25 Super Years
November 5, 2008

Australia is in a very fortunate position. It does not face an old age pension crisis, similar to that in many other developed countries. Australia’s fortunate situation is due to changes made 25 years ago by the then new Hawke Labor Government.

James Capretta is a fellow of the Centre for Strategic and International Systems at Washington DC, and he is an expert on national pension systems. He has done an international review of state-based pensions for the Trieste-based Risk Institute “European Papers on the New Welfare: The Counter-Ageing Society” (September 2007). The journal is one of the best ways to keep up to date on the financial implications of ageing societies.

Capretta’s conclusion is that Australia still faces challenges associated with the ageing of the population, particularly with regard to rising health care costs. But, unlike the rest of the developed world (such as Europe, United States, New Zealand and Japan) Australia does not face an aged pension crisis.

He says that government spending on the national aged pension is projected to be manageable in the decades ahead and likely can be made more so as workers accumulate substantial reserves in their superannuation accounts. Australia has thus reconciled better than most other countries the tensions arising from an aging population.

Capretta recalls the way that Australia – unlike most other developed countries – never established an earnings-related state pension system. It relied instead on a means-tested state pension, voluntary employer plans (usually for the more senior employees) and personal retirement savings.

Over the years, more and more Australians qualified for the age pension. By the mid-1980s some 85 per cent of the population aged 65 and over were receiving a full or partial national age pension.

The incoming 1983 Labor Government had a new idea: workers and their employers would be obliged to put a set percentage of the salary into a superannuation scheme. The percentage started low – which is why many people retiring now may not have much money on which to live in retirement.

But, the percentage has risen and, with the magic of compounding, a younger worker should be able to look forward to a comfortable retirement.

I might also add that the Superannuation Guarantee Levy (as the percentage is called) is now widely accepted. This is contrary to the usual Australian resistance to paying new taxes! If anything, there is a public pressure to increase the percentage rather than reduce or abolish it. Australians realize that they have not done enough to pay for their retirement – and so they do not resent the government coercion to force them to do so.

Capretta notes that slowly other governments and their populations are recognizing the extent of the crisis.

For example, there have been strikes and demonstrations in some western European countries, where workers have opposed government plans to increase the normal retirement age (say from 65 to 67). He notes: “Facing up to the challenge of population ageing can be overwhelming for political leaders”.

But Australia is a world leader in old age pensions thanks to the superannuation innovations introduced 25 years ago. It therefore faces a more comfortable future than other developed countries