The costs of an ageing population keep growing, but who's going to pay?

Extract from ABC News

Analysis

By chief economics correspondent Emma Alberici

Posted about an hour ago

Photo: Baby boomers have been retiring in droves since 2011. (Pixabay)

Related Story: Labor's franking credit proposal may prompt retirees to move their super

In the post-mortem of Labor's election loss, calls to dump their franking credits policy have risen to a clamour.

On the ABC's Q&A program, audience member Paul Keighery not only labelled the plan to claw back taxpayers' money from older Australians a "monumental blunder", he asked the Opposition's finance spokesman for an apology for having even considered it.
When Jim Chalmers refused to resile from his party's previous position, an incredulous Tony Jones asked him "would you go back and drink that poison again?"
The politics may be tricky but future governments will have to confront the grim economic reality of the post-World War II baby boom.
Australians born after 1946 began to retire in huge numbers in 2011. Demand for the aged pension, aged care and health services have been rising commensurately.
The working age population is a net contributor to the federal budget. Older people, on the other hand, are the largest recipients of welfare, aged care and health care services.

Retirees are getting expensive

A report released last month by the independent, non-partisan Parliamentary Budget Office (PBO) warns the ageing population will exert "historically unique" pressure on the federal finances in the decade to 2028-29.
New figures in the report show that by 2028, Australians born between 1946 and 1964 will cost the Government more than Medicare does each year. Based on 2018 budget forecasts, the PBO estimates the cost of Medicare to be $32 billion in 2028-29. By then, lost revenue ($20 billion) and increased spending ($16 billion) on baby boomers will amount to $36 billion.
The number of working-age Australians for every person aged 65 and over has fallen from 7.4 in the mid-1970s, to 4.4 in 2015. That figure is projected to fall to just 3.2 in 2055.
Economists and policy makers need to find new taxpayers and increase workforce participation to support the hordes of older people entering retirement.
The ageing population means that by 2028-29, the PBO estimates there will be 600,000 fewer workers.
While the Australian population has been ageing, life expectancy has also improved.
As far as the government's fiscal fortunes go, it's a perfect storm. The pension was introduced in 1909 with 65 set as the qualifying age for men.
Since then, male life expectancy has skyrocketed from 55 to 80 but, the PBO observes, our "retirement behaviour has remained anchored to the qualifying age" which is reflected in the sharp decrease in labour force participation at that point.

Video: Stephen Gledhill, with wife Julie Gledhill, says Labor's proposed franking credit changes are "unfair" and "hostile". (ABC News)

The boomer vote

Baby boomers accounted for close to one in four of the 16.4 million people who cast a vote on May 18.
The swings against Labor were most significant in seats with a higher proportion of over 65s. The ABC's chief election analyst, Antony Green, thinks the franking credits policy was always going to upset the grey vote.
"Importantly for Labor's task of selling changes to negative gearing and capital gains tax, the proposal grandfathered all properties currently negatively geared. No-one would be directly worse off due to past investment decisions," he said.
"The problem with the franking credits change was that it was not grandfathered. Retirees could be worse off due to investment decisions made under the existing rules.
"It was much easier to paint the change as a tax grab and turn the issue into a scare campaign where even retirees who didn't have franking credits thought they were to be hit by a 'retiree tax'."
Green notes some of the swings in seats with large retiree populations point to older voters latching onto the idea that there was to be a so-called "retiree tax".
It would indeed be audacious to ever again propose policy that winds back current payments to seniors, but some economists think the electorate could have been swayed to support the policy had existing arrangements been protected.

Paying for the rising costs of aged care

Health economist Lynne Pezzullo says the government needs to establish a three-pillar funding strategy for older Australians within the next five to 10 years. She says the government might consider quarantining 3 per cent or more of superannuation balances to put toward the rising costs of healthcare and aged care services.
She is also optimistic about the future work prospects of older Australians, as improvement in health outcomes will mean a greater capacity to keep working
But whatever policies are adopted for future retirement, the important thing is not to disrupt a retiree's current arrangements.
"You have to remember that policy is made in its time, and you have to grandfather things because people make decisions about their lifestyles based on policies at the time," she said.
"You can't change choices people have made when they're now old, retrospectively. Anything introduced needs to begin and be a generational change that young voters understand.
"Being a mother of four children in their 20s, I don't think many of them expect that the government is going to provide for them in their old age, so I think to try to change the expectations of baby boomers may be not the way to go."

Superannuation hasn't done its job

When Paul Keating introduced compulsory superannuation in 1992, the whole point was to wean older Australians off the public purse and encourage economic independence in retirement.
Following the recommendation by the Financial System Inquiry, the Coalition has enshrined in law that the goal of super is to "provide income in retirement to substitute or supplement the age pension".
When John Howard won government in 1996, the number of Australians over 65 paying income tax was 27 per cent. A once-in-a-generation mining boom provided the funds to deliver tax-free superannuation and higher pensions.
A policy designed by Mr Keating to avoid the double taxation of share dividends was expanded so retiree shareholders who pay no income tax still receive a tax refund. Australia is still the only country in the OECD to do this.

Thanks in large part to the Howard government's generosity, the number of Australians over 65 paying income tax today has fallen to 17 per cent.
Until changes introduced by the government in 2016, superannuation had also become a lucrative tax avoidance vehicle for the wealthy.
As assistant treasurer, Kelly O'Dwyer copped a lot of flak from her considerable cohort of grey voters in Higgins when she introduced laws putting a ceiling on the amount of tax-free superannuation people could accumulate before retirement.
There is now a cap on retiree superannuation accounts of $1.6 million for singles and $3.2 million for couples. Even with low investment return of 2 per cent that still provides for a $32,000 a year income for a single and $64,000 for a couple while protecting their nest egg and the family home.
Woe betide the politician that dares to suggest older Australians consume their lump sum or sell assets in retirement.
Their children, who stand to inherit all that, would also likely punish them at the ballot box.