The Australian
9 January 2017
Henry Ergas
There was good news late last year for governments struggling with soaring pension costs: according to a study published in the prestigious journal Nature, it may not be possible to extend the human lifespan beyond the ages already attained by the oldest people on record.
Focusing on the four countries with the largest number of individuals aged 110 or older (the US, France, Japan and Britain), the study, which was led by Jan Vijg from New York’s Albert Einstein College of Medicine, found that after increasing rapidly in the 1970s and 80s, the average maximum age at death of supercentenarians reached a plateau of about 115 years in the mid-90s, and has not risen.
That plateau occurred just before the death in 1997 of 122-year-old Frenchwoman Jeanne Calment, who achieved the greatest documented lifespan of any person in history. Calment, the study concluded, was a statistical outlier, with its best estimate being that the likelihood in a given year of seeing one person live to 125 anywhere in the world is less than one in 10,000.
So much for Joe Hockey’s famous statement that “somewhere in the world today it is highly probable a child has been born who will live to be 150”. But it would be wrong to get too excited. To begin with, at least since 1798, when Thomas Malthus wrote that “with regard to the duration of human life, there does not appear to have existed, from the earliest ages of the world, to the present moment, the smallest permanent indication of increasing prolongation”, demographers have far more often underestimated than overestimated the future rise in life expectancy.
Even more importantly, increases in the maximum age at death have only made a minor contribution to the growing cost of age pensions. Rather, almost all of that growth is due to the rise in the share of the population whose life span comes close to the maximum. As that trend persists, the numbers who live for decades after age 67, which is being phased in as the entitlement age for the age pension, will continue to climb.
Unfortunately, our retirement incomes system remains extremely poorly placed to cope with the pressures that will create. And while it is understandable that governments should seek short-term budget savings, their incessant fiddling has made the longer-term problems more acute. The changes to the age pension which came into effect last week are a case in point. Lost in the political point-scoring is the fact that they will lead to unprecedentedly high effective tax rates on private savings.
Moreover, those increases are especially great for younger Australians, who will face effective tax rates on additional retirement savings that approach, and in some cases exceed, 100 per cent. As those tax rates bite, working hard, earning a higher income and setting money aside for one’s retirement will be positively disadvantageous.
For example, economist Sean Corbett finds that a young person who starts work on an annual income of $50,000 and contributes $15,000 a year of additional super contributions from age 52 can now expect to have a lower income in retirement than someone starting work on $40,000 and doing the same.
Corbett’s analysis shows a staggering rise in the rate at which the savings of middleincome younger workers will be clawed back: under the previous rules, a $300,000 increase in private savings would have generated about $200,000 in retirement income. Thanks to the change in the rules, almost half of that $200,000 increment will be offset by lower pension eligibility, implying an effective tax rate on retirement savings of close to 77 per cent.
Given those tax rates, accumulating a substantial superannuation balance will hardly seem worth the sacrifice. Comparing, for example, two superannuants, one with a balance on retirement of $1.2 million and the other with $245,000, Corbett estimates that the 500 per cent difference in their accumulated savings will lead to a difference of just 20 per cent in retirement incomes.
Just how great the impacts of those punitive tax rates will be on long-term decisions to study, work and save is difficult to predict. What is certain is that they compound the failings of a retirement incomes system that has fallen far behind international best practice.
In Sweden and Finland, for example, the age pension adjusts automatically to longterm demographic and economic change, as clearly set out rules alter entitlements without requiring punitive taxes on savings. Phasing those adjustments in gradually avoids abrupt income falls such as those older Australians are now experiencing.
Adopting such a system involves many challenges, but the sooner we look at a comprehensive overhaul, the better. After all, when the age pension was introduced, the median voter was 37 and had some 29 years of remaining life; despite a lower voting age, the median voter in 2017 is 44 and can expect to live for 40 more years. The share of the median voter’s remaining life that will be lived in retirement has therefore risen from barely 6 per cent in 1910 to 42 per cent today, making retirement incomes an ever greater factor in voting decisions.
Little wonder the politics of reforming retirement incomes have become so poisonous. Indeed, perhaps we have already reached the point at which serious reform is impossible, condemning us to decades of fiddling and pointless shouting matches. Now, that’s something those who will make it to 115 can look forward to. But there is a consolation: at least they won’t live to be 150.
