Age Pension becoming cheaper and cheaper
FROM 1 January this year for the next 18 months, the Age Pension eligibility age will be 66. It will then go up to 66.5 and will finally reach the target age of 67 on 1 July 2023.
Talk of increasing the pension age to 70 is off the table for now, but the debate will re-ignite at some point.
What may delay this re-ignition is the fact that the Age Pension is actually starting to cost the Australian Government less. The Government acknowledges this is due to two factors. First, the pension age has gone up from 65 to 66 and will land at 67.
Second, we are now beginning to see superannuation savings beginning to kick in.
There’s a third reason, too. On 1 January 2017, the asset test taper rate doubled, reducing the pension payments of hundreds of thousands of pensioners. This may actually be the most important reason why the spending on the Age Pension has gone down.
A fourth reason for the lower projected cost of the Age Pension may be the Government’s plan to require proof-of-life certificates every two years from those 80-and-over who are living overseas. This plan aims to stop the pension being paid to third parties after the death of a pensioner, whether as a result of fraud or a pensioner’s family’s belief that they remain entitled to receiving payments. This requirement is to take effect from 1 July 2019 and is expected to save $150 million over four years.
Combined, these four reasons may explain why confidential Treasury modelling obtained by The Australian under Freedom of Information laws shows that the Government expects the cost of the Age Pension to fall from 2.7 per cent of Gross Domestic Product (GDP) last year to 2.5 per cent in 2038. The Government’s 2015 Intergenerational Report had the cost of the Age Pension holding steady at about 3 per cent of GDP. Instead, the Government now expects annually increasing savings in the order of $375 million a year by 2038 in today’s dollars.
Separate monitoring by consultancy firm Rice Warner found that the share of the population eligible to receive the Age Pension would decline from about 69 per cent last year to 57 per cent in 2038.
This may be of some comfort to those who think that the Age Pension will be abolished in the future because it’s becoming unaffordable.