Opinion article

What is the right retirement or pension age for Australia?

The recent Australian Government decision to axe a plan to increase the pension age to 70 has prompted discussion on just when or how Australians should access a pension. Considering how the pension age should be determined, Dr David Knox writes that pension eligibility should be linked to life expectancy. 

Before we begin, let’s recognise that Australia does not have a retirement age. Some people retire in their 50s whereas others work until their 70s or even beyond. The actual age of each person’s retirement is affected by many factors including the availability of work, their health and the health of their partner or parents, their financial position and their personal enjoyment of work.

So now let’s turn to the pension age, or more correctly, the eligibility conditions for the age pension. It is also worth noting that the receipt of the age pension has always been subject to a means test (currently both an assets test and an income test) as well as a residential requirement.

The means-tested age pension commenced in 1909 replacing some state schemes and had an eligibility age of 65 for men and, from 1910, an eligibility age of 60 for women. These eligibility ages remained unchanged until 1995 when the Keating Government announced that the female eligibility age would gradually rise from 60 reaching 65 in July 2013. Subsequently, in 2009 the Rudd Government announced that the pension eligibility age for both men and women would gradually increase from 65 in June 2017 to 67 in July 2023.

It is interesting to note that the life expectancy at birth in 1909 (when the age pension commenced) was 55 for males and 59 for females. The latest life expectancies at birth are 80 for males and 84 for females. In other words, our life expectancy has increased by 25 years and we are just beginning to raise the pension age that was set in 1909. During the same period, the life expectancy for a 65-year-old has increased from 11 to 19 years for males and 13 to 22 years for females.

Of course, we are not alone. Many other countries adopted age 65 as the normal age for retirement or pension eligibility. It still remains the most common age amongst OECD countries. However, there is movement in many countries as life expectancies continue to rise and the financial consequences of an ageing population become more apparent.

Like Australia, several developed nations are also increasing their pension age. For example, Finland, Ireland and the United Kingdom are moving to an eligibility age of 68; no country has yet legislated for a higher age. The other interesting development is that in Denmark, Italy and the Netherlands there is a link between the pension eligibility age and life expectancy. That is, as life expectancy rises, so does the pension age.

For example, if the life expectancy at age 65 was to increase by one year, then the pension age could automatically increase by, say, half a year, thereby sharing the impact between workers and the retired. Of course, such an increase should not happen immediately. There should always be a transition period, perhaps as long as 10 years, before any increase takes effect.

It is also recognised that there is no perfect age. There will always be individuals whose bodies are worn out before they reach the pension age, whatever that age may be. Hence it makes sense to enable individuals to access their superannuation benefit some years before the pension eligibility age. It also means that the disability support pension needs to be available in the years before the age pension is available. That is, for those who are unable to work due to incapacity, the Government should provide income support at the same level as the age pension.

Increases in the pension eligibility age are inevitable if life expectancy continues to rise. To assist prudent planning by Governments and to ensure that it does not become an unpredictable political football, we need to introduce an automatic adjustment whereby the pension age is gradually raised to reflect our longer lives.

About the authors

David Knox

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David is a Senior Partner at Mercer and Senior Actuary for Australia. He is the National Leader for Research and Policy and the lead author of the Melbourne Mercer Global Pension Index. Before joining Mercer in 2005, David was at PricewaterhouseCoopers and prior to that was the Foundation Professor of Actuarial Studies at The University of Melbourne. David was an independent Board member of Australian Prudential Regulation Authority from 1998 to 2003 and President of the Actuaries Institute in 2000. 

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