Australians enjoy one of the longest life expectancies in the world, with people born after 2010 living, on average, more than 80 years.
However, the ageing population presents long-term fiscal challenges to the sustainability of social welfare systems of advanced economies such as Australia and especially the cost of providing age pensions.
The Australian government’s Intergenerational Report 2023 suggests the number of people aged 65 and over will more than double over the next 40 years. But economic growth is forecast to be slower than the previous four decades because of lower population growth and reduced workforce participation due to ageing.
In response, the federal government has increased the pension age from 65 to 67, possibly increasing to 70 by 2035.
New research led by Professor Hanlin Shang from the Department of Actuarial Studies and Business Analytics at Macquarie Business School, suggests the pension age should not be fixed, but increase at a rate that maintains a stable old-age dependency ratio (OADR) level feasible for working Australians.
A fair and equitable pension system goes beyond a one-size-fits-all approach. For instance, it might allow disadvantaged groups in the Northern Territory to access their pensions earlier than more advantaged groups.
The OADR reflects the number of working-age individuals available to support each retiree and is used as a measure of the financial burden of the age pension on the Australian workforce.
Professor Shang’s research paper, Is the age pension in Australia sustainable and fair? Evidence from forecasting the old-age dependency ratio using the Hamilton-Perry model, also finds a uniform increase in the pension age is neither fair nor equitable.
“Life expectancies vary significantly across Australian states, influenced by factors such as gender, race, and ethnicity,” Professor Shang says. “A uniform pension age for all Australians may therefore be less effective, as it fails to account for these demographic differences.”
Professor Shang’s findings use the Hamilton-Perry model to forecast each state and territory’s unique demographic characteristics that are often overlooked due to a lack of available data.
Professor Shang says what constitutes disadvantage differs across Australia, reflecting variations in average remaining life expectancies and the OADR.
“An ideal OADR is around 23 per cent, suggesting that taxes from every 100 working-age people would fund the pensions of 23 retirees,” Professor Shang says.
Professor Shang says 23 per cent is not a “magic” number, but rather an estimate of the number of working-age people needed to support one retiree.
“Given the rising life expectancy and declining fertility rates, one approach to addressing the seemingly increasing old-age dependency ratio is to gradually raise the pension age,” he says. “This would effectively extend the working-age period, helping to balance the ratio.”
However, not all people over the pension age threshold are eligible to receive it, relying instead on superannuation. Self-funded retirees may also cease paid employment before reaching the pension age, which could impact labour force participation.
Professor Shang says the greatest disparity in pension fairness exists between the Northern Territory, which has the lowest average life expectancy in the country, and the Australian Capital Territory, where people tend to live longest.
“This means that, on average, residents of the ACT are expected to live longer than those in the NT, resulting in a higher average demand for pension funds over their lifetime,” he says.
Further, Professor Shang says disadvantaged residents in the NT primarily include Indigenous people.
“Our findings indicate that the NT has the lowest average life expectancy in Australia,” he says.
Professor Shang’s research suggests access to the age pension, which is currently set at 67, should not be uniform, but vary between the states and territories.
“A fair and equitable pension system goes beyond a one-size-fits-all approach,” he says. “For instance, it might allow disadvantaged groups residing in the Northern Territory to access their pensions earlier than more advantaged groups.”
Hanlin Shang is a Professor in the Department of Actuarial Studies and Business Analytics at Macquarie Business School.
