Work till we drop? or till 70? or just a beat up??

work till drop

There has been more than a little hysteria in the response to the proposed “increase in the retirement age to 70”. The Commission of Audit had suggested an implementation date of 2050, and the Liberal Government has brought this back to 2035.

I am not insensitive to the issue of manual labourers literally wearing themselves out well before 70, but I am also not unaware of the growth in the cost of providing the aged pension to an increasing number of long living recipients.

SOME GET OUR HEAD AROUND THE ISSUE NUMBERS

In 1909 when Australia first (Federally) provided an aged pension it was means tested and required 25 years of prior residency. (NSW and Victoria had had State aged pensions from 1900).  Just 4% of the population were living long enough to be old enough to gain a pension.

And those “4%” pensioners were averaging just 12 years on the pension. Today average (on pension) pensioner life expectancy is out 19 years and continuing to increase.

pension life expectancy

There is a related stat the demonstrates the affordability challenge, and its increasing difficulty. (In cannot find the 1909 stats but believe it was then far higher than 10:1) Today there are 5 working age people for each person older than 65. By 2050 this will have fallen to just 2.4 working age citizens for each person older than 65.

The post 2050 affordability of a pension in the form it is today is not some open question, challenging demographers, and policy planners. There are simply no circumstances under which the current pension system will be affordable.  The only open question is what do we change and when.

SOME CLARITY ABOUT WHAT IS BEING PROPOSED

“Forced to work to 70” is nonsense. It is entirely false that somehow there will be a requirement to remain in work (or actively looking for work) to the age of 70.  This is simple wilful stupidity by any number of partisan and non partisan commentators. Any commentary that states or implies the “forced to work to 70” line is nonsense.

What has been recommended, and is now being proposed is a change to the age at which citizens become eligible for the aged pension (changing to 70 from 65), and a parallel change to the “preservation age” (basically changing to 65 from 60).

People will be able to retire at 65 and access their personal compulsory Super, and also retire earlier than 65 IF they are able to arrange their financial circumstances to fund any gap years.

COMPULSORY SUPER

In 1992 Paul Keating, via “The Accord” process, brought in compulsory Super for Australia. A good thing too!  Starting at 3% it has been increased to 9% and is now on its way (from 9.25%) to 12%  Someone who will be 70 in 2035 was 27 in 1992.

So what will this compulsory Super be worth? Let us call our specimen 48 y.o. citizen “Wayne”, someone who remains in employment across his working life, and does nothing more than pay in the compulsory super contribution via his employer for that period.

(A few modelling assumptions all the $s are based in 2013/14. Super post tax, post inflation, average return is 3.5%).

An income of just $43,000p.a. across that period for Wayne allows him to retire at 65 on a self funded retirement income exactly matching the pension.

At $57,400 (Australian Median Annual Wage) Wayne would have self funded “pension” equivalence at 62, 1.33x pension at 65, and 1.95x pension at 70.

At $72,800 (Australian Average Annual Wage) Wayne would have self funded “pension” equivalence at 59, 1.69x pension at 65, and 2.46x pension at 70.

So let me put this simply, even on a below median wage Wayne could expect to continue to retire at 65 and self fund a pension equivalent.

Reality is Wayne could probably live for 10 or so years at considerably more than pension and then fall back on the safety net.

It is also worth point out that “Wayne” our 2035 70 y.o. is not typical of what it will be like in years after. Someone 22 y.o. this year (“Wayne Jnr” (with the same financial modelling assumptions) would need an income of just $24,500 p.a. to 65 to allow him to retire at 65 on a self funded retirement income exactly matching the pension.

At $57,400 (Australian Median Annual Wage) Wayne would have self funded “pension” equivalence before 55, 2.34x pension at 65, and 3.29x pension at 70.

At $72,800 (Australian Average Annual Wage) Wayne would have self funded “pension” equivalence way before 55, 2.97x pension at 65, and 4.17x pension at 70.

NOT THE END OF THE WORLD

In the years beyond 2035 there will have been more years of compulsory super for our “Waynes” and the retirement incomes increase. Also I have not modelled any increase beyond 12% rate which I think is very conservative.  Both sides of parliament have talked of the need to move to 15%.

SUMMARY

The reality is pensions will be changing. This change is not the sky falling in.  No one will be “forced to work ‘till they are 70”. Commentary on this topic has been thin on reality.

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