Budgeting was easier when life was brutish and short

It’s grimly amusing that when the age pension was introduced in Australia in 1908 the age of eligibility for men was set at one year ABOVE average male life expectancy of 64. Way to go Mr Deakin.

Now eligibility is still 65 and life expectancy is 16 years longer. The great achievements of modern medicine have ruined the budget. Balancing the books was so much easier when life was "solitary, poor, nasty, brutish and short", to quote Thomas Hobbes.

The latest contribution from the Grattan Institute on Australia’s budget problems shows that governments are simply not raising enough in taxes to fund the medical costs of helping us live longer, or to pay the extra living costs via the age pension.

Governments are, to put it surgically, cutting their own throats: they are funding the research into life extending medicine, paying for the drugs and therapies that are discovered and then funding the living and maintenance costs of their increasingly aged citizens, without raising sufficient taxes to pay for any of it.

The pension age, says the Grattan Institute, has to be raised beyond the 65 it is now, and the 67 to which it is already being raised, to 70 at least. The Productivity Commission agrees.

The debate in our house over the weekend has been around whether older people can actually get or keep a job into their late sixties and beyond, since employers are always looking for young workers.

The Grattan Institute says its research shows that: “In Australia most people retire because they choose to do so rather than because they are unable to find employment.”

Most 70-year-olds I know are fit and healthy and obviously capable of working, and usually are, although we need to be careful of the tyranny of the anecdote.

The Grattan Institute says that lifting the pension age would increase income taxes by $9 billion and lower pension payments by $3 billion. It is also suggesting tightening superannuation taxes and including the family home in the age pension assets test, to raise another $19 billion a year.

In all, the Grattan Institute comes up with 20 suggestions that would improve the federal budget by $37 billion a year. Needless to say, they would all be very unpopular.

So what repairing the budget requires is a sacrificial government - a group of civic-minded politicians prepared to be unpopular and lose power for the sake of the nation. Fat chance.

The current Treasurer, Joe Hockey and his colleagues talk tough about budget savings, but his government has actually announced measures that would add $15 billion a year to the deficit within ten years, so he’s starting well behind.

That’s 1 per cent of GDP. The Grattan Institute says health spending (1.5 per cent), welfare (0.5 per cent) and the expected decline in the terms of trade (1 per cent) will subtract another 3 per cent of GDP from the budget over ten years, for a total structural deficit of 4 per cent of GDP – or $60 billion.

The biggest problem is health spending: “While education, research and infrastructure will benefit future generations, spending on increased health and age pensions increased the most. While health spending increases workforce participation a little, its major effect is to help today’s generation live longer and enjoy happier retirements.”

The problem is that today’s long happy retirements are being funded by deficits that send the bill to the next generation of workers.