Pension age would rise under business council's austerity plan

THE age at which Australians receive the pension should be indexed to life expectancy, so that as the population ages, the pension age continually rises in tandem, the Business Council of Australia proposes.

By InvestSMART · 20 Feb 2012

By InvestSMART ·
20 Feb 2012

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The council, the lobby group for the biggest 100 companies, also wants the federal government to start putting money away now to help pay the bills an older population will impose on future taxpayers for health care, aged care and pensions.

Its budget submission, released today, urges the federal government to stick to its commitment to put the budget back in surplus in 2012-13. But it also proposes a number of new rules to lock in austerity for years to come, and to prepare for the expected costs after 2020 as baby boomers swell the numbers of the oldest Australians.

While applauding the Rudd government's move in 2010 to lift the pension age to 67 by 2023, the Business Council says it is not enough to offset the costs to the budget of rapidly increasing life expectancy.

"Based on the standard population data, and not allowing for any (future) improvements, 50 per cent of men aged 65 can expect to live to age 84 (with 25 per cent living to age 89)," the council said.

But if one extrapolates the trend of improving life expectancy into the future, it could increase substantially. "Under some scenarios, a 65-year-old man today may have a 50 per cent probability of living to age 93, and a 25 per cent probability of living to over 100."

It recommends that the government should commit in principle to index the pension age to life expectancy, and order Treasury to compile an updated intergenerational report, this time looking at the costs of an ageing population for the whole economy, and not merely for the federal government.

The critical questions of how long the government should support people on average in retirement, and the details of the scheme, would be decided after Treasury reported. But it would clearly open the door for much bigger and faster rises in the pension age than either side of politics has committed to.

The council also wants the government to adopt three new fiscal rules, designed to limit future taxes, give priority to saving over new spending and start putting money aside each year in a fund earmarked to meet future health, aged care and pension costs.

Under its plan, the government would:

Commit permanently to keep taxes below 23.7 per cent of GDP, the level in the final year of the Howard-Costello government. This is unlikely to be accepted as it would limit the government's options when the economy is on the point of boiling over.

Adopt a target of paying off its net debt by 2021 so it would be able to inject up to 3 per cent of GDP $42 billion in today's money into counter-cyclical stimulus measures, as the Rudd government did in 2008-09.

While giving priority to paying off debt, start putting money aside ultimately about 0.6 per cent of GDP, $8 billion a year in today's money to meet the future costs of an ageing society.

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Frequently Asked Questions about this Article…

What pension age changes has the Business Council of Australia proposed?

The Business Council of Australia proposes indexing the pension age to life expectancy so the pension age automatically rises as Australians live longer. The council welcomed the previous move to lift the pension age to 67 by 2023 but says that on its own it won’t offset the budget impact of increasing life expectancy.

How would indexing the pension age to life expectancy work for retirees?

Indexing the pension age to life expectancy would mean the age at which people become eligible for the pension would be regularly adjusted based on updated life expectancy data. The council says this could lead to much larger and faster increases than the current political commitments, with specific details to be decided after Treasury produces an updated report.

Why does the Business Council want the government to start putting money aside for ageing costs now?

The council argues the federal government should begin saving now to help meet future costs from an ageing population — including health care, aged care and pensions — so that the burden on future taxpayers is reduced. It recommends setting aside about 0.6% of GDP (around $8 billion a year in today’s money) into a fund earmarked for those costs.

What new fiscal rules does the Business Council recommend to lock in austerity?

The council recommends three fiscal rules: commit to keeping taxes below 23.7% of GDP (the Howard-Costello era level); set a target to pay off net government debt by 2021 so the government could have up to 3% of GDP available for counter‑cyclical stimulus; and prioritise paying down debt and saving for ageing costs over new spending.

How might the council’s tax and debt proposals affect future government spending?

If adopted, the proposed rules would constrain future tax settings by capping taxes at 23.7% of GDP and put pressure on the government to prioritise debt repayment and savings. That combination would likely limit room for new spending and lock in a more austere fiscal approach over the long term, the council says.

What life expectancy data did the Business Council use to justify indexing the pension age?

The council cited standard population data showing that, without future improvements, 50% of men aged 65 can expect to live to about 84 (25% to 89). It also warned that extrapolating recent trends could push those figures much higher — for example, a 65‑year‑old man today could have a 50% chance of living to 93 and a 25% chance of living past 100 under some scenarios.

What role would Treasury and an updated intergenerational report play in the council’s plan?

The council wants the government to order Treasury to produce an updated intergenerational report that looks at the costs of an ageing population for the whole economy. Treasury’s findings would inform the details of any scheme — including how long government support in retirement should last and how pension age indexing would be implemented.

What should everyday investors watch for in response to these pension and fiscal proposals?

Everyday investors should watch government responses to the Business Council’s recommendations, Treasury’s updated intergenerational report, and any moves to enshrine the proposed fiscal rules. These decisions could affect long‑term government spending priorities, taxation settings and the broader economic policy backdrop, which are relevant when planning long‑term investments.