In September just passed, Michelle Levy and I attended the second Asian Pensions Forum in Hong Kong, organised by ASFA. A prominent message that emerged was the urgency with which the economies of the world need to address how their respective retirement/pensions systems are going to cope with their aging populations.
For Australia, despite having a world class superannuation system in the accumulation phase, the problem is equally as acute and urgent. Information and analysis from Treasury’s Intergenerational Report in 2010 made clear, if it was not already, that the problem is real.
Since then, we have had the Henry Review and the Cooper Review both consider the issue. It is fair to say that, in both instances, the subject of retirement incomes was not the main focus of their work, with Henry also constrained by not being permitted through its terms of reference to consider changing the tax free status of superannuation benefits from age 60. Even so, both Reviews materially contributed to the discussion but history since those Reviews suggests that the problem is being ‘kicked down the road’ for now by the present Government and there is little at this stage to suggest that the Opposition thinks differently.
There are interesting comparisons that can be drawn with climate change. Both issues are a world-wide problem; both are a long term issue potentially placing a burden on future generations; both have various options for addressing the problem with tax policy being potentially prominent. Perhaps the greatest difference in the comparison (apart from the subject matter itself) is that climate change has hit the hearts and minds of the community across all age groups as being an immediate and serious issue. In the media, it is front page news and policies to address it present as a key difference between our leading political parties.
At this stage, the same cannot be said for retirement incomes although that might be changing. On 9 November, 2012, the front page of the Sydney Morning Herald reported findings from the Australian Bureau of Statistics that expressed the concerns about the aging population and how people would be funded throughout their retirement. The next day, a similar story was run on Channel Nine’s Today show.
Set out below are some select materials from the White Paper prepared by the Institute of Actuaries of Australia and titled Australia’s Longevity Tsunami. With apologies to non-lawyers, like the Intergenerational Report from 2010 and the recent ABS work, the work by the Institute of Actuaries presents as res ipsa loquitur: the facts speak for themselves.
What to do?
The Cooper Review and the White Paper are helpful in their succinct analyses of the problem as it manifests itself in the Australian system. From the reviews, key risks that are identified in relation to the funding of retirement incomes are:
- Longevity: how long will the funding be required;
- Investment/volatility: will the funding be detrimentally affected by poor investment performance and what happens if it is;
- Inflation: will the value of the funding be diminished by inflation.
The various reviews and reports offer various solutions and recommendations. For example, the recent Melbourne Mercer report states that Australia’s index (being third out of the 18 countries analysed) could be increased by:
- Introducing a requirement that part of the retirement benefit be taken as an income stream;Increasing labour force participation amongst older workers;
- Introducing a mechanism to increase the pension age as life expectancy continues to increase;
- and Increasing the minimum access age for superannuation benefits from private pension plans so that retirement benefits are not available more than 5 years before the age pension eligibility age.
These items are consistent with the views expressed by the Institute of Actuaries.
However, across the spectrum of various reviews, the solutions and recommendations are generally quite high level and, most relevantly, do not seem to be getting much traction from the Government or have been rejected.
While regretting the need to suggest yet another review, my sense is that we need a review in the nature of Henry and Cooper but focussed exclusively on retirement incomes. I would suggest that the terms of reference include that:
- nothing should be out of scope in relation to retirement incomes;
- all risks to the funding of retirement incomes should be identified and analysed;
- the potential costs of those risks should be quantified. All assumptions should be published and should be supportable;
- a range of options should be presented, with each option purporting to address all risks or explain why a risk is not being addressed;
- all options should be costed.
To have this task undertaken, the impediments need to be removed.
What are the impediments?
Politics seems to be the main impediment. At this stage, the political will to wrestle with this issue does not seem to be there. The reasons are probably the lack of pressing community and media interest and, possibly, the perceived prospect that any solution would involve a cost to the revenue in one form or another.
If this is so, then I think it is incumbent on the superannuation industry to bring the issue fully into the community’s awareness. When that happens, politicians tend to listen. A large part of that task of increasing awareness will rest with industry associations but it can also be a discussion for all in the industry. It is an issue that unites the industry across all sectors, even if there are differences as to how to solve the problem.
The startling information
Some of the more startling pieces of information covered in the White Paper include:
- the average global life expectancy has doubled over the past 100 years. Half of all people who have ever lived to age 65 are currently alive;
- in 2012, the IMF reported that there would be a cost in the order of 25%-50% of 2010 Global GDP if people live only three years longer than currently expected;
- current projections based on past data are likely to underestimate life expectancies. Advances in medical science explain much of this. The wild card unknown for the affluent world is the effect of obesity and whether it will materially slow down the increase in life expectancies;
- in 2010 in Australia, life expectancy at birth according to the ABS was 79.5 for males and 84 for females. If these are adjusted to take into account mortality improvements derived by using mortality improvement factors over the last 25 years, the figures for males and for females increase to 92.4 and 93.9. By 2050, those numbers would be 96.7 and 97.3, representing a very substantial increase in the number of years for which retirement funding will be required when compared with 2010.
It’s time to do something about it!