Written by Bob Deutsch, CTA
Australia’s aging population has been an issue for some time, but the full extent of the problem has been revealed with the recent release of a UN population study (United Nations Population Division – World Population Prospects 2019). The line that caught my attention was the one that showed that there are currently roughly 3.6 working Australians for every Australian retiree. What this means is that currently the incomes of 3.6 Australians are needed to finance the retirement needs of one retiree.
Of course, many retirees are self-funded. Nonetheless, the central point remains that the ratio matters in thinking about the population and the legitimate needs and demands of its retirees.
By international comparisons, the Australian ratio is actually not too bad. The Japanese ratio, for example, sits at 1.9:1 and France at 2.7:1. In fact, there are some 40 countries with lower ratios than ours.
More troubling however is where we are headed. By 2040, based on current ages and demographics, the Australian ratio is expected to drop to 2.6:1. This falling ratio is a worldwide phenomenon but the figures show that our ratio will drop by a significantly larger percentage than almost every other country.
What implication does this have for Australia? Essentially, it means that if we do nothing – which is an easy option which historically we are very good at – reliance on the age pension will increase dramatically which will have large and important budgetary implications. Federal budget expenditure in 2015-16 was roughly $440 billion with $60 billion of that going on assistance to the aged. That’s about 13.6% dedicated to caring for the aged. We can fully expect that number to skyrocket if we sit on our hands and take the do-nothing option. That will inevitably impact on future Federal governments and their ability to assist in respect to other social welfare initiatives as a larger part of the available social security budget is eaten up by the aging population problem.
What can be done? – actually quite a lot!
First, we need to ensure that superannuation settings are appropriate such that they encourage as many people as possible to self-fund their retirement during their working lives. That requires some genuine simplification of the rules which many people distrust because they cannot get their heads around the complexities which bedevil the system. Some of the recent rule changes have not helped in this regard.
Secondly, retired super fund members need some generous rules that would allow them to convert some or all of their super entitlements into a remainder of life annuity. Currently, there are too many obstacles to allow this to happen seamlessly.
Thirdly, and I know this is controversial, the Super Guarantee should be lifted to the original level of 12% so as to ensure a larger cohort get to where they need to be to fund a reasonable retirement. Perhaps some further reasonable delay can be accommodated to allow a catch up in wages which have stagnated in recent years. This needs careful management as too long a delay would exacerbate the aging population issue.
Fourthly, and perhaps even more controversially, migration rules for younger skilled people with longer working lives ahead of them should be relaxed so as to directly improve the ratio.
As always, Members, I welcome your thoughts and comments via the TaxVine feedback inbox.
Bob Deutsch, CTA