Australia’s comprehensive superannuation system means spending on the age pension will decline as a proportion of GDP by 2062-63 despite a doubling of Australians aged 65 and over, according to the government’s Intergenerational Report to be released on Thursday.
Expenditure on age and service pensions is projected to fall from about 2.3% of GDP in 2022–23 to 2% in the early 2060s.
On the other hand, superannuation tax concessions are projected to rise substantially as a proportion of GDP – from about 1.9% in 2022–23 to 2.4% in 2062–63.
These tax concessions are projected to overtake spending on the age pension in the 2040s. The increase is driven primarily by earnings tax concessions rising from about 1% of GDP in 2022–23 to 1.5% in 2062–63.
The figures will refocus attention on the generous tax breaks for superannuation, although attempting change is politically fraught. Both the former Coalition government and the current government faced sharp backlashes when they tightened concessions.
The intergenerational report puts the number of people 65 and over at about nine million by the early 2060s – up from nearly 4.4 million in the 2021 census.
But a smaller share of them will receive the pension or another income support, falling by about 15 percentage points by 2062–63.
The age pension is among the federal government’s largest spending programs, so the decline will significantly help the budget’s sustainability, the report says.
It says the superannuation system is “maturing”. About 17 million people own a total of about $3.5 trillion in superannuation assets. By the mid-2040s most people retiring will have received the Superannuation Guarantee at 9% or more all their working lives.
Australia’s compulsory superannuation system was introduced in the early 1990s by the Labor government. It provided for regular rises in the rate although the Coalition paused the rises for some time. The rate increased from 10.5% to 11% from July 1.
“Australia currently has the fourth largest pool of retirement assets in the world, with total superannuation balances projected to grow from 116% of GDP in 2022–23 to around 218% of GDP by 2062–63,” the report says.
Treasurer Jim Chalmers said the fact spending on the age pension would fall while the population aged was “the intergenerational genius of super”.
“Super is delivering on its promise – providing a better retirement for more Australians and a better outcome for the budget over the next 40 years. Labor built the super system and we’ve always worked to protect it and make it stronger,” Chalmers said.
Chalmers has been anxious to encourage superannuation funds to invest in areas such as affordable housing, but there is some reluctance by them,
Assistant Treasurer Stephen Jones said the report “shows that our super system is improving the lives of Australians.
"Our government wants to make it even stronger by boosting performance, improving access to retirement advice and improving the service members receive from their super funds.”
Jones has repeatedly been blunt about superannuation funds needing to lift their game.
He said in a speech in July: “Service standards in the superannuation system need to improve. Funds have to do better. And now.” Five million Australians were retired or nearing retirement, with the average Australian now retiring with more than $200,000 in super.
“When the time comes to retire, there are huge decisions to be made about how to manage that money and get the most out of it. Australians expect that their super fund will be ready to help them navigate it.”
But a report into complaints handling had found nearly 20% of funds failed to consistently respond to complaints within the mandatory 45-day deadline, and 80% of funds were poorly set up to deal with systemic issues, Jones said.
Chalmers is releasing the Intergenerational Report in stages, before its formal unveiling on Thursday, and wants to use it to kick start as much discussion as possible about Australia’s long term economic directions and issues, as well as its budgetary challenges.
THE SHORT TERM CHALLENGES
In the short term, the government still remains firmly focused on inflation – which has moderated encouragingly – while facing an economy which is set to slow substantially over coming months, after the multiple interest rate rises.
Growth in the coming three or four quarters is expected to be flat: the government hopes a recession can be avoided although a “technical recession” (two quarters of negative growth) is not out of the question.
Consumption, which is 60% of the economy and a “lagging” indicator, is coming off. Consumption in Australia is weakening faster than in some European countries where people are on fixed interest rates. The current high level of net migration, with students and tourists returning faster than anticipated, is preventing an even greater fall in consumption.
Unemployment has started to rise and is expected to increase further, although the government doesn’t expect it to spike.
Externally, eyes are particularly on the Chinese economy, which is now softer than was earlier anticipated.
Looking to the longer term, the government this year will release its employment white paper, a migration review, and an economic strategy for engaging with south east Asia, looking for opportunities for investment to flow in both directions.
Work is being done to encourage investment generally – particularly important in the Australia’s transition to cleaner energy - which will include streamlining processes under the Foreign Investment Review Board.
Beyond the Stage 3 tax cuts, which Anthony Albanese has said repeatedly will go ahead, the government is not contemplating other income tax changes this term. And despite the Business Council of Australia’s call for comprehensive tax reform, the government favours any longer term tax reform to be in bite size increments.
While much talk is around the need to boost productivity, the government stresses that while vital, this is a complicated challenge, with productivity in the care economy hard to measure, and slow productivity growth a feature internationally.
Michelle Grattan does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.
This article was originally published on The Conversation. Read the original article.
