The Actuaries Institute said that the Intergenerational Report (IGR) has “conclusively” demonstrated the need for policy change, while the Australian Institute of Superannuation Trustees (AIST) said that “there is no need to panic”.
The Actuaries Institute believes the IGR’s forecast change in demographics will put “significant pressure on health, pension and aged care costs”, but AIST’s position is that future pension costs are “manageable within existing policy settings”.
The IGR predicts that the number of Australians aged 65 and over will have more than doubled by 2055, with government expenditure on Age and Service pension projected to rise from 2.9 per cent of GDP today to 3.6 per cent over that time period.
“It is clear that without policy action, the ageing of our population means future workers will pay a higher proportion of taxes to support the elderly than occurs today. There must be an equitable sharing of future social costs between baby boomers and younger generations,” Estelle Pearson, President of the Actuaries Institute said.
She added that the only other alternatives were reducing retirees’ Government benefits, increasing taxes, or reducing government expenditure in other areas.
But AIST believes there are mitigating factors to the Age Pension increasing to 3.6 per cent.
“Under the government’s proposals to increase the pension age to 70 and change indexation and deeming thresholds, the proportion of people of Age Pension age receiving the Age Pension is projected to fall to around 67 per cent [from 70 per cent] by 2055 – and account for 2.7% of GDP, ” Tom Garcia, chief executive of AIST said.
He anticipated that even having a retirement at the lower age of 67 would “sufficiently reduced long term pressure on the budget” and stated that AIST would be pushing for this lower limit instead of the proposed 70 years which is due to come into effect by 2035.
While the Actuaries Institute believes the raising of the retirement age is an “important first step” in tackling retirement income, it is also concerned about the linkage between an ageing population and health care costs.
“As our recent Health Green Paper noted, without future proofing Australia’s health care system, the working population may be paying almost double their own health expenditure to support older Australians,” Pearson said. “With a recognition that almost half of household wealth is projected to be in the hands of the over 65s by 2030, the Institute considers it maybe necessary to ask older Australians to contribute more to help fund their future health care costs.”
Despite the differences of view on the degree of change required to policy both AIST and the Actuaries Institute have significant overlap in recommendations to the government.
They both agree that the government should increase the superannuation guarantee to 12 per cent, with the AIST calling on the government to confirm its commitment to the system by reinstating the original timetable, which would have the guarantee reach the 12 per cent mark by 2019.
Both have called for clear objectives of the superannuation system so that future decisions on retirement income, Age Pension, health and aged care are sustainable and equitable. This would entail taking a holistic view, including examining Age Pension indexation, means testing and tax concessions, because of the close interconnectedness between the different facets.
Garcia said this was required for long-term strategic change to achieve a better system, but needed to be carefully thought out as when one lever was pulled 15 other levers changed.
Additionally, both AIST and the Actuaries Institute support the recommendation of the Financial System Inquiry that superannuation trustees pre-select an optional default retirement income product, delivering an income stream over a retirees’ life, and assist in easing the demand on the Age Pension.
David Bell, chief executive of the Actuaries Institute said that they will be providing a more detailed response to the IGR in the coming weeks.