their parents’ generation), to bare the full cost.

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Something’s gotta give.

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About the author
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.