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Paying for our old age

By Bill Richmond - posted Tuesday, 23 September 2008


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.

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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.

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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.

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About the Author

Dr Bill Richmond lectures in Economics at the University of Queensland.

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