The Australian Government Pension

Should we be relying on the Australian Government Pension to fund our retirement or should it be viewed as the last resort when thinking about how we might financially support ourselves when we retire? The following reasons suggest we shouldn’t be banking on the pension to supplement our retirement income.

Firstly, I struggle to comprehend how anyone can be happy to reduce their standard of living to the level necessary to be able to live from day to day on the pension.

Secondly, extensive Government research has revealed that the pension (even at its current low level) is not a sustainable option long-term if Australia is to remain economically sound. Thus, we must accept the reality that the age pension will continue to be available to less and less Australians, until a point where the age pension is possibly eliminated. By tightening the eligibility (i.e. through tighter rules around asset testing) and by increasing retirement age to 70 by 2035, the Government has already started addressing the issue by reducing the percentage of people that can access the pension and the number of years they can access the pension for. Ultimately this means that Australians relying on the pension must work a lot longer in life before they can retire.

Unfortunately, the reasons supporting the argument that the pension is unsustainable are not going to disappear, and, in fact, are only going to get worse and continue to put more and more pressure on future Governments to make drastic changes to the pension system. The 3 main reasons why the pension must and will change are as follows:

1. Australia’s ageing population, resulting in more retirees and health costs per taxpayer. In 2015, The Australian Bureau of Statistic (ABS) completed a report called the “3236.0 Household and Family Projections, Australia, 2011 to 2036”. This report contains projections of households, families and living arrangements for 2011-2036. The research shows that as time goes on, a greater proportion of people are projected in older age groups, and Australia’s median population age is projected to be 40.1 years in 2036, compared with 37.2 years in 2011. In 2036 it is expected that 20% of our population will be aged over 65 years, compared to only 14% in 2011.
2. We are living longer and spending longer in retirement. When the age pension was introduced in 1909, a male retiring at 65 spent, on average, 11 years in retirement. At that time, around half of the male population reached retirement age. Today, 85% of the male population reaches retirement age, and they can expect to spend, on average, more than 19 years in retirement. This means that we now have more people reaching retirement age and receiving the pension for a lot longer because they are living longer.
3. Australia’s costs are rising, largely due to increasing healthcare relating to our ageing population. The graph below shows just how much government spending starts to increase as the population exceeds 60 years of age.

   In summary, I hope you can understand why it is not a wise option to rely on the pension to fund your retirement given our ageing population, our longer life expectancy and increased Government spending.