Why the age pension is here to stay

Australians can rely on the age pension to provide retirement income.

The age pension has long been a central part of Australia’s retirement system. It was introduced back in 1909, making Australia one of the first countries to put such a pension in place.

The pension plays a vital role in raising the standard of living for retired Australians. The independent Retirement Income Review made the point that it is more than a safety net – it also guards against the possibility of outliving your savings.

A separate payment, the disability support pension, is set at the same level as the age pension. It provides financial support for people who aren’t old enough for the age pension but who have sustained a permanent physical, intellectual or psychiatric condition that prevents them from working. 

But unclear messaging has left many Australians concerned the age pension could be wound back, or even abolished entirely.

This concern may lead to a lower quality of life as people become reluctant to spend their money, believing they may need it one day if the government-funded retirement income disappears.

Treasurer: ‘We must do more to reassure Australians’

Recently Treasurer Josh Frydenberg conceded that the government hadn’t done enough to clarify that Australians can plan for their retirement with the knowledge that the age pension will still be there to provide retirement income.

“Clearly, we must do more to reassure all Australians that this concern is unfounded,” he said.

The age pension is sustainable and strongly supported by both major parties. Any politician proposing to reduce or even remove it would face an inevitable backlash to their career.

“People do worry, but this is an area that’s really safe,” says Paul Henman, a professor at the University of Queensland. 

The age pension is sustainable

The age pension is a central part of Australia’s retirement income system. For people who were lower or middle-income earners during their working life, it’s their primary source of income.

Two recent reports have found that the cost of the age pension, as a proportion of the gross domestic product, will actually decline going forward.

A report from Actuaries Australia reached the same conclusion – that the cost (to the government) of the age pension is decreasing.

These findings put to rest fears that the age pension will be abolished because it will cost Australia too much as the population ages.

Politicians have given unhelpful messages

At different times, politicians have made unclear statements on whether the age pension will continue in its current form, or argued that the government should reduce its ‘reliance’ on the age pension.

These comments may have clouded the more important point that Australians can plan for their retirement knowing that the age pension will continue.

The age pension is not going anywhere, and that’s a good thing for public policy in Australia

Brendan Coates, Grattan Institute

David Knox, senior partner and senior actuary at Mercer, says that both major parties should make a joint statement that the age pension will always be there. Further, he says, they should agree the payments will keep pace with a percentage of average weekly earnings. 

A joint message like this would give greater clarity to Australians as they plan for retirement.

Brendan Coates, economic policy program director at the Grattan Institute, says that politicians could do more to reassure Australians.

“It is incumbent on the government to get that message out there,” he says. “The age pension is not going anywhere, and that’s a good thing for public policy in Australia.”

Removing the pension would be political self-destruction

While there is a perception that politicians may seek to remove the pension in future, Henman says that would be an intensely unpopular move.

“The key thing in all of this is that it’s really poisonous to change too much about the age pension,” he explains.

“Age pensioners represent a large proportion of the voting population. They’re a very strong and conservative voter bloc, but they will change their vote if their pension entitlements are changed.”

Coates agrees. “Cuts to the pension would [be] an incredibly tough sell for any party,” he says. 

“An ageing Australia means that any political party that tries to reduce or abolish the pension can expect to be punished at the ballot box.”

Any political party that tries to reduce or abolish the pension can expect to be punished at the ballot box

Brendan Coates, Grattan Institute

One key feature of Australia’s age pension is that the family home is excluded from the means test. This has been the case since 1912.

Henman says the public backlash against anyone seeking to wind back the age pension can be seen in debates over the family home means test. 

Policies have been proposed which would see the family home included in the means test to ensure more equity in the system. 

As it stands, people are able to live in expensive family homes and leave these properties to their children, all while being eligible for the age pension. 

Attempts to address this issue have proved “politically toxic”, says Henman.

Media, industry also sending mixed messages

Australia’s ageing population has been covered extensively in the media. It’s possible that headlines about the “pressure” this puts the pension under have contributed to a perception that the age pension isn’t sustainable.

Coates says that the way the super industry frames its role in the retirement system means it isn’t surprising that some people are concerned the age pension will disappear. 

“I think (that fear) comes from 25 years of people being told that super’s purpose is to replace the age pension and that the age pension is unsustainable,” he says.

“When you have an industry whose stated objective is, in part, replacing the age pension and they’re telling everyone it’s inadequate, I think we shouldn’t be surprised that a lot of people think the age pension won’t be there when they retire.”

Is the age pension eligibility age rising?

One possible source of confusion around the age pension was a now-abandoned announcement that the start age would move to 70.

The age you can get the pension varies slightly depending on when you were born. If you’re unsure when you can get the age pension, Moneysmart’s super and pension age calculator can give you the answer.

Tweaks to the pension age have been relatively minor given the rise in life expectancy since the system began. People now live 25 years longer on average than when the original eligibility age was set in 1909. 

Tweaks to the pension age have been relatively minor given the rise in life expectancy since the system began

Another recent reform to the age pension was a tightening of the means test in 2017. ACOSS supported this change on the grounds that it made the age pension fairer. The organisation reported that around 170,000 part pensioners got an increase as a result of the change, while most of those who got less were home-owning couples with assets (besides their home) worth between $500,000 and $1,000,000.

But it doesn’t follow from these reforms that the pension isn’t sustainable or that the government will one day abolish it.

The bottom line

“You can understand why there’s confusion over the future of the age pension, given the unhelpful and unclear messages sent by some politicians, super funds, advisors and media members,” says Super Consumers Australia director Xavier O’Halloran.

“This misinformation could see retirees have a lower standard of living as they over-save in the belief that the government will cut the age pension. 

“The good news is, there may be tweaks to make it fairer, but the age pension is going nowhere.”

This content was produced by Super Consumers Australia which is an independent, nonprofit consumer organisation partnering with CHOICE to advance and protect the interests of people in the Australian superannuation system.