Pension Spending is too high

Tony Shepherd, Chair National Commission of Audit, talks about pension spending being way to high and what needs to be done to curb it.

Introduction Pension spending is too high

Ross Greenwood: Welcome back to Work Life Money, right around Australia. Now Australia, as we understand, is got a fundamental problem of an aging society. That aging society means the more people are turned of pensionable age, in other words, they qualify for an age pension, the more money that comes out of tax payers pockets. The issue is that Australia does not have a rapidly expanding younger population.

If it did and all those people were paying taxes, we might be okay. The problem fundamentally is that if you’ve fewer people working and paying taxes to support the people who are retired and collecting a pension, then you’d be okay, but we don’t have that. We’ve got quite the opposite: that fewer people are working to support the people who are retiring. It’s one of these things we are a first world nation, one of the wealthiest in the world but we have a problem.

Unless we address that problem in some way, it’s either through an increased population at the younger age or we somehow get tighter on the older generation, something is going to give. Now, this message is being put out by one of the key business leaders in Australia, but also the man who chaired the government’s Commission of Audit. He keeps telling people this; people keep on refusing to listen properly. I thought we’d get him on-air now. That man, of course, is Tony Shepherd, who’s on the line right now. Many thanks for your time, Tony.

Interview – Tony Shepherd

Tony Shepherd: Good afternoon, Ross. Great to be on.

Ross Greenwood: You and I have spoken many times about this but the aging of Australians population is really something that most people, especially those who are getting older, almost refuse to acknowledge. They figure that the money will be there forever, that life can go on as it was. But something ultimately is going break. Doesn’t it?

Tony: It does. I think it’s our largest single national challenge because it’s what’s driving the increase in welfare payments; it’s what’s driving increase in heath payments; it’s lowering our productivity. We’ve got five people working for everybody retired now. By 2050, we’ll have 2.7 people working for every person retired. Those 2.7 are going to have to do the work of five just to keep pace with our current level of prosperity. Frankly, immigration is at a reasonably high level. I don’t know whether from a social cohesion point of view we could take on anymore per annum without a reaction from the community.

We’re on the horns of a dilemma. We really do have to find ways to deal with it. One of them might be we might have to raise the retirement age. When we set 65 as the retirement age, the average life expectancy for a male was 64. [chuckles] They were pretty smart in those days. But now the average life expectancy I think is 83, so it’s grown significantly. We might just have to bring forward the increase in the retirement age. I think it’s going to 67 next and then to 70.

Ross Greenwood: Not being too rude about this Tony. You are almost living proof of the fact that people live –

Tony: I’m 72. I work 6 days a week, so it hasn’t killed me yet.

Ross Greenwood: No, that’s exactly right. It’s not going to kill — In fact, you’re invigorated by this.

Tony: Hard work never killed anybody.

Ross Greenwood: Because I look at US senators and US public officials who are well into their 70s and sometimes even into their 80s, and you sit there seeing these people living and working. It’s almost as though they are revered. In our society, a person gets to 50 and 55 and we speak to people-

Ross Greenwood: And you run them off.

Tony: And you’re almost thrown on the scrap heap.

Tony: Donald Trump’s 72. He’s running the largest Western nation in the word in terms of economic power and political power for that matter. I think we’re a bit too quick to pension people off.

Ross Greenwood: I want to get back to those numbers. This is just to really ram it into people. Think about this; today there will be four a half people working today to support one person in their age retirement years. But in 2050 or so, only 2.7 people working to support each Australian in their aged years and there’s your problem. You can either have people working later in lives. You can have more younger people coming in to try and buff out your taxable area, but it makes it very difficult all ways round.

Tony: It does. The other thing to do is to get greater participation. If we can move to get more people post 65 working or post 60 working and get to the best international averages for modern democracies, we’ll increase significantly our workforce. If we get a bigger share of women working and get to the best international averages, we will again improve and lift our workforce.

Of course, obviously with youth unemployment particularly in areas like Western Sydney, if we can get youth employment up to the best international averages for a developed country, then that’s another way of getting a greater increase in our workforce which we will need in the future. There’s many levers that we need to pull. Of course, we also should look at the case of age pension, examples of middle-class welfare in terms of — I believe that including the value of the family home above a particular level in the assets test would be fair and reasonable tax payer.

Ross Greenwood: Tell you what. These are all big good political decision that are to be made. Aren’t they Tony?

Tony: They’re hard decisions to make but you can’t keep kicking the can down the road.

Ross Greenwood: One thing you’ve indicated is Australia could be at risk of becoming the new Japan. I can always remember seeing economic studies saying the more rapidly that your population ages, the more that your economic growth is basically curtailed: it makes it harder to grow and all that type of thing. This is a reason why say India is one of the fastest growing nations in the world because they’ve got a very young population becoming more increasingly educated, a growing middle class, so the economy is going to grow for a very long period of time. That’s not the story in Australia.

Tony: No, it’s not. Look, when I talk about those numbers in 2050, that’s where Japan is now. Virtually, they’ve got zero to negative growth because of that age population problem. They’ve [sic] just haven’t got enough people working for the number of people that are retired, and so their economy is virtually standing still. They’ve got a reasonably good standard of living and life expectancy there, of course, is very high: they’re more into the 90’s than the 80’s. But the country not going anywhere.

For a country like Australia, which is relatively undeveloped, certainly outside of its capital cities, I think that’s a real concern from both an economic, social and a strategic point of view.

Ross Greenwood: The man who chaired the Commission of Audit for the Abbott Government, but also then ultimately has come up and put up this piece of research for Menzies Research Center which I should say is liberal aligned. But it doesn’t matter because Tony Shepherd’s been thoroughly independent all the way through his career and is continuing to be so now. It’s not necessarily the most popular line that might take politically, but it’s a realistic one there is no doubt. Tony Shepherd, we appreciate your time on the program.

Tony: My pleasure. Thank’s, Ross.

Super changes in the 2017 Budget

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