Tax | Superannuation

Pension age: 97 years on, time for a rethink

CEDA chief executive David Byers explains the thinking behind Dr Knox's pension age proposal.

Australian 65-year-olds first received the national age pension in 1910. It was a time we can now barely imagine: the year when Harry Houdini made Australia's first controlled, powered airplane flight, a year when a week's wages might be 40 shillings ($4), a year when the Newtown Jets defeated the Rabbitohs for the NSW Rugby League premiership and Collingwood beat Carlton to claim the VFL crown.

That first age pension was 10 shillings a week.

At the time, if you were a man, your life expectancy at birth was just 56 years old. Just one in 25 Australians was 65 or older. If you were a typical 65-year-old Australian man, you'd probably had a hard life of manual labour. And being one of the few who made it 65, you could expect to live just 11 more years.

But being 65 today is not what it was. In recent decades, Australian life expectancies have shot up. Ninety-seven years after the introduction of the age pension, one in 7 Australians is 65 or older. Today's typical 65-year-old man can expect almost 20 more years of life - and women almost 23 more years. And those numbers are still going up.

Make no mistake: this is great news. It means people who would have been long gone are still alive. Medical science and preventative health measures have reduced fatalities from heart disease, many types of cancers, and smoking-related conditions like emphysema. And what evidence we have suggests people are not just living longer, but staying healthy and enjoying life longer too. These days 65-year-olds are setting off to trek the Himalayas.

But along with the good news comes a different story. More than 15 per cent of Australians are now 65 or over. In another 40 years, we can expect a quarter of all Australians to be 65 or older. Even with private superannuation doing its part, that's a lot of people receiving an age pension - and with a smaller proportion of working-age people paying the taxes that fund those pensions.

That's why CEDA believes it's time to look at raising the pension age - slowly, sensibly, and over a number of years. In a new CEDA paper, actuarial expert Dr David Knox argues that we should move the pension age up gradually from 65 to 67 between 2015 and 2022.

A slightly higher pension age would not only reflect how the world is changing. It would also boost our economy, encourage more people to stay in the workforce and ease the tax bill that we Australians will have to pay in the years ahead. Dr Knox suggests it would save the budget about $800 million a year in today's dollars.

It's hardly a radical proposal. Wealthy Iceland and Norway already wait until 67 to confer the age pension, and countries like the US, the UK and Germany have all started raising their pension ages. Indeed, Australia is already doing something similar. Since 1995 Australian women have waited a little longer each year for the pension. Women now wait until 63, and by 2014 they'll receive the pension at 65.

As well as looking at raising the pension age to 67, we should consider an ongoing linkage to changes in Australians' likely life expectancy. After all, if the current trend continues, by 2047 the average Australian 67-year-old women will face another 30 years of life. At that point, even a pension age of 67 will seem faintly silly. We'd be better off with a system that responds to changing realities and alters the preconception about when you are "too old" to work.

A higher pension age doesn't mean everyone should work longer. By their mid-sixties, some people will suffer medical conditions that leave them unable to put in a full workweek. And thankfully, Australia already has a safety net for these people - the disability support pension, paid at the same rate and with the same broad rules as the age pension. Indeed, the disability support pension has been used to help many women in the early sixties as the female pension age has risen. Dr Knox's proposal is clear about this: if we raise the pension age, those Australians who qualify for the disability support pension would continue to do so.

Thankfully, 65 isn't what it used to be. We should look at fine-tuning our pension system to respond to that fact.