Treasurer Joe Hockey under-reaches on pensions

The idea of pushing the retirement age out to 70, which the Productivity Commission recommended in a report last year and which Treasurer Joe Hockey has again raised as part of the Coalition’s pre-budget kite-flying, looks certain to be adopted, and sooner rather than later. The age at which people can access the pension is already due to climb to 67 by 2023 (a decision handed down by Labor’s Wayne Swan in the 2009 federal budget), and last year’s Productivity Commission report suggested it be lifted further, perhaps to 70 by 2035 or 2040.

With forecasts that Australians aged 65 and over will account for 25 per cent of the population by 2060, and that many will live well beyond the Biblical three score and 10, arguments for restricting accessibility to the pension have a demographic as well as economic logic. The Productivity Commission has calculated that unless the pension age is extended – and older people are required to pay more of their aged care out of their own pockets – Australians in work will need to pay an extra 6 per cent of gross domestic product in tax by 2060 to meet the additional costs.  

Although workers in more physically demanding occupations such as agriculture or construction might argue otherwise, a requirement for older Australians to help bear some of the costs of their extended retirement (including aged care and healthcare) does not appear particularly onerous. With the spread of mechanisation, there are very few jobs now that involve the sort of hard physical effort that can lead to premature ageing. That, and the fact that Australians are now generally healthier and have access to better health services, suggests most individuals should be able endure a working life that extends 45 or even 50 years. That said, however, governments and policymakers intent on keeping older people in the workforce longer have to recognise that there are significant barriers to their participation in the workforce. Treasury’s intergenerational reports have identified some of these, including ageist attitudes among employers and a lack of flexible working hours, and it’s probable that governments will have to resort to a mixture of carrots and sticks to ensure that employers retain and support older workers rather than (as some do) casting them aside when they reach their sixties and hiring younger staff. Extending the pension age may be problematic for Mr Hockey, but nowhere near as difficult as tightening eligibility – which is essential if its costs are to be contained.

The architects of Australia’s compulsory superannuation arrangements – to which employers have contributed on behalf of their employers since 1992 – always intended it should become the principal source of income for retired workers (along with voluntary savings through super and other investments). A means-tested age pension was envisaged only as a safety net. But thanks to an assets test that excludes the family home, access to pension remains widespread, even among wealthier Australians. Around 80 per cent of people aged 65 and over with $1 million in assets collect the age pension.

The Grattan Institute suggests that including the family home in the assets test for the age pension would save about $7 billion a year, and reducing the tax concession on super contributions for higher-income earners an additional $6 billion.

Mr Hockey, who has talked endlessly about getting more people off the government payroll in order to ensure the sustainability of Australia’s welfare system, has yet to come up with any real specifics regarding how rising pension costs might be reined in. On the other hand, there has been much discussion about tightening the activity test for people on disability support pensions to ensure they look for work where they are able. And though there have been hints about scaling back the implementation date of the National Disability Insurance Scheme, no such doubts have arisen about the government’s commitment to its signature paid parental leave scheme.

Mr Hockey’s reservations about the age pension are well founded. But he needs to go beyond lifting the age of entitlement to 70 to canvass specific options which share the burden fairly.