Date posted: 1/12/2016 8 min read

The growing dilemma of retirement and our ageing population

What is an appropriate age to retire? And how can we ensure our elderly citizens are financially secure?

In brief

  • With average life expectancies increasing, most people will need to work longer in order to survive
  • Unless there are jobs for 60-70 year olds, elderly people will be on the unemployment benefit
  • Entrepreneurialism is encouraged, but misfortune can result in financially unviability in old age

Australians all let us rejoice, for we are young and free. It is certainly true that Australians, and their neighbours in New Zealand, remain free. But the concept of youth is, so to speak, one for the ages.

Our “population pyramid” is in the process of inverting. In 2020, there will be more 65 year olds than one year olds in Australia, according to McCrindle Research.

In New Zealand, 11 per cent of the population was aged over 65 in 1991. This group had reached 13 per cent of the population by 2009 and is expected to be 21 per cent by 2031.

The shifting tectonic plates of demographics have created considerable economic aftershocks, most notably in superannuation and the retirement age.

According to the Australian Bureau of Statistics, the 2015 life expectancy is 84.3 years for women and 80.1 years for men — the first time male life expectancy has passed 80 years. In 1960 it was 67.9 years for men and 74.2 years for women. Statistics New Zealand says a baby girl born in 2015 can expect to live to 83.2 years, and a boy 79.5 years, compared with 81.1 and 76.3 respectively if born just 15 years earlier.

Considering these changing demographics, what can be considered an appropriate age to retire?

“The appropriate age to retire will vary depending on the individual,” says Nathan Bonarius, consultant, at research firm Rice Warner.

“Those with the resources to retire, and those who are physically unable to continue to work, may retire earlier than others.”

Bonarius notes that advances in medicine and life expectancy will also make it easier for younger generations to retire at a later age than people retiring today.

“There is no single appropriate age [to retire], but most people will retire somewhere from 60 to 70, with the average currently being about 62 years. We should expect the average age of retirement to go up over time.”

Keep going

Monica Rule, an independent SMSF advisor, echoes that an appropriate age for retirement is whenever someone can fully support themselves financially.

“Whether that age is in your 50s, 60s or older does not matter. However, nowadays, people are generally living well beyond their 70s. In the past, it was normal to expect someone who retired at the age of 65 to only live another five or ten years.

“This means, today, whatever savings or investment income that a retiree accesses will need to last a lot longer if they retire at 55 — and then live until their 90s.”

Liz Westover FCA, head of superannuation at Chartered Accountants Australia and New Zealand, says the appropriate age to retire is currently a challenging question.

“The appropriate age for retirement for any individual could be vastly different but will be greatly influenced by their ability to access, and their level of access to, [Australia’s] Age Pension and their access to, and balance, of superannuation accounts.

“With average life expectancies increasing all the time, most people will need to consider working longer simply to be able to survive for longer periods in retirement. Anyone can ‘retire’ whenever they like — if they choose to do before any access ages for Age Pension or super, then they will need a non-superannuation retirement plan.”

Westover says the anticipated retirement age, particularly around access to superannuation and Age Pension, has changed little over time despite average life expectancies changing dramatically. “What this means is that our Age Pension system is now catering for people whose average life expectancy far exceeds the Age Pension access age,” she says.

“When the pension was first introduced over a century ago, it was only available to people who outlived their average life expectancy by as much as ten years.

“Simply put, some level of Age Pension is now paid to approximately 75 per cent of Australians over the age of 65. When introduced, it was only available as an absolute safety net for those who outlived average life expectancies and had no other means of support.”

Westover says this trend is not economically viable and is a strong argument for reviewing the rationale for Age Pension, and the age at which it is made available.

Living comfortably

Katrina Horrobin, GM of member strategy, communications and brand at the Association of Superannuation Funds of Australia (ASFA), says while every individual’s circumstances are different, a lot depends on aspects such as whether they own their own home or have private savings or income.

“Generally speaking, to live comfortably in retirement, the ASFA retirement standard states that a couple who retires at age 65 needs a super balance of A$510,000.

“If you have not accumulated that amount in super and are able to work, then you may wish to continue to do so to ensure a more comfortable retirement.”

Diane Maxwell, retirement commissioner at New Zealand’s Commission for Financial Capability, says in December 2013 the Commission put forward some recommendations to the government.

“One of which was to raise the age of eligibility in line with longevity, simply meaning as we live longer so the age goes up. With the next generation likely to live into their 90s, if they continue to be eligible for super at 65 they will be receiving it for 25 to 30 years.

“The other consideration is that 65 today is not what it was 20 years ago and it will be different again in 20 years’ time.

“We are saying the age should not go up today, or tomorrow, or in five years’ time, but it should go up to 67 in 20 years time. That will give people time to prepare for change, but ensure that change is gradual,” says Maxwell.

Rafal Chomik, senior research fellow at the UNSW’s ARC Centre of Excellence in Population Ageing Research, says given the fiscal challenges of an ageing population, most governments in advanced economies are looking to increase labour force participation at older ages.

“This has the double whammy effect of increasing tax revenue and delaying access to benefits,” he says.

“Working longer has its advantages, too. An extra year of work can mean a higher income in retirement — savings accumulate and compound longer and the income is spread over a shorter period.

“People do not often appreciate how long they will be retired. Someone aged 50 today is expected to have another 30 years ahead of them when they turn 65 in 2030, on average,” says Chomik.

The appropriate age to retire will vary depending on the individual. Those with the resources to retire, and those who are physically unable to continue to work, may retire earlier than others.
Nathan Bonarius Consultant, at research firm, Rice Warner

Government support

Much debate takes place over the involvement of the government in supporting retirees.

Governments must strike a balance between encouraging savings for retirees to support themselves, and ensuring that retirees are not left in desperate situations in their final years.

Dick Bryan, professor of political economy at the University of Sydney, says the starting point for debate over the level of government support for retirees is a human rights and citizenship one.

“People have entitlement to a decent living in old age. The problem the government has is that it wants us to take more responsibility for life course risks and become more and more entrepreneurs of our own lives, and those of our dependents.”

Bryan says that two major issues emerge from this government aim.

“First, life course risks tend to be unpredictable and hard to manage individually. Financial misfortune or mismanagement can see any self-entrepreneur become financially unviable in old age,” he says.

“So the government’s current strategy is to compel us to save, and to provide just a minimal safety net for the misfortunate or the mismanaged. In personal entrepreneurship, there are no provisions of limited liability.

“Second, it is unclear how much of a self-entrepreneur’s accumulated assets must be expended before they become eligible for some government funding. Here there is no simple answer.

“A system that encourages being an entrepreneur, yet provides no access to limited liability on investments, has an incoherent set of incentives,” says Bryan.

Bonarius says the government needs to continue providing a universal Age Pension to those who do not have adequate savings to ensure that elderly Australians do not face poverty in retirement. “The government should also continue to provide tax incentives on contributions and earnings in super to incentivise and reward savings.

“There are some problems with the current levels of support provided. Firstly, the Age Pension is too generous. Couples may receive a part pension when they own their own home and have over A$1m in additional assets. Secondly, tax concessions are poorly targeted for those with very high incomes.”

Bonarius suggests the government should consider abolishing part Age Pensions and taxing earnings in superannuation in the retirement phase, alongside taxing contributions at marginal rates less a 20 per cent rebate in order to achieve equity.

Chomik says, because the Age Pension reduces as people have more of their own income and assets, choosing the maximum value of the pension for those who have little else is based on a value judgement about poverty.

“An acceptable standard of living allowed by the pension could be judged against some absolute value, for example a fixed basket of goods, or against prevailing, economy-wide community standards. Australian policy has tended to focus on the latter, relative, concept.”

Rule says for those on the Age Pension, an appropriate level of support should be enough money to pay for non-discretionary expenses such as rent, electricity, gas, water, and food.

“People on the Age Pension should be comfortable but obviously they would not be able to live extravagantly.

“Self-funded retirees should obviously receive less government support but by the same token they should not be penalised for having saved for their retirement. They need to stretch their nest eggs as far as they can so government subsidies for public transport and medicines for this group would be appropriate,” says Rule.

Taxpayers’ money

New Zealand’s Maxwell stresses that the government makes a series of difficult decisions about where to spend taxpayers’ money.

“We have a commitment as a society to supporting those we see as the most vulnerable, which includes the very young and older New Zealanders. However, when drawing on a finite pot of money the priorities about what should be spent where is an ongoing national discussion.”

Westover takes the view that the ultimate goal should be to ensure that all Australians are able to have a reasonable standard of living in their retirement, but the difficulty is in determining when a level of government support should cease.

“When has the government done enough to make sure an individual will be able to live comfortably in their retirement?

“This is where we may need to consider capping the access people have to concessionally taxed savings through their super funds,” says Westover.

“Unfortunately, different people have a different view on what that level should be. On one hand they are critical of the level of Age Pension but at the same time suggest that support through super should be no more than that level.

“There is a range of other issues to consider when deciding on where any ‘cap’ may be best placed — dependants, spouse balances and support, increasing life expectancies – bearing in mind that 50 per cent of people will live beyond the average life expectancy,” says Westover.

Increasing the eligibility age

While the current qualification age for the Age Pension in Australia is 65 years, it is increasing to 67 years by 1 July 2023.

On 1 July 2025 the qualifying age will increase from 67 years by six months every two years until 1 July 2035 when the Age Pension qualifying age will reach 70.

In New Zealand, the current government has ruled out raising the age of eligibility for superannuation (65) but the debate continues to simmer.

While demographic factors such as heightened life expectancy are undeniable, does the increase in the age of eligibility for retirement support meet a fairness test, or make economic sense? “Increasing the Age Pension age is fair,” says Bonarius.

“Increases in life expectancy and advances in medicine mean that older Australians would end up spending a much longer time in retirement compared with their grandparents.

“To not increase the Age Pension age over time would be fiscally unsustainable. Future increases could be indexed to life expectancy.”

Westover says with an ageing population and increasing life expectancies, access to Age Pension will need to be revised from time to time.

“It will be important to do this gradually over a number of years to ensure that no-one is significantly or detrimentally impacted.

“Clearly, it is not economically viable to continue to support people for longer periods of time in retirement as life expectancies increase.

“Arguably, it is not fair on taxpayers either to support people via the Age Pension who might otherwise be perfectly capable of remaining in the workforce to support themselves. A balanced, measured approach is needed that is fair on all Australians and that is economically viable in the long run,” says Westover.

However, the academic view from the UNSW and the University of Sydney places greater emphasis on issues of inequality and fairness.

“By shifting from the Age Pension and defined benefit-type super, toward defined contribution superannuation, we have by design a system that will tend to widen inequality in retirement,” says Bryan.

Chomik agrees there are equity issues.

“That is, poor people live shorter lives. However, even the poor have seen increases in life expectancy.

“So even if pension age is increased at a slower rate than average life expectancy, there is still an argument for some level of increase.”

Focus on savings

While much of the focus on government involvement is on the Age Pension, the government can also encourage savings.

“Obviously the more savings that sit in super and the less reliance on the government, the better the government is able to support those who are really in need,” says Horrobin.

Bonarius takes the line that the government should not substitute focus on the Age Pension for savings.

“Retirement income policy needs to be holistic in its focus and include measures to improve savings outcomes for the broad population as well as ensuring the Age Pension is well-targeted, especially for those without any superannuation.”

Bryan says the current policy is not to encourage savings in a bank account sense, it is to encourage investing in assets, especially through house purchases and through compulsory superannuation.

“For many people these incentives are at odds, for history shows that, over a full life, it may have been financially sounder to pay off the house than to allocate income to superannuation.

“And this is probably why Australians carry so much debt — it is the way in which they access their superannuation before they retire,” he says.

“But it is all such a costly process, where fees to banks and superannuation abound,” adds Bryan.

Maxwell says the role of private provision — how much we provide for ourselves — will increase for retiring New Zealanders.

“The [New Zealand] government has encouraged saving through KiwiSaver since 2007 and its continued growth should be promoted, but there are some inequities and gaps in knowledge about the scheme that need to be addressed.

“It’s also worth remembering that KiwiSaver balances do not have to be used for retirement income, so the scheme is not explicitly linked to the overall retirement income framework.”

Westover agrees that balance is needed: “However, to the extent possible, we should be encouraging and supporting those who are most likely to be able to support themselves in retirement to do so.”

This article was first published in the August 2015 issue of Acuity magazine.

Change is afoot

  • Labour market must change if we are to work longer

    “Unconscious bias” is a trendy term and one we may discount as bollocks, or worse.

    But here’s a question: when did you last employ someone in their 60s or 70s in a significant, full-time job?

    Unless your answer is “I would never think about someone’s age as I simply employ the best person for the job”, those heading towards retirement are likely to suffer a miserable future. Their chance of remaining gainfully employed until their 70s is remote.

    Australian Treasurer Joe Hockey intends raising Australia’s retirement age to 70. In New Zealand, any change in the retirement age is highly unlikely because of an undertaking by Prime Minister John Key.

    But the current Australian government also made a pre-election promise not to increase the pension age. And in NZ the challenge cannot continue to be ignored.

  • Labour's plan

    The New Zealand Labour Party is promising to increase the entitlement age for superannuation to 67 on a graduated basis, starting in 2030. It is difficult to argue with its logic, given the future cost of funding superannuation and healthcare, and especially in light of the increased life expectancy.

    The harsh reality is that unless those facing retirement have bucked the trend and saved enough, they need to focus on the reality the retirement age will increase.

    The other reality is that it’s highly unlikely they will be gainfully employed by the time they reach 70, meaning they must earn enough from their investments to self-fund their retirement.

    Is the New Zealand National Party adopting a head-in-the-sand approach? Australia’s last Labor government increased the retirement age from 65 to 67, effective from 2023. Countries such as the United Kingdom are also looking at increasing their retirement age to 70.

  • What does super cost?

    In New Zealand, the cost of superannuation — NZ$10.2b a year, or 4.5 per cent of GDP — exceeds the cost of all other benefits, including Working for Families.

    This is an increase of NZ$2.9b since 2008. Future projections indicate that by the middle of this century, one in four New Zealanders will be over 65.

    Increasing the entitlement age from 65 to 67 saves less than 1 per cent of GDP and would not apply until 2030. If nothing is done, superannuation costs could increase to between 8 per cent and 9 per cent of GDP.

    Voluntary retirement savings scheme KiwiSaver is only part of this solution, and providing more tax concessions for people to save for their retirement will merely bring forward the cost to the government.

    Australia provides extensive tax concessions for superannuation savings, costing A$40b a year — equal to the existing cost of the Australian government pension.

    This is clearly a complex and multifaceted problem and unless employment opportunities exist for those aged between 60 and 70, then adopting a one-sided approach is simply exchanging the costs of superannuation with the cost of unemployment benefits.

    In times of full employment a higher retirement age may be the answer but this would depend on the employee’s industry sector.

  • Will income testing work?

    Income and asset testing of superannuation is a potential solution. But Australia already does this and its experience is that more than 80 per cent of men and nearly 90 per cent of women receiving a full pension at age 65 are moving from other welfare benefits.

    Among all the noise, it is difficult to see any in-depth analysis of all the issues involved. Perhaps the name-calling and focus on increasing our retirement age in 2030 is simply a political ploy.

    After all, how can you promise to do something that will extend beyond your electoral term? What is needed is a cross-party solution that puts aside political differences and looks at what is best.

    The best offer so far seems to be that of United Future [NZ] leader Peter Dunne who is promoting a flexible policy where, if you retire between 60 and 70, you receive a lower amount than those retiring at 70-plus.

    The success, or otherwise, of this policy still depends on New Zealand ensuring there are employment opportunities for 60 to 70 year olds.

    For their part, individuals need to focus not only on saving for their retirement but also on other ways to release capital by selling assets, such as their family home, and moving to a model such as leasing for life.

    Given the cloud of a future capital gains tax in New Zealand, this also could have some challenges.

    Meanwhile we can actively work on our unconscious bias or ageism.

    Joanna Doolan is a partner at EY New Zealand.