Paying for our old age

Most people are aware of, and understand, how the Australian population is “ageing” and that a larger proportion of the population is made up of “older” people. This is partly because people are now living longer.

This characteristic of Australian society raises (at least) three important questions, both for individuals and society as a whole.

How are people going to fund their “old age”?

This has always been a problem for individuals of course, but increased life expectancy has meant that it has become more of an issue and is starting to become more acute. Until the late 20th century, this didn’t loom too large in peoples’ thoughts. On average they didn’t expect to live for too many years beyond what became enshrined as the age when it was the norm to stop work. And after the (somewhat arbitrary) age of 65, the age pension could be relied upon (without any action of any sort having been taken earlier in life) to provide a modest stream of income.

There’s no indication that the pension will be abandoned. However, the absolute level (25 per cent of average earnings) means that on its own the pension constitutes only a meagre income, particularly if it is going to be required to sustain an individual over a longer span of time.

This means that individuals are going to have to give much more thought to how they fund their old age. This is already happening of course, though it tends to be something that people start thinking about as they approach “retirement” rather than earlier in life. But how individuals are going to fund the later part (as much as one quarter) of their life must become part of their thinking at an earlier stage of their life than is the case now.

This will involve thinking explicitly about how income will be derived - what the mix will be of income earned from work, and income derived from other sources, whether it is from accumulated income-bearing assets (a superannuation fund, in whatever form) or a taxpayer-funded pension.

Individuals will have to plan, as far as possible, to ensure that they are in fact productive in the sense that their labour can generate an income. Ensuring income from work or employment may be part of the plan as working for longer into life has become widely accepted as the norm, and for some individuals this may mean they can now look forward to a healthier life into their old age. This means that they have to take whatever action they can, during their lives, to ensure that they are “employable” in their later years.

If people elect not to work after a certain age, or they find that no one wants to pay them for their services, they have to be aware that they need to fall back on other sources, and be aware of what income stream this will generate.

What are people going to do in their old age?

As people age - even into what is generally regarded as old age - they may choose to spend part or all of their time working - or do so (however willingly) in order to ensure that their income is maintained at a level that they desire.

But if they prefer not to work - or for whatever reason can’t do so - they have to (on the basis of whatever income they have been able to arrange or is otherwise available to them) do something.

For most people this isn’t a problem. For them the freedom to use their time in pursuit of interests and activities that give them pleasure is welcome.

For some the cessation of work creates a vacuum, and puts them “at a loose end”. Even some activities - such as travel - are undertaken by some people more as a way of filling in time, rather than providing a satisfying experience. The phenomenon of older people waking up in the morning and wondering “how to fill in the day” is a common one. This can be the case even for people who in earlier life have undertaken activities, and held jobs, where they have influenced the course of events or the development of knowledge. In fact it often affects them more; through the onset of “relevance deprivation syndrome”.

This circumstance is one that can hardly be “planned for” in the way that the financial basis of old age can be, and needs to be. Indeed it’s not one that affects everyone, though the experience of old age and how people spend it is often something of a surprise to many. Even in the absence of life-changing events, for example, in regard to physical health.

However, people should avoid having this “creep up on them” as it were, catching them unawares. Increasingly, people are going to be confronted with deciding what they are going to do that is going to be satisfying to them and ensure a life that they enjoy and consider to be “worth living”. And not only in the first year or so after retirement, but possibly for 20 years or more.

What should we (“the government”) do?

The ageing population will mean, to put it in simply, that a smaller and smaller proportion of the population will be responsible for creating the society’s GDP and paying the taxes necessary to fund whatever expenditure is deemed necessary by the government of the day.

This problem will be eased to the extent that people will work for longer, but will be exacerbated to the extent that the increasing proportion of older people lay a greater claim to services (such as health and aged care) that are provided, in whole or part, from taxes paid by the progressively smaller and smaller proportion of the population who earn income.

To a large extent the ageing of the population is inevitable: its central cause being the decline in the fertility rate (and hence the birth rate) since the 1960s. Can the government change this? It can try to turn around the fall in the fertility rate - a trend now more than four decades old. It has in fact tried to do this, both by exhortation and by providing financial incentives (for example the “baby bonus”). This appears to have had limited success. Since 2005, the downward trend has been (slightly) reversed, but so it has in other countries such as Japan. Moreover, it remains to be seen how significant or sustained the turnaround will be.

Much store has also been put in immigration as a way of “younging” the population to some extent. In the 2000s governments have been actively pursuing immigration policies, to the point where towards the end of the decade net migration reached record levels. However, demographic studies have indicated that this is at best a partial solution. In the absence of a significant turnaround in the fertility rate, immigration needs to be maintained - indefinitely.

The basic problem in thinking it is a total solution is that immigrants also grow old. The same issues as discussed above thus confront them. By encouraging immigration we only enlarge the magnitude of these problems.

So the issues discussed above must (in large part at least) be confronted. Should the government play any role?

For much of the 20th century the age pension represented a very large proportion of the income that funded people in their old age. Government employees were included in superannuation schemes and increasingly in the post-war decades, private employers came to encourage private superannuation arrangements to which employers contributed. However, these affected only a relatively small percentage of the population. The majority relied on the pension.

Originally conceived essentially as a “safety net” to prevent old people falling into abject poverty, the age pension in Australia was, almost uniquely, funded from government revenue without there being any obligation on people to pay into that revenue (e.g. through some sort of national insurance system).

Only ever set at around 22-25 per cent of the average wage, the pension was never intended to be a living wage. However, towards the end of the century it came to be seen as such, thus constituting “what old people lived on”. In the process, Australia had - with the best of intentions, and unwittingly - created a sort of underclass of “poor old people” who lived (meagrely) on the age pension after they had stopped work at the age of 65.

There have been mounting pressures to increase the amount of the age pension. But as long ago as the 1980s (when it was acknowledged that the fall in the fertility rate was likely to continue and the population would as a result “age”) it was recognised that the government could not continue to pay the pension to all people over the age at which they were eligible.

The result was the introduction in the early 1990s of the system of compulsory private superannuation, whereby employees (but not self-employed people) were effectively obliged to have a portion of what they were paid by their employer handed to a superannuation fund to manage the money so as to provide an income for them later in their life.

The system has evolved in a way that employees can now freely choose a superannuation fund (i.e. who manages their money, including themselves). A number of changes, including to taxation provisions relating to superannuation, have also enhanced the attractiveness of individuals effectively being forced to provide an income for themselves in old age.

Changes in taxation laws have also been passed to encourage voluntary contributions to superannuation funds.

While these measures have been taken in order to lessen dependence on the age pension (and thus relieve pressure on government finances) the pension continues to be payable under quite liberal terms (in respect for example to the income and assets of individuals).

Increasingly over time (and especially once everyone will have spent a working life under the regime of private superannuation) the pension will come to be seen merely as a “safety net” to catch those people who, for whatever reason, have not made adequate provision to self-fund their old age.

It may be that far from the pension being seen as a “right” there will even be a slight stigma attached to receipt of it - an acknowledgement that the recipient has failed somewhere along the line to provide for themselves.

Whether these “three pillars” dictated, encouraged, and provided by the government -constitute an appropriate method for a society to oversee the need for an increasing number of people to fund their old age depends essentially on one’s view of the appropriate function of government.

In respect of the second of the questions raised above, it could be argued that what people do with their time (provided it’s legal) is no one’s business but their own. Currently government (mainly state and local governments) fund activities and programs, many of which are at subsidised, even zero, cost to those who avail themselves of them. This possibly reflects the widespread view that older people are disadvantaged and in particular, those who are heavily or totally reliant on the pension should have what is provided to them by government “topped up”.

Nevertheless, could it be argued that in a world where individuals accept the idea that  they should act themselves to fund their old age (while a “safety net” should be provided to prevent hardship) and that they need to explicitly think about how they occupy their lives, the market should be left to respond to needs and demands. If this is the case, the most a government should do is undertake the minimal task of informing people of the need for, and the options available to them, to take action for themselves.