Australia: A world leader on intergenerational fairness?

David Kingman explores a range of government policies which suggest Australia has done more than most other countries to make its ageing population affordable

The Australian government has predicted that, like most developed countries, it will have to grapple with the challenges posed by an ageing population during the next 40 years.

Yet despite being known as “the lucky country” and having a famously laid-back national character, Australia is neither burying its head in the sand about this nor leaving the outcomes up to chance.

Rather, a series of policies have been created which rapidly seek to address these growing problems, as a result of which Australia may become a glowing example for the rest of the world to follow.

The scale of the intergenerational challenge

In January 2010 the Australian government published its third Intergenerational Report, which looked at the challenges facing the country between now and 2050.

Demography cast a pall over its findings, as the population was projected to both grow and age substantially. While at present there are only around 22 million Australians, this should rise to 36 million by 2050, in part because of continued high migration from the UK (currently the largest source of immigrants) and also from parts of Asia, especially India and China.

In the same time period, those over 65 will go from around 13% of the population now to over 22% – which is an even bigger increase than it seems because the size of the total population is going up. In numerical terms, the change would amount to around 5 million additional pensioners.

This is expected to reduce drastically their old-age dependency ratio, as by 2050 there will be only 2.7 Australians of working age for every pensioner, while today there are nearly 5.

The treasury predicts this will reduce the tax take while, at the same time, expenditure will have to go up, meaning they will go from having a very low national debt now to one which accounts for nearly 20% of GDP in forty years’ time.

Government spending will also change as the population ages, becoming heavily skewed towards the elderly: at present roughly a quarter of total government spending is directed towards age-related pensions, social care and health, but the treasury believes this will have risen to half by 2050.

An innovative range of solutions

These figures seem rather worrying, which is why it is impressive that successive governments have adopted strategies that should make the problems more affordable over the long-term.

Firstly, the Australian state pension is made more affordable by being heavily means-tested, with both a person’s income and assets being taken into account when calculating how much they should receive.

Secondly, Australia has the highest rate of coverage for company pensions in the world, owing to a unique scheme called the “Superannuation Guarantee”. Introduced in 1992, it made it compulsory for employers to annually pay 9% of the salary of each of their workers earning over A$470 (£334) a year into a pension fund, while tax incentives encourage the workers themselves to top this up by an average of 2–3%.

The result is that 95% of full-time workers in Australia have an occupational pension, whereas the figure is still only around 50% in Britain. The prolonged boom in the Australian stock market over the last ten years – fuelled by rampant demand for the country’s natural resources from China – has allowed Australians to quickly shake off the worst effects of the global recession, meaning the value of these pensions has continued to go up.

Collectively, they are worth around £800 billion, held in privately-managed funds that are free to invest wherever they like, creating a pool of capital for the rest of the economy.

However, their best feature is that they have facilitated a gradual transition towards privately-funded, rather than taxpayer-funded, retirements, as the value of a person’s superannuation fund is taken into account during the means-test for the state pension, so as the value of the former goes up the cost of the latter goes down.

Thirdly, the economic growth that the country has enjoyed over the last ten years has enabled the government to run budget surpluses, which it has invested in something called the Australian Government Future Fund. This is a government asset with a current value of A$67 billion, specifically created to address Australia’s unfunded pension liabilities, from which money cannot be withdrawn until 2020.

Unsustainable growth?

Of course, the one way in which Australian government policy is entirely retrograde with regards to the interests of future generations is that much of the economic growth which facilitates these projects has been generated by sending shipments of coal, metals and natural gas to China, where they are burned and smelted in ways that – some will argue – greatly increase the likelihood of environmental collapse during the next century.

As an arid land with many fragile environments, Australia knows the dangers of this more than most countries, brought starkly into relief by its experiences of both severe drought and biblical flooding in the last year alone.

The Intergenerational Report contains a number of strategies for managing the transition to a low-carbon economy, but this will remain a mirage while the country continues to have some of the highest per capita carbon emissions in the world, and continues to export the means of hydrocarbon pollution to other countries.

As a result, while future Australians may thank their ancestors for their shrewd management of the pensions time bomb, how they will feel about the way the present generation treated the environment is much harder to gauge.

Posted on: 28 July, 2011

2 thoughts on “Australia: A world leader on intergenerational fairness?

  1. Pete

    The way the Australian government have tackled the pensions conundrum that Britain seems to be hopelessly grappling with makes interesting reading, but if a higher superannuation fund eventually means a lower state pension, what is the incentive for employees to pay into it?

  2. Pete

    I think I’ve just answered my own question!

    “Superannuation is a tax-advantaged method of saving as the 15% tax rate on contributions is lower than the rate an employee would have paid if they received the money as income.”

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