Immediate drastic changes on age pensions are highly unlikely

It's pointless to be concerned about unknown possible changes when we're so close to the announcement of the May budget decisions. However, by highlighting just how serious a problem the future funding of the age pension will become, the government may be preparing the grounds for longer-term changes.

Just as the major changes made by the previous government increasing the age pension eligibility age from 65 to 67 will be phased in over an extended period, immediate drastic changes are most unlikely. The age 67 requirement will start in about three years and will take 10 years to be fully implemented.

In a difficult budgetary situation, this government and all in the future will face hard decisions to meet age pension and related age services outlays.

There's no indication that improvements in longevity are tapering off. Consequently, the numbers of people aged above 75 and 80 will continue to grow. On 2012 projections this will mean there will be a doubling of the population aged over 75, while the percentage of the population aged over 65 will increase by only one third from 15 per cent to 20per cent of the population.

The underlying life expectancy figures supporting these projections highlight the difficulty of self-provision for a comfortable retirement. An Australian male who lives until age 65 has about an 82 per cent chance of living beyond age 85 and a 70 per cent chance of living past 90. Females still have a longer life expectancy. This is reflected in the life expectancy of couples who live to 65. After that, there's a 90 per cent chance that one or both will live beyond 92 years of age and an 81 per cent chance that one or both will live beyond 97.

These figures, extracted from official life tables and Deloittes and ABS data, explain why future funding of the age pension will continue to be a problem for the federal government. They also highlight the significant challenge facing people retired or retiring now and those in the future of ensuring that their private money doesn't run out before they die.

The advent of low interest rates and volatile investment markets adds to these problems even if, as appears to be the government's assumption, people are able to continue working till 67 or a later pension entitlement age.

If low interest rates continue, the minimum allocated pension requirements that increase steeply with age will add to the retiree's problems. Among other things, this will add to the future demand for part age pension and government aged services as the assets owned by retirees are used up in retirement.

Without doubt, whatever changes are made in this year's budget, they're likely to be the first of many because of the underlying dynamics of our ageing population.

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Daryl Dixon

Executive Chairman

Daryl Dixon is one of Australia’s foremost investment experts and a well known writer and consultant. He has provided trusted advice to thousands of personal clients over more than 25 years and is an acknowledged expert in the areas of tax, superannuation (including public sector superannuation), social security and investments.

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