12 May 2012

Governments of developed countries around the world are struggling with the ballooning costs of providing for the costs of retirement. Australia is no exception. Forecasts provided in the Intergenerational Report show that the cost of funding the aged pension is expected to rise from 2.9percent to 4.6 percent of GDP by 2050. (To access a copy of this report, click here). This is due to a combination of factors including people living longer, the rising cost of health care and the declining percentage of the population who are tax payers. Already the government has declared that it will increase the retirement age (qualifying for the aged pension) from 65 to 67 as from 2013. This is to be reviewed again in 2020. It is unlikely to be reduced.

Elsewhere the government is looking for other means of reducing the amount that has to be paid out as aged pensions. Given the pensions need to rise by the inflation rate just to maintain purchasing power, there is little scope to reduce the payment per person. Where there is scope is to reduce the number of people eligible to claim either the full or part pension. For those Australians nearing retirement this is a topic that should hold their attention. Michael Rice, chief executive of Rice Warner actuaries, has suggested that future governments look to target the family home as a way of both reducing pension entitlements and recouping monies paid out as pensions. In an article in today’s Weekend Australian, Rice suggests that governments could place a caveat over the homes of certain retirees who receive the aged pension. At a later stage when the house is sold, presumably the government will be first in line to be repaid the amount of money it outlayed in pension payments. Rice proposes that this could apply to retirees’  homes with values in excess of $1 million.

While we consider it unlikely that such a proposal would be adopted in the near future, it is indicative of the sort of thinking that is gaining currency in Canberra at the moment. Expect to hear a lot more over the coming years as governments of both persuasions come to grips with the rising costs of providing for an aging population.

Hytrin