The Financial Price of Longer Life Expectancy

An interesting newspaper article, written by Shane Wright in the West Australian

I intend to live forever, or die trying – so said Groucho Marx. Think about how long you’ll live. Then consider how much cash you will need – in savings, superannuation or aged pension – for a comfortable life in retirement.

Now add 13 years to that expected lifespan and try to work out how you are going to afford retirement.

These aren’t isses that most of us spend a lot of time considering. And when we do, it’s usually when we’ve retired or about to. Fortunately some pretty smart people are looking at the numbers – and they reckon we are coming up short. The Actuaries Institute last week released a white paper on Australia’s “logivity tsunami”. Stuff Fifty Shades of Grey. This report is a real page-turner.

The issue, according to our actuaries, is that almost every official report on Australia’s demographic challenges is wrong. The main document in this space is the intergenerational report. First commissioned by former Federal treasurer Peter Costello, the report attempts to outline how society’s ageing will affect the Budget. For instance, the most current report forecast that the Budget would be put into permanent deficit simply through demographic change by 2029-30.

The proportion of the Budget taken up by costs associated with ageing and health would climb to 22.4 per cent of GDP by 2015-16 and 27.1 per cent of GDP by the middle of the century.

At the heart of these forecasts was an assumption about how long the average Australian will live. In 2010, the report used Australian Bureau of Statistic figures which forecast a man born that year could expect to live 79.5 years. A woman born in 2010 could expect 84 candles on her last birthday cake.

A man born in 2050 would have an expected lifespan of 87.7 years and a woman 90.5 years.

But what if those assumptions were wrong? According to the Actuaries Institute, they were wrong, and by a sizeable factor.

Based on what has occurred to Australians’ life expectancy over the past 25 years they came up with some vastly different numbers. It forecast a man born in 2010 could expect to live 92.4 years and a woman 93.9 years. A man born in 2050 could get 96.7 years on planet Earth and a woman 97.3 years.

So quickly have advances in medicine come along, the institute’s white paper find there are “plausible scenarios” under which a person currently aged 65 could expect to live past 100. The life expectancy for younger generations could exceed 120 years.

Such a huge increase in our expected lifespans has come big ramifications for the Budget. There is the aged pension (the single biggest welfare payment made by the Commonwealth at $37 billion this financial year). Then there are the concessions that encourage us to put money away for superannuation (the difference between the marginal tax rate and the 15 per cent superannuation rate for most people). Then add in health (16 percent of the Commonwealth Budget).

There are some offsetting financial impacts. The increase in the aged pension to 67 will ensure that employers have a bigger pool of workers from which to choose. The biggest growth in terms of workers over the past decade has been among those aged over 55.

But the Actuaries Institute reckons the financial costs of not properly taking into account how quickly we are adding years to our lives greatly outweighs the benefits.

So how to deal with this? One idea the Institute offered was to link increases in life expectancy with increases in the age at which you could access the age pension.

When the age pension started in 1910, life expectancy for a woman born that year was 60. For a man it was 56. But since 1910, the work we do has dramatically changed as has our life expectancy. And over its first 100 years of operation, the age pension at which men could access the pension did not change.

Based on what the institute suggests, the move to life the age pension access age to 67 would only be a first step. Given the relativities at play, you could expect an age pension access age of somewhere between 72 and 75 by 2050 (if not even higher).

Among a host of other measures, the institute argues there needs to be more incentives to encourage people to take their superannuation as a continuing income stream rather than a lump sum. The preservation age, currently 60, should be increased to between three to five years beneath the eligibility age. That would take it, based on an age pension of 67, to between 62 and 64.

The institute also backs policies aimed at encouraging older Australians to continue working. These include removing the age limit on super contributions (one policy that is being adopted), removing earned income from the means test on accessing the age pension and an interesting idea of increasing the pension for those people who do not retire at 65.

Under this idea, a person who worked for an extra five years over and above the age at which they could retire would get a boost to their government payment. Governments have been unable to stop tinkering with superannuation over the past decade or so.

If the Actuaries Institute is correct – and the figures are on its side – then we are going to spend a lot longer on this planet than we and our policymakers had expected. That’s something to celebrate. But it’s also something to plan for now.