Challenge of change - the 2015 Intergenerational Report
24 Jun 2015
By Shadforth Financial Group
In early March this year, the Treasurer released the Intergenerational Report (IGR). Every five years, the IGR provides a snapshot analysis of how Australia is tracking now and how it will be in 40 years' time. The IGR is important to the Government's policy agenda because it provides the evidential basis for reform.
This is the fourth IGR to be published since 2002 and, like its predecessors, the 2015 IGR focuses on the three 'Ps':
Australia's population is expected to grow from 23.9 million to 39.7 million by 2055. The report emphasises the undeniable fact that we are living longer.
Life expectancy at birth is expected to increase from 91.5 years (men) and 93.6 years (women) in 2015 to 95.1 and 96.6 respectively in 2055. Not surprisingly, life expectancy at age 60 is expected to increase from 26.4 years (men) and 29.1 years (women) in 2015 to 31.5 and 33.3 years in 2055, which is a long time to stretch out your super savings.
Currently, 15 per cent of the population is aged 65 or over, however, by 2055, this is expected to increase to 22.6 per cent of the population.
Participation in the workforce for those aged 15+ is expected to decline from 64.6 per cent today to 62.4 per cent in 2055.
The IGR also identified that the current participation of women in the workforce is 4 per cent below New Zealand and Canada, but increasing female participation to Canadian levels would add $25 billion to GDP.
It is also predicted that the participation rates of people in the workforce aged 65 and over will increase significantly from 12.9 per cent in 2014/15 to 17.3 per cent in 2054/55.
Labour productivity has slowed from 2.2 per cent in the 1990s to 1.5 per cent in the 2000s. To retain and improve living standards, productivity improvements are required.
How could this affect you?
From a retirement planning perspective, the fact that there will be more people living longer and working longer requires the Government to makes changes and adjustments to superannuation and social security policy settings.
The report points to the inevitability of people having to remain longer in the workforce before being able to access the age pension and their super.
It also highlights that, as more Australians receive compulsory super contributions for longer periods of their working lives, they are likely to retire with higher super balances. This would assist with Government policy to lower the level of reliance on the age pension and assist in the national budget deficits.
The report noted that the median super account balance for a person aged 60 or over in 2011/12 was around $95,000, which is clearly not enough for individuals to be self-sufficient in retirement. Therefore, there is no doubt that super balances need to be much higher by 2055.
The ageing population underlines the need for the Government to review the adequacy of the superannuation and social security system. Areas for policy review may include the taxation of the super system, review of existing social security payment policies, means of transforming super savings into retirement income streams and barriers to retirement product initiatives.
The Financial Planning Association of Australia (FPA) is calling for Australians to seek quality financial advice, particularly in light of our ageing population and the fact that, as a nation, our life expectancy is among the longest in the world.
CEO of the FPA, Mark Rantall, explains that, while the report does not anticipate a decline in the proportion of retirees receiving the age pension, it does project an increase in the proportion of part-rate relative to full-rate pensioners.
"The IGR makes it very clear that there is a link between superannuation savings and reliance on the age pension. Fewer people relying on the age pension will clearly help reduce the overall financial burden on the nation. That's where getting the right financial advice comes in. If Australians seek proper financial advice from an early age, and use it to maximise their superannuation so they can reduce reliance on the age pension, the nation as a whole will be infinitely better off," he said.
"It's clear that benefits also flow to individual Australians. Those who do receive financial advice are more likely to only rely on a part-pension rather than a full pension. They are more financially secure, have a greater standard of living and are able to better manage any longevity risk", said Mr Rantall.
With an ageing population, another important area of advice that individuals will need is in the area of aged care planning. Family members who want to ensure their parents and loved ones have proper aged care and accommodation (whether at home or in a care facility) in their later parts of life, should also seek early financial advice to make sure all possible options be properly explored.
Observations on the age pension
The 2015 report notes that around 70 per cent of people of age pension age (currently age 65) were receiving the age pension. Of these, 60 per cent were in receipt of the full rate pension. While it's predicted that the proportion of part-pensioners relative to full-pensioners is expected to increase, the proportion of retirees receiving any pension is not projected to decline.