Australia’s Demographic Challenges, Australian Government, The Treasury.


A More Flexible and Adaptable Retirement Income System


The Retirement Income System

The Government's retirement income policy is designed to provide incentives, flexibility and security. Retirement income policy should encourage people to achieve a higher standard of living in retirement than would be possible from the age pension alone, while ensuring that all Australians have security and dignity in retirement. Australia's ageing population also highlights the need for retirement income policy to be fiscally sustainable in the longer term.

The World Bank has broadly endorsed Australia's three-pillar approach to providing retirement incomes. This is based on:

  • a taxpayer funded means-tested age pension for people who are unable to fully support themselves in retirement;
  • a minimum level of compulsory employer superannuation contributions made in respect of those in the workforce; and
  • voluntary private superannuation and other savings.

The three pillars

The age pension has been the cornerstone of Australia's retirement income system since 1909. The age pension provides a modest retirement for those people who are unable to fully support themselves. It is not designed to provide a replacement for income achieved over a working life. The age pension will continue to support living standards for the majority of people in retirement.

The maximum single rate age pension is currently $11,772 per year ($19,656 for a couple).1 The actual amount a person receives depends on their other income and assets. The means test underpins the sustainability of the age pension. Under the means test, people who have significant resources must draw on them before calling on the community for assistance through the age pension. These arrangements maintain an equitable, affordable and sustainable age pension. Without the means test, current age and service pension expenses would increase by between $6billion and $7 billion a year.

Pensioners also receive the Pensioner Concession Card which entitles them to cheaper pharmaceuticals and a range of State/Territory and local government concessions, including transport concessions and discounts on utility bills, council rates and vehicle registrations.

Retirees ineligible for the age pension can receive a Commonwealth Seniors Health Card if their taxable income is below $50,000 per year (single) or $80,000per year (couples). This card offers the same concessions on pharmaceuticals as the Pensioner Concession Card as well as a telephone allowance.

The Government has legislated to set the maximum single rate age pension to at least 25percent of Male Total Average Weekly Earnings, with proportional increases to the partnered pension rate. This guarantees pensioners will continue to share in improvements in general community living standards, as measured by wages.

Compulsory employer superannuation contributions comprise the second pillar of the retirement income system. The Superannuation Guarantee was introduced in 1992 and the ten-year phase in of the Superannuation Guarantee minimum contribution rate was completed on 1July2002 with the rate now at 9percent. The coverage of superannuation in Australia has grown significantly as a result of the introduction of the Superannuation Guarantee system. The latest estimates show that 98percent of employees with leave entitlements and 72percent of casual employees are covered by superannuation.2

The Superannuation Guarantee directs some of an employee's current remuneration into improving their standard of living in retirement. The current rate of 9percent provides a balance between employees forgoing current consumption for increases in living standards after retirement. On this basis the Government is not inclined to increase the rate. Increasing the rate would impact most on lower income earners through a reduction in the possible growth in their real take-home pay.

The Government believes that individuals should be able to choose whether they wish to make additional savings over and above the Superannuation Guarantee. The Government supports this approach by providing tax concessions for voluntary saving both within and outside of superannuation. This constitutes the third pillar of the retirement income system. Around 27percent of employees already receive employer contributions (including salary sacrifice) greater than the Superannuation Guarantee level, while 20percent of all employees make voluntary post-tax contributions.3

The Government appreciates that some people prefer to save for retirement outside superannuation. For example, the self-employed who own businesses may choose to save for retirement by building up the value of their business, in addition to or instead of contributing to superannuation. In recognition of this the Government provides capital gains tax relief for people who invest the proceeds from the sale of their business into superannuation.

The Superannuation Guarantee and other retirement savings will allow Australians to retire with higher living standards than previously. The age or service pension will still remain an important part of these higher living standards. However the number of people receiving a full rate pension will fall. Around 54percent of people of age pension age currently receive a full rate pension; another 28percent receive a part-rate pension; and 18percent do not receive a pension. By 2050, all employees will retire after having received the full 9percent Superannuation Guarantee over their working life. This is expected to result in the proportion of people aged 65 and over receiving a full rate pension falling to around one third, and the proportion of people not receiving the pension to rise to around 25percent. The proportion of people receiving a part-rate pension is expected to increase to around 40percent.4

Impact of demographic change

Over the next 40 years, Australia's population will go through a major shift. A greater proportion of the population will be older because people are living longer and birth rates have declined over many years. There will be increasing numbers of older people to support, and fewer people of workforce age to provide that support.

By 2042, Australia's population is projected to increase by around 30percent, to over 25million. The number of people aged 55 and over will grow faster than the number aged under 55 (Chart1).

This will mean substantially fewer Australians of workforce age (15 to 64) compared to people aged 65 and over. Currently, for every person aged 65 and over, there are about 5.3people of workforce age. By 2043, this will decrease to about 2.5 people of workforce age. This reduction in the proportion of workers has obvious implications for the Government's ability to raise revenues and provide services like health and pension benefits in the future.

Australians' life expectancies also are among the highest of the Organisation for Economic Cooperation and Development (OECD) countries and this is expected to continue. In the past 40 years, Australians' life expectancies at birth have increased by more than 8.3years for men and 7.6 years for women. Life expectancies are projected to increase an additional 5.3 years for men and 4.9 years for women over the next 40 years (Table 1).

The combination of an ageing population and increased life expectancy will see pension expenses grow significantly. Age and service pension expenses are projected to increase from $20.8 billion or 2.9percent of Gross Domestic Product (GDP) in 2001-02 to around $80 billion (in 2001-02dollars) or 4.6percent of GDP in 2041-42. Although this represents a significant increase, Australia is well placed compared with other OECD countries in relation to meeting its age pension obligations. The Government is not considering reducing the real value of the age pension or increasing the age pension age, as is happening in some other countries.

The ageing of the population will have other impacts on expenditure such as health and aged care services. A description of the economic implications of an ageing population and the choices for the Government is included in the discussion paper Australia's demographic challenges.

Chart 1: Projected population size for selected age ranges.

Chart 1: Projected population size for selected age ranges.

Table 1: Australians' projected life expectancy at birth (in years)



















Source: Treasury projections, Intergenerational Report 2002-03 (2002-03 Budget Paper No.5)

Workforce participation and retirement incomes

A person's standard of living in retirement is directly affected by the number of years spent in the workforce. Workforce participation builds Superannuation Guarantee savings and gives people income to support voluntary savings for retirement.

People also can improve their standard of living in retirement by deferring their retirement from the workforce. This increases their superannuation savings and delays the need to start drawing down on retirement savings. For example, a single woman aged 62 earning around $35,000 (median earnings) could increase her superannuation savings by around $30,000 by working an additional three years and retiring at 65.5

The earlier retirees access their superannuation, the lower their ultimate retirement income. This is because their superannuation savings have to support them for a longer period. This is particularly important as increased life expectancy means that people will spend more time in retirement.

1 Based on pension rates effective from 20 September 2003.

2 Australian Bureau of Statistics, Survey of Employment Arrangements and Superannuation, Australia 6361.0.

3 Bingham, C. ‘Impact of private saving and longer careers on retirement incomes’, Paper to the Eleventh Annual Colloquium of Superannuation Researchers, University of New South Wales, July 2003.

4 Submission by the Commonwealth Treasury, ‘Inquiry into superannuation and standards of living in retirement’, Senate Select Committee on Superannuation, July 2002.

5 Modelling by Treasury’s Retirement and Income Modelling Unit (RIM Unit). This estimate is based on a single woman who is aged 62 in 2029 but chooses to work until 2032 when she is 65. The $30,000 consists of $10,200 of additional Superannuation Guarantee contributions and $19,800 of additional investment earnings from total contributions. All RIMU projections used in this paper assume current income is indexed at 4% pa, net earnings of 7% pa and inflation of 2.5% pa.

6 Treasury’s RIM Unit projections. Based on a single male who retires in 2034 after 30 years of contributions and retires in 2044 after 40 years of contributions.


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Commonwealth of Australia 2004
ISBN 0 642 74231 6

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Australia’s Demographic Challenges
Social Policy Division
The Treasury
Langton Crescent