HAS THE AUSTRALIAN TREASURY GOT ITS PROJECTIONS RIGHT FOR AGE PENSION EXPENDITURE?
Research suggests that unless there are big changes to superannuation rules or changes in human behaviour, forecasts of the money required to finance the Age Pension may have been considerably underestimated.The pension is a means-tested income support paid to Australian retirees. This benefit is publicly funded from government revenue and is now the largest single item of expenditure in the Federal Budget, sitting at around $34.8 billion in the 2011-12 financial year. Research by Jie Ding, which factors in human behavioural effects, presents long term projections of the cost of public pensions in Australia which differ considerably from Treasury figures. The Treasury in its 2010 “Intergenerational Report” projected that pension pay- ments would rise slightly to about 3.9% of Australian GDP by the 2049-50 financial year. Treasury argues that despite the population ageing and more people reaching retirement age than ever before, cost increases to the pension will be largely offset by the increasing wealth generated by superannuation for successive cohorts of retirees. In his research Jie Ding assumes that most people will act rationally and adjust their financial decisions to optimise their outcome. The research focuses on owner occupied properties, as the family home is exempted under the current pension as- set test. 75% of Australian retirees are home owners, accounting for about 80% of their total wealth. Ding finds that, while future cohorts of retirees will have more superannuation savings, it is rational for them to allocate more savings into their family home while preparing for retirement. This will enable them to optimise their pension entitlements. Ding projects that the pension payments in the 2035-36 financial year will be about 13% higher than the Treasury estimates in the Intergenerational Report. He also finds that savings in future pension payments, achieved by increasing the Super Guarantee rate from 9% to 12% of wages, will be less than half Treasury’s estimates. Australia’s population is ageing and there is much debate about how retirees should be financed and the consequences on the public purse. Jie Ding’s research shows that the Treasury may have underestimated the future pension payments by not fully accounting for behavioural effects arising from owner occupied property.