Hockey’s hinting at pushing up the retirement age. Something’s got to be done, but if you’re banking on a political solution, or relying on the pension in retirement, it’s a risky strategy.
Joe Hockey put raising the retirement age back on the agenda over the weekend.
The economic case is pretty clear. The pension is looming as one of the biggest drains on the budget going forward, and Australia needs to get on top of it.
But there’s nothing new here. The population data are pretty steady and predictable. We have a very good idea of how many people are going to be around in the next ten to twenty years.
And we’ve seen it on the political agenda before. Labor pushed the retirement age back from 65 to 67, which in turn followed Peter Costello’s lead, in what ended up being called, a little unfairly, his “work ‘til you drop” policy.
And so the “ageing crisis” gets a run every few years, normally when a new Treasurer looks at the numbers and pees himself a little a bit.
Take a look at this chart here, for example. It comes from the Treasury in Canberra. Using ABS population projections, they expect health care costs will expand from 4 to 7% of GDP, and aged care costs will double from 0.8 to 1.6% of GDP.
Sorry Mr Hockey, do you need a moment?
It’s a bit of a scary thought – just how much all that health and aged care is going to cost you. Especially, if you’re already worried about where the budget’s heading.
And the burden of the baby boomers moving into retirement will be felt for a generation. It eclipses any political or economic cycles – and threatens to hammer them both.
Because it’s not just that we’ll have more retirees to look after. We’ll be doing it off a shrinking per captia economic base.
For a long time, Australia’s demographics have worked in our favour. Each year we had better and better dependency ratios. That is, there were more and more working people for every person who couldn’t work (because they were too old or too young.)
But that turned (a sharp!) corner in 2010, as the first baby boomers started entering retirement. And the dependency ratio just gets worse from here on, depending on what assumptions you’ve got about future population growth (see chart).
You also see it in the participation rate. After increasing year after year for many years, engagement with the labour force has started falling. Partly this is cyclical, but partly it reflects the weight of population moving into age brackets that don’t have such high participation rates.
Another good way to get a sense of it is to look at the number of Aussies in their peak working years (45 to 54), and the number of elderly who are 65+. That’s what this chart shows (thanks again to MacroBusiness).
What it shows is that in the thirty years running up to 2010, these two were in lock step. For 30 years, the number of Aussies in the peak years was equal to the number of elderly.
But from 2010 on, that story changes dramatically. The peak year Aussies is still growing at trend, but there’s a massive ramp up in the number of elderly. It’s a pretty major change in the constitution of the Australian population and economy.
And what it means is that the ageing of the Aussie population is going to put more and more burden on those who are working to support those who can’t.
And the way that burden is generally expressed is through taxation. The working people pay tax to fund government-delivered health and aged care.
And so that’s the shot across the bows we got from Hockey this week:
“We have also got to recognise that there are unique costs associated with that and you have got to ask if the current system is able to cope with that on a sustainable basis.”
Translation: “We can’t go on like this. Either get used to less, or be prepared to pay more tax.”
But this potentially sets the stage for an intergenerational war.
Because imagine it comes down to the crunch. You could end up with the situation where either the working young have to pay more tax, or the elderly will have to accept less generous conditions.
Which one will you vote for? Well, it depends on how old you are!
And the baby boomers will be just as powerful a political block as they are now. Plus, they already control a fair chunk of the country’s wealth. It could be father against son, mother against daughter, the rise of retirement village militias.
So what can we do about it?
Well, as Hockey points out, it probably requires a bit of sacrifice of personal interest for the national interest. (This includes making sure that the government pension is only going to those who actually need it!)
But on a personal level, I wouldn’t be holding my breath for a political solution. Politicians on 3-4 year electoral cycles haven’t shown themselves to be that good at dealing with problems across generational time frames.
So do we ‘work til we drop’? That’s hardly appealing. Especially when you consider there’s still a bit of a stigma against employing anyone over 60. How do you think you’ll go once you’re 75.
No. To me, it’s more motivation to take charge of your own finances. If your plan is to let the government to look after you, it’s a risky strategy. Better to look after yourself, and the best way to do that is to put the time and energy into your wealth strategy now.
And I mean right now.
You’re not getting any younger.