One of the cornerstones of our retirement savings system is the age pension. This week the voice of grey power was raised in anger and frustration at the level of payment to pensioners. The federal government's review of the pension system has raised the temperature of the debate - no-one doubts the work needs to be done but the timeframe smacks of a story line straight out of the ABC TV's political spoof Hollowmen. All the media attention - and it has been hard to watch a popular current affairs program this week without seeing a comparison of pension payments - raises the question of how you should factor in the age pension when you are planning your retirement income. Ask investors at retirement seminars about the age pension and most profess to not be considering the age pension at all. The aim is to be self-funding in retirement. The federal government - and its political predecessors - will be quietly cheering that ambition on. But the reality is that most retirees will access some level of pension at some stage. According to treasury estimates in the second intergenerational report while the proportion of people receiving full pensions will decline because of rising super balances the proportion of people eligible for a partial pension will continue to rise. So what is the role of the age pension? By legislation it is set at 25% of male total average weekly earnings which means by definition it is about poverty alleviation not income replacement like some European pension systems. Today the basic age pension is worth $546 a fortnight for a single pensioner and $456 each for a couple. Full credit to our federal treasurer Wayne Swan and the deputy prime minister for stating the obvious that they could not live on that alone. The rather heated debate this week has focused on the income replacement notion. But there is also the bigger issue of affordability - our ageing population means a powerful demographic shift is underway. Today there are five people in the workforce for every person over 65. By 2047 the number of workers will fall to 2.4 for every person over 65. Put another way the number of people over 85 will quadruple by 2047. So any increase in the aged pension will come at a significant cost to the federal government budget and by implication potentially higher taxes or lower spending on other areas. So the federal treasurer has a personal and professional interest in hoping that investment markets will turn some time soon and begin growing personal super accounts. Financial planners - if they get involved early enough - will typically aim for people to build enough super wealth to cover their income needs. But there is another way to look at the age pension. The interaction of the social security and tax system means that for middle income Australians the age pension is a form of longevity insurance. It effectively puts a basic income floor under your retirement income plan. Certainly if you wanted to purchase from your friendly life insurance company a guaranteed income stream of $14,100 per annum for life you would have to hand over a considerable amount of capital - and risk losing it if you have the misfortune to die earlier rather than later. So the age pension has a real world, commercial value - even for those people who hope to never be in a position to use it. The debate about the level of pensioner payments is absolutely valid and overdue. But given the strengths of our superannuation system it is to be hoped that the debate gets beyond the dollars per week and considers different ways that the pension can be used to provide greater certainty around retirement incomes.
19th-September-2008 | 
