Intergenerational Report – policy reform needed to address budget sustainability and equity

The Actuaries Institute President, Estelle Pearson, today said the Intergenerational Report should be a policy wake-up call that safeguards living standards for future generations.

“The report provides a valuable insight into the demographic challenges Australia faces over the next four decades,” Ms Pearson said.

Based on its analysis of policy imperatives and the report’s findings, the Actuaries Institute reaffirmed its previous recommendations, that Government:

 Defines clear objectives of the superannuation system so that future decisions on the related funding of retirement income, Age Pension, health and aged care are sustainable and equitable. Under this approach decisions on Age Pension indexation, means testing and tax concessions should be considered together, not in isolation.

 Encourages retirees to take up income streams and develop options for default retirement products to reduce demand on the Age Pension, boost future retirement incomes and build national savings

 Progressively increases the Superannuation Guarantee to 12%

 Investigates ways retirees can more easily contribute to funding their future health

and aged care costs

Ms Pearson said the report’s findings are consistent with a number of research projects recently undertaken by the Actuaries Institute and will play an important role in driving reform.

“The report demonstrates conclusively that policy action is required if the Government and the community want to ensure that older Australians enjoy a comfortable retirement without unfairly burdening younger generations,” she said.

“The Institute has long warned on the implications of underestimating longevity risk. The Intergenerational Report, now allowing for future mortality improvements, confirms that the number of Australians aged 65 and over is projected to more than double by 2055 – adding significant pressure to health, pension and aged care costs.

“It is clear that without policy action, the ageing of our population means future workers will pay a higher proportion of taxes to support the elderly than occurs today. There must be an equitable sharing of future social costs between baby boomers and younger generations,” Ms Pearson noted.

“The only other alternatives include reducing retirees’ Government benefits, increasing taxes, or reducing government expenditure in other areas,” she said.

“The Actuaries Institute believes recent Government decisions, such as increasing the pension age, are important first steps in addressing these challenges, including encouraging people to work longer provided there is a safety net for those unable to work to pension age. Older people will increasingly choose to work longer to remain active and engaged but their work patterns will change as they transition to retirement.

In addition, we support the recommendation of the recent Financial System Inquiry that superannuation trustees pre-select an optional default retirement income product. This would deliver an income stream over a retirees’ life, and assist in easing the demand on the Age Pension. “

“To assist people to have higher superannuation balances in retirement and to reduce the reliance on the Aged Pension, the Government must progressively increase the superannuation guarantee level to 12%,” Ms Pearson said.

Ms Pearson said the Intergenerational Report clearly outlines the policy linkages between an ageing population, retirement income and health care costs.

“As our recent Health Green Paper noted, without future proofing Australia’s health care system, the working population may be paying almost double their own health expenditure to support older Australians. With a recognition that almost half of household wealth is projected to be in the hands of the over 65s by 2030, the Institute considers it maybe necessary to ask older Australians to contribute more to help fund their future health care costs.”

CEO David Bell said the actuarial profession has significant expertise with intergenerational equity issues and demographic changes and will provide a detailed response to the Intergenerational Report in coming weeks. The Actuaries Institute will also be releasing a white paper that considers the conflict between individuals’ retirement income adequacy and the sustainability of the overall Age Pension system.