Retirees have “a misplaced sense of entitlement” for demanding the pension rather than self-funding their retirement and many are gaming the superannuation system to retire early and receive the pension later, a report has said.
The fiscally conservative Centre for Independent Studies has released a report labelling the pension system “increasingly unbalanced” towards retirees at the expense of workers.
The report concluded the proportion of wages needed to pay for the pension system has “substantially increased, suggesting that each generation is demanding a greater share of national wealth in retirement than they were willing to contribute while working”.
The cost of the pension system per worker as a percentage of wages is at the highest level ever, rising from just over 3% of the average wage in 1966 to 5% in 2011, the report states.
The average worker is now expected to contribute $3,500 a year to everyone else’s retirement but only $6,270 to their own, it said. By 2054 it projected the average worker would contribute nearly as much to everyone else’s retirement ($9,424) as to their own ($11,895), assuming the superannuation guarantee remains frozen at 9.5%.
The main cost driver is “the significant relative increase in the number of retirees compared to the number of workers”, it said.
The percentage of the population of retirement age has risen from less than 2% in 1911 to almost 11% in 2011, mainly due to the ageing population. The percentage of people of retirement age receiving the pension has increased from about 30% in 1911 to 75% in 2011.
The report also noted the full rate of the pension has grown significantly in real terms from $3,000 a year in 1911 to more than $20,000 (in 2012 dollars).
Compulsory superannuation “has largely failed to substantially increase the number of retirees who are self-sufficient, or to slow the growth in pension expenditure”, the report said.
“Instead, some retirees have also taken advantage of rules that allow access to superannuation well before pension eligibility to retire early.”
Its evidence for this claim was that at least one third of retirees voluntarily leave the workforce before pension age and “a significant proportion” of those who voluntarily retire early end up receiving the pension, with only 20% of retirees remaining self-sufficient.
“In fact, two of every five retirees (40%) have no superannuation at all by pension age and half of those retirees have exhausted their superannuation balances between the age at which you can access your superannuation and retirement age.”
The report warned the growing pension cost may be unsustainable with the current tax base and “as generational bargain becomes more imbalanced, there is an increasing chance that it will exceed the taxpayers willingness to pay”.
The current pension eligibility age is at least 65 and rises in increments to 67 years for those born from 1 January 1957. The age at which workers can access superannuation is 55 for those born before 1 July 1960, rising to 60 for those born after 1 July 1964.
The report recommended the government lifts the retirement age by about six months every four years and review it regularly “to ensure that it is in line with life expectancy”.
Similarly, the age at which workers can access their superannuation should increase in line with the retirement age to be “no more than five years before pension age and preferably much closer”.
The government should also consider restrictions on early withdrawal of superannuation and efforts to boost the number of people who can rely on their own superannuation in retirement by “improving the effectiveness of superannuation tax concessions”.
The report predicts the ageing of the population will have a considerable impact on politics and older voters are likely to resist changes to pension entitlements.
