The end August release of the 2023 Intergenerational Report (IGR) was met with extensive media coverage. And at the conclusion of the launch of this report, Treasurer Jim Chalmers stated that the decumulation phase of retirement will be his next major focus.
So retirement income and retirement spending is now officially the ‘next big thing’.
This week we explain the background to the IGRs, why these reports matter for those in, or heading towards, retirement and how you might use the findings to guide your own income management.
Why do we need Intergenerational Reports?
The first IGR was published by then Treasurer, Peter Costello, in 2002. He felt that Australia needed a longer term discussion about the economic future than that afforded by typical three-year electoral cycles. It was one of the more visionary moments in recent politics, as it set the standard for future governments to confront their current spending as well as what might be needed in the future. Prepared by Treasury, the timespan examined in each review is 40 years. Initially set to be released every five years, this has varied a little, but since 2002 reports have been released in 2007, 2010, 2015 and 2021. The latest IGR was brought forward by three years by the Treasurer in order to spark a debate about choices he believes Australians will need to make sooner rather than later.
What do IGRs examine?
This is a broad look at the nation’s finances through the lens of the most important aspects of potential growth or headwinds for our economy. This year’s report has identified the five critical future challenges as:
- Population ageing
- Digital and data technology
- Climate change and the move to net zero
- Increased demand for care and support services
- Increased geopolitical risk and fragmentation
Which aspects matter most for you?
The main area of focus from a retirement point of view is the projections on how a rapidly ageing population will be funded. As noted in the 2023 IGR, about 70% of those of Age Pension age are supported by government benefits, with about 30% self-funded. The report notes some key movements in the funding of retirees:
- The proportion of GST spent on Age Pensions will decline
- The proportion of GST spent on super concessions (contributions and earnings) will increase
- The proportion of those on full Age Pensions will decline
- The proportion of those on part Age Pensions will increase, as will
- The proportion of those who are supported by other means (super and private savings).
Separately, the report noted that there will be a growing need for workers. The Treasurer also referred to an Employment White Paper which is in progress. He noted the previous change to benefits that allows more older workers to work extra hours (Work Bonus Credit), so it can be assumed that this will also be a strategy under discussion.
Should this information change how you view your income?
Whilst it is hardly helpful to react to the stock market or government initiatives on a daily basis, the longer term trends revealed in a report such as the IGR are very useful.
For instance, the trendline on how much the Age Pension costs the country as a proportion of GDP is declining. It’s a handy reminder that this government benefit is guaranteed. There is no doubt that it will be delivered on time, over the next 40 years. And that, at $27,664 for singles and $41,704 for couples (combined), it is a significant and dependable contribution to most Australian retiree households. As it is linked to price rises and wage increases, the Age Pension is also largely protected from the vagaries of the financial markets
The 2023 IGR also highlights expected increases in lifespans, with the Treasurer stating that Australians are living longer, more active lives. This obviously means there may be a few more years that individuals will need to fund, but bonus years should realistically be seen as a positive, not a negative. (Knowing how extra years will affect your own savings can be easily calculated using our new Retirement Essentials Life Expectancy Calculator.
The need for higher productivity includes a need for more workers, which immigration is unlikely to completely cover. After years of ageism and other general negativity about older workers’ capacity and capabilities, it seems they are now highly desired. But if taking on extra hours or days means loss of pension entitlements for the vast bulk of retirees, then this source of labour will not be successfully activated. Hence the Employment White Paper and the allusion to the previously increased Work Bonus credit. This amount is currently $11,800 but it is due to be reduced back to $7800 on 31 December, 2023. Watch this space as this change now seems debatable – it could be held at the higher level for a while longer.
The cost of health and related care is the very big ticket item in future budgets, so incentives for Australians to maintain health insurance are likely to stay in place. The next frontier for discussion is of course aged care – and who should pay for it.
It’s also worth noting the question of equity. Currently Australia is the third ‘meanest’ in its expenditure on the Age Pension compared with other Organisation for Economic Co-operation and Development (OECD) nations. IGR 2023 tells us that, over time, this proportion of our GDP will decrease further.. but what is increasing is the important role that super is going to play in funding retirement income over the coming years. As promised 30 years ago super will start to take the pressure off the Age Pension.
What do you think?
Was there any aspect of the IGR of particular concern or interest to you? Is the base rate of the Age Pension sufficient for retirees to live an adequate lifestyle? Are renting Age Pensioners able to survive as rents increase by more than CPI?
Which changes do you believe we need to make now to ensure a better future?
You can also book a consultation to review your retirement income forecast over the coming decades.