Reduce super taxes now to prepare for the baby boomers' retirement

In five years time we will see the start of a significant social change. The first wave of baby-boomers will begin to retire and about 700 will be leaving the workforce each day.

As a result of this, a picture of population distribution in Australia in 2021 will look like an inverse triangle, with the working taxpayers straining to support the burgeoning retired generation. The ratio of taxpayers to retirees will drop from more than 5:1 to below 3:1.

Increased longevity will mean that retirement for many could span at least 20 years. The number of Australians aged over 85 is expected to double in less than 20 years from now, reaching nearly half a million in 2021. By 2051 this age group is projected to reach 1.3 million, around 5 per cent of the population, compared to only 1.3 per cent now.

The big question is, can we AFFORD to live for the 20 years or so after we retire?

The Federal Treasurer’s Intergenerational Report notes that over the next forty years, the proportion of GDP devoted to Commonwealth spending on health and aged care is projected to more than double, from 4.7 per cent of GDP to 9.9 per cent. Spending on Age and Service Pensions is projected to increase by around 50 per cent over the same period, from the current 2.9 per cent to 4.6 per cent.

Both the current and projected levels of expenditure on government income support to the aged are relatively modest by international standards. The Intergenerational Report notes that age pension spending is contained because our Age Pension is means tested and targets poverty alleviation compared to other countries which typically pay pension according to previous individual earnings.

However, low, flat rate social security payments mean that additional private retirement income is needed if even minimum retirement expectations and needs are to be met.

Compulsory and voluntary superannuation arrangements therefore have an important role to play in making the Australian system sustainable, both in the sense of containing Commonwealth government expenditures and meeting the most basic expectations of retirees. Surprisingly, the Intergenerational Report makes little reference to superannuation, or to the cost savings to government that will be delivered by compulsory and voluntary super.

We baby-boomers – and I am one myself – have higher expectations than our parents and grandparents and will not accept the ageing process gracefully. We’ll want the wherewithal to do things. Many hope that the new age of retirement – the third age – will bring other opportunities and rewards – study, travel, volunteer work to name a few, not to mention health and access to the latest medical advances.

But as individuals and as a community we are largely living in massive self-delusion. For the most part we are individually unprepared for our own retirement. And as a nation we are chronically and myopically ill equipped for the pressures of an ageing population.

We have two ways forward – lower expectations or get prepared.

Let’s crunch the numbers for a moment. The average worker on an income of $40,000 who has saved 9 per cent through compulsory super for 30 years, will receive a retirement income of around $19,000 a year. It’s much higher than the age pension, but a quick calculation on the back of an envelope will tell you that it’s not going to allow many of the activities we might hope for in retirement – travel, entertainment, books and the like.