Raising the pension age is just the beginning

Raising the retirement age to 70 years will help to address fiscal sustainability, but the government will need to embrace a range of other reforms to prevent long-term pain.

Treasurer Joe Hockey will receive a lot of flak for suggesting that the pension age should rise. But instead he deserves a lot of credit for finally focusing on the long-term challenges facing the federal budget.

I’ve been critical of the Treasurer and indeed the media for focusing primarily on short-term budget fluctuations and ignoring the long-term structural budget issues.

Recent comments by former Treasury Secretary Dr Ken Henry and current Treasury Secretary Dr Martin Parkinson support the view that there are no quick fixes (Henry and the tax experts are wasting their breath, March 12).

The long-term sustainability of the budget comes down to three fundamental issues: tax reform, healthcare spending and aged-care / pension expenditure. Everything else is just window dressing.

Hockey’s speech in Washington suggests that the Coalition at least has an appreciation of the third issue, even if they have yet to genuinely consider the first two.

The Productivity Commission estimates that by 2059/60, government spending on aged-care and the age pension will rise by 2.8 percentage points of nominal GDP. This is not as large as the contribution from rising healthcare costs, but nevertheless marks a significant challenge for the government.


Graph for Raising the pension age is just the beginning

Increasing the pension age is an obvious approach to address this issue, as acknowledged by previous governments. The retirement age is already set to increase gradually from 2017 until it reaches 67 years in 2023.

It is not yet clear what the Coalition will do, but realistically a retirement age of 70 years gradually brought in seems likely.

The Grattan Institute estimate that the government could save $12 billion a year simply by raising the retirement age to 70. That’s nothing to sneeze at and, combined with a range of other reforms, would lead to a sustainable long-term budget.

However, there are a number of considerations that the Coalition must address. Working until 70 will be a lot harder in some professions than in others. This will certainly be the case in jobs involving manual labour, where reaching 60 is already a difficult proposition.

But with an economy that is increasingly services-oriented, that will perhaps become less of an issue. Nevertheless, there has to be provisions that recognise that certain professions may need to access their superannuation and pension earlier than others. Businesses may also need a greater appreciation of what jobs are appropriate for older workers.

In addition, the Coalition must address age discrimination. If you lose your job in your 50s, good luck finding a new one.

Businesses are often incredibly reluctant to hire older workers, particularly if they require additional training. Our attitudes to older workers must change.

To some extent, simply raising the retirement age may improve that attitude. One issue with hiring older workers is that it sometimes isn’t a good investment. You hire them, you train them, then a few years later they retire -- leaving little time to make a return on your investment.

But by raising the retirement age, you effectively increase the window where a business can make a return and that may encourage greater hiring of older workers.

Attitudes may also change due to necessity. Reserve Bank of Australia governor Glenn Stevens raised the possibility last week that in time there may actually be more jobs than there are workers (Why she’ll be right in the long run, April 3). In that environment, businesses will be desperate for workers regardless of their age.

Raising the retirement age represents one small step on the road to budget sustainability but it sends a strong message to the Coalition’s most ardent supporters that sacrifices will have to be made by everyone.

To be successful, the Coalition will need to address issues of work suitability and age discrimination.

It is not, however, a silver bullet. A higher retirement age will need to be combined with other reforms. Tax reform cannot be ignored; neither can health care expenditure. The Coalition would be negligent and heartless if they failed to address superannuation concessions that primarily accrue to people who don’t need them.

Raising the retirement age will be unpopular but we cannot ignore the impact of an ageing population. If we do, the long-term pain will be far greater than the sacrifices we make in the short-term.