Future Retirement Income Systems – Australian Superannuation and State Old Age Pension

Developed nations are ageing with increasing numbers of retirees going onto pensions, but backgrounded by increasing old age dependency ratios while decline in working age cohorts, which pay taxes to support budgets. Many nations now are desperate in attracting long term temporary net migration or churn over of workers, students, digital nomads etc. as ‘net financial budget contributors’ who cannot and will not access services and budgets, open only to citizens and some permanent residents.

See OECD (2023), Australian Old-age dependency ratio (indicator). doi: 10.1787/e0255c98-en (Accessed on 07 August 2023)

Australia’s solution, still in a generational development phase for another generation, was to introduce industry superannuation under a Labor government in the 1980s-90s, tracking the baby boomer ‘bubble’ which is now in transition to retirement; influenced by the US 401(K) employee accounts system.

Rationale was the need to provide retirement income, public healthcare and other services, but keeping pressure off budgets and/or pension funds by introducing superannuation for employees paid by employers i.e. industry, in addition to public/independent, retail or self managed; all invest in mix of shares, property, fixed interest etc.. 

Employers pay the SCG Superannuation Contribution Guarantee into people’s individual or multiple superannuation accounts, also allows personal contributions, tax breaks or incentives and compounding, for then later to access income streams in retirement.

While the state pension is and has been a citizenship right to apply, especially for single retirees without substantial superannuation funds, it is means and assets tested i.e. if no or little superannuation income, full pension is available, then tapering downwards to zero depending level of Superannuation retirement income stream and thresholds.

Win win for Australians now and into the future, but it has been under constant attack by right wing parties, Koch linked think tanks and media (as a proxy for unions), described as a tax on business, gives funds too much financial power and influence e.g. including those linked to unions, while total now stands at approximately 2 trillion Euros, then conversely the same complain that the system is used as a tax dodge by wealthy…. or demands to allow substantive access at an early age for buying property….. Trying to crash the system.

Following is an article from former Australian Treasurer Wayne Swan in The Daily News owned by  giving good analysis and overview of how the benefits far outweigh any costs, keep budgets balanced and retirees comfortable, whether they have superannuation, or not.

‘From The New Daily Australia:

Wayne Swan: Superannuation’s benefits continue to stack up as ideologues attack

It wasn’t all that long ago that for most people retirement meant just getting by on the pension.

No luxuries, no holidays, no spoiling the grandchildren. Such things were the preserve of a very lucky minority with generous pension plans attached to their salaries – airline pilots, professors, bank workers, public servants, police force members, and others.

For the rest, giving up work might mean living on the borderline between sufficiency and poverty.

Today, thanks to industry superannuation, working people can have a decent retirement, too. Ending centuries of age-related poverty is one of the biggest examples of social progress in our nation’s history.

Dare I say, giving people a couple of extra decades of economic security through superannuation has probably advanced the sum total of human happiness more than just about anything else an Australian government has done.

How otherwise sensible people could be opposed to this step forward for our society really is beyond me.

It shows you just how easy it is to forget the realities of life in the past – especially when you have a vested interest or ideological obsession in forgetting.

Ideological opposition

That’s where most of the opposition to industry superannuation is coming from: A small minority with ideological opposition to the equal representation model of unions and employers on a profit-to-member basis.

The main point to grasp is that the performance of industry superannuation funds isn’t what motivates them – because their performance is consistently superior to that of the retail funds. They just think that if unions are involved, it must be illegitimate.

Well, industry super is now middle-aged and after 40 years the first cohort of members who have had industry super for their whole working lives are starting to retire.

Ordinary people understand gains

This is why the opposition to industry super is doomed – ordinary people know what benefits it produces. And those with 40-year-old balances, built up by compounding interest during this era of steady and sometimes accelerated economic growth, are increasing in number every year.

That still isn’t stopping its opponents from trying to pull industry super down.

Without financial arguments to fall back upon, they are resorting to crude and misleading populist arguments that are getting more strident and desperate with every silly campaign. It takes several forms.

On the political right, the current argument of choice involves housing.

Putting money into super, they say, is stopping young people saving for a house. And if only those young people could get their hands on the super in their balances, they could go out and bid more for a house each Saturday morning.

But of course all this will do is bid up the price of housing, and rob them of compounding interest over their working life, meaning they will be worse off and even more exposed to the ups and downs of the housing market. Super helps them diversify their assets – a good thing if ever there was one.

This choice between a retirement and a house is a false choice indeed.

But one can see why the opponents of industry use it.

It’s emotive – and as we know emotion is easier to create than understanding. They know it’s a bloody brave politician who will tell millennials they have to choose between saving for a house and retirement.

But brave they must be, because raiding super for housing is like shutting down schools to pay for hospitals.

Sound investment decisions

The right’s other argument is that superannuation balances are being turned into piggy banks for do-gooders to raid for their pet schemes, like public housing and industry investment.

All funds are required by law to make investment decisions based on their projected returns to members. This law hasn’t changed and never will. Industry funds would never stand for such a change. Never.

On the left, different but no less populist and misleading arguments are being employed with increasing frequency.

One is that industry super, in fact all super, is a neoliberal plot that has effectively privatised the aged pension.

This is another nonsense. Industry superannuation didn’t come at the expense of the pension—the pension was raised significantly during its period of creation, as were other benefits to seniors. The dual existence of industry superannuation and a significantly higher aged pension is a double buffer against the vicissitudes of old age.

In the long-term, this so-called progressive populist critique of industry superannuation is as dangerous as the conservative populist critique it imitates. It’s a case of different sheep costumes but essentially the same wolf.

Far better off

Australians and Australia are far better off for four decades of the equal employer union representation model on a profit-to-member basis.

With each passing year, its future will be more certain, but there is still much work to do to combat the dangerous myths peddled by its opponents.

Fighting back against these misleading campaigns is one of the most important things for Industry fund leaders can do.

Wayne Swan is chair of Cbus. He was also Treasurer of Australia, and Deputy Prime Minister of Australia in the Gillard and Rudd Labor governments.’

For more related articles and blogs on Ageing Democracy, Australian Politics, Demography, Finance, Government Budgets, Koch Network, Pensions, Superannuation and Younger Generations click through:

Baby Boomer Bomb or Bubble is Ending – Retirement Income Planning

Population Pyramids, Economics, Ageing, Pensions, Demography and Misunderstanding Data Sets

Population Decline and Effects on Taxation, Benefits, Economy and Society

Pension Systems and Budget Sustainability

Immigration Population Growth Decline NOM Net Overseas Migration

Japan – Australia: Ageing Populations – Demographic Socio Political Comparison

Population Decline and Effects on Taxation, Benefits, Economy and Society

While Australian media, politicians and commentators obsess, through an inflated and nativist Malthusian view, about undefined immigration, NOM net overseas migration and population growth, the ‘elephant in the room’ is ignored.  The misdefined  ‘immigration’ that media obsesses about is mostly ‘churn over’ of temporary residents e.g. international students,  caught up in the NOM net overseas migration, as ‘net financial contributors’ to budgets through taxes paid to support increasing numbers of retirees; backgrounded by a commensurate decline in the permanent population’s working age cohort. 

Warning is that as baby boomers and oldies dominate electoral rolls, governments especially conservative, cater to the same cohorts at the expense of younger generations following which in future could include higher future taxes and lower public services.

Following are excerpts or summary based upon two articles from MorningStar’s FirstLinks newsletter focusing upon the demographic, economic and social effects of past baby booms, retirement, ageing, longevity and social services in a future with fewer working age tax-payers.

‘The populations of key countries are shrinking 

Michael Collins  17 June 2020

Released by US film producer Mike Moore, the documentary Planet of the Humans tells how renewable sources of energy are flawed solutions to mitigate the dangers of climate change.

About halfway through the documentary, a scientist laments that the environment’s biggest problem is that “there are too many human beings using too much, too fast”. The warning here and elsewhere in the documentary is that only a reduction in the world’s population can save the planet.

Declining birth rates

Well, in that case, the battle against climate change is winnable because the populations of many countries are shrinking. The OECD says that only three (Israel, Mexico and Turkey) of its 37 members have fertility rates above the replacement rate of 2.1 children per woman.

The UN reports the reproduction rates of all European countries are below replenishment levels. The EU forecasts that the populations of 12 of its 27 member countries will shrink in coming decades as only immigration props up numbers in the others. The World Bank predicts China’s population will decline by 100 million people by 2050, that East Asia’s will shrink from the 2030s and Brazil’s will contract from the late 2040s by when India’s population growth will be static.

Already dwindling are the populations of Russia (since 1992), Japan (first in 2008 and uninterrupted since 2010, see below) and Italy (since 2014). But for immigration, many Anglo countries with declining birth rates including Australia and the US would be shrinking population-wise too.

Many demographers say, if anything, the global bodies are underestimating the declines in population numbers. Social and economic forces that lowered birth rates in advanced countries are now universal across the emerging world. These factors include expectations of low infant mortality, rising female education, better career prospects for women, and urbanisation.

Fewer births in the emerging world, these demographers say, will see the world’s population diminish from a peak of between eight and nine billion people from around the middle of this century, whereas the UN forecasts the world’s population to increase another three billion to 10.9 billion by 2100.

The economic impact

The consequences of declining populations could be significant and mostly grim, any environmental benefits aside. Fewer births reduce what is probably the biggest motivational force in society; young parents seeking a better life for their children. In economic terms, declining populations are a bigger challenge than ageing populations because the former herald a lasting shortfall in private demand that points to lower output, even if GDP per capita might rise. Businesses will invest less if fewer people are consuming less. Such outcomes hint at the ‘Japanification’ of economies; deflation and almost permanent recessions for economies that prove impervious to stimulus.

Government finances face difficulties as the shrinking and ageing of populations accelerates because a smaller working-age cohort must support more elderly people who cost more health-wise. A stretched bunch of fewer workers could lead to reduced innovation and productivity gains. Government policy, especially with regards to taxation and social-security spending, could become skewed towards the elderly rather than productivity should older voters form a voting bloc.

Turning point: the 2020s baby boom retirement surge

Bernard Salt   24 March 2021

And so, what can we expect of the balance of the 2020s beyond the coronavirus?

It is likely for example that there will be greater use of technology and a lesser engagement with China. It is also possible that the community will take a renewed interest in hand washing, in appreciating family, in having the freedom to travel beyond Australia. These ‘reactions’ to events triggered by the pandemic are logical enough, I suppose, but there is something else sitting out there, lurking (with intent) in the middle of the decade.

Baby boom must lead to a baby bust

It is something demographers have known about for decades. Indeed, there have been books written (by demographers) about its impact. This menace goes by the name of the baby bust. If you accept there was a baby boom in the 1950s then 70 years later the limitations of human life dictate that there will be, there must be, a baby bust.

In a crude sense, the baby bust takes effect when baby boomers press into their 70s and – how shall I put this? – then they die off. But the baby bust is more than this. It will trigger workforce and funding issues that will need to be managed. More baby boomers aged 65 exiting the workforce than 15-year-olds entering the workforce leads to a diminution of workers and, some would say, also of taxpayers.

The number of people entering the so-called ‘retirement age’ of 65+ has ramped up over time. In the 1990s, for example, Australia’s 65-and-over population increased by an average of around 40,000 per year (see graphic). Retirees in this decade were born in the 1920s.

But 30 years later in the 2020s it’s a different story. The number of Australians being added to the 65+ cohort every year will rise during this post-pandemic decade passing 126,000 in 2021, peaking at 137,000 in 2026, before subsiding to 105,000 in 2030. This surge in the retiree population is caused, of course, by the great baby boom of the 1950s.

Impact of surge into retirement towards five million

The transitioning of the baby boom population from working age to retirement stage will ‘play out’ in the post-covid 2020s. The retirement cohort will continue to expand for another five years creating a community culture that is hyper-sensitive to retirement issues.

It could be argued that the social impact of ‘retired Australians’, based on underlying demography, will not begin to subside until later in the decade.

In this context the period 2021-2027 will represent the peak years of the Australian baby-boom retirement surge. Not only is this an issue of the retirement cohort’s collective voice (now close to five million) but this will also translate into an elevation of retirement issues such as concerns about health care and aged care and access to various aged-based financial concessions.

Baby boomers will not age as past generations did

Baby boomers in retirement, peaking in the middle of the 2020s, but extending in progressively fewer numbers into the 2030s and 2040s, will be determined not to age as their parents aged. They are already railing against ageism. Many are remaining in the workforce. Some are re-partnering later in life. Some are choosing to remain single (but not lonely) in life’s later years.

The concept of a large proportion of the population living beyond the age of 65, being dependent upon the goodwill of younger cohorts, and the reliability of governments to uphold the social contract implicit in the idea of ‘ageing with dignity’ are all new to humanity.

What to do with the aged wasn’t a problem for previous generations in history.

It could be argued that the 2020s really is a turning point and not just because of the new world that is likely to emerge from the post-pandemic ashes, but because of the longevity of life for perhaps one-fifth or one-sixth of the Australian population.’

For more articles and blogs about Ageing Democracy, Australian Politics, Demography, Economics, GDP Growth, Government Budgets, Immigration, NOM Net Overseas Migration, Population Growth,  Populist Politics, Statistical Analysis, Superannuation, Taxation and Younger Generations.