Opinion article

Australia needs harmonised, simplified provision for retirement

Australia needs taxation policy that moves us toward a harmonised and simpliefied system of provision for retirement, writes Professor Susan Thorp.

One of the first announcements that Scott Morrison made after becoming Prime Minister was that the Age Pension eligibility age would not rise to 70 years.

From July 2017, the Age Pension age has been gradually escalating from 65 toward 67 years, to be reached in 2023. The PM revoked the proposed increments that would have continued to increase the eligibility age to 70 by 2035. 

A first order effect of stopping further rises in the Age Pension eligibility age is to transfer expected wealth from future taxpayers to future pensioners. A second order effect is to raise the uncertainty of all agents in the Australian economy, exacerbating the complexity of an already poorly integrated tax and transfer system. Rather than unexpected, marginal rule changes, Australia needs policy that moves us toward a harmonised and simplified system of provision for retirement. 

Inter-generational transfers are to fiscal policy what late payment fees are to credit cards – 'shrouded attributes'. Just as credit providers take a profit from naïve card holders who fail to anticipate their tendency to overspend and incur fees, so governments can take a popularity dividend from naïve taxpayers who do not anticipate the future constraints of debt.

Debate about the pension age is often unhelpfully framed around 'entitlements' of retiring taxpayers, instead of the incentives, both positive and negative, that affect current and future workers.1 The 'shrouded' outcomes of targeted pension policy need to be identified and discussed. 

Good policy deals with the Age Pension not in isolation, but as a part of the whole tax and transfer system. The Age Pension is a critical component of the retirement income system and will remain so as the superannuation system matures. A majority of retirees will continue to rely on a full or part pension. Although, in the next two or three decades, an increasing proportion of workers will retire with several hundred thousand dollars in superannuation, this will delay, not eliminate, their claim on the pension.2

Debt repayment, wealth decumulation and increasing life expectancy will ensure that most households will eventually draw a pension. It follows that means-testing rules, taxation of superannuation benefits, personal income taxes and capital gains taxation all come into effect, depending on wealth, asset holdings, investment and labour incomes and household composition (not to mention interactions with the daunting aged care provisions).

Despite the thoughtful analysis of many reviews and studies, such as the Henry Review, changes to pension policy are often artificially detached from the network of rules that operate on superannuation and other retirement incomes. “(C)apacity …to deal with the resulting complexity has been overreached.”3  

A major related area of policy development that industry and government are now addressing is the retirement income framework (Comprehensive Income Products for Retirement). Superannuation funds will be required to offer retirement income products to members that incorporate specific features, including a broadly constant income in expectation, some longevity protection and some access to capital.4

The Age Pension affects the design and suitability of CIPRs for fund members. For example, a retiring couple might find their superannuation fund’s CIPR suitable at one pension eligibility age but not at another age because their accumulations are more depleted before they can access the public pension. The success of CIPR design depends on clarity about pension regulation, and critically, clarity about eligibility ages. 

Finally, natural limitations to human health can bound the impact of policy. Australia does not have an official retirement age, although Age Pension age has always been a natural reference point for retirement expectations. A large minority (around 40 per cent) of Australians retiring in their sixties do so largely involuntarily, for health reasons, for lack of employment or to care for a family member.5

Earlier changes to the eligibility age for women have encouraged labour supply6  but there are no guarantees that ratcheting the pension age in step with life expectancy will continue to boost labour supply. On the contrary, recent increases in life expectancy are associated with a longer period of life lived with disabilities.7  

Retiring Australians confront the many complications of managing, wealth, health, and ageing. They need a policy and regulatory system that is well integrated, stable and sustainable, and that is delivered with empathy. 


1. Tran, C., & Woodland, A. (2014). Trade-offs in means tested pension design.lJournal of Economic Dynamics and Control, 47, 72-93; Iskhakov, F., & Keane, M. (2018). Effects of taxes and safety net pensions on life-cycle labor supply, savings and human capital: the case of Australia, CEPAR Working paper No. 2018-095.  
2. Iskhakov, F., Thorp, S., & Bateman, H. (2015). Optimal annuity purchases for Australian Retirees. Economic Record, 91(293), 139-154.
3. Australia’s Future Tax System, Chapter 1. 
4. Treasury (2018) Retirement Income Covenant Position Paper.
5. Agnew, J., Bateman, H., & Thorp, S. (2013). Work, money, lifestyle: Plans of Australian retirees, JASSA, vol. 2013, no. 1, 40-44.
6. Atalay, K., & Barrett, G. F. (2015). The impact of age pension eligibility age on retirement and program dependence: Evidence from an Australian experiment. Review of Economics and Statistics, 97(1), 71-87.
About the authors

Susan Thorp

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Susan Thorp is Professor of Finance at the University of Sydney Business School. Susan researches household and consumer finance with a particular focus on retirement savings and decumulation.