According to ASFA’s new report, The cost of pensions across advanced economies, Organisation for Economic Co-operation and Development (OECD) nations’ retirement income systems are struggling with poor system design, an ageing population, and elevated inflation.
The report found that average OECD government spending on pension payments will increase from 9.0 to 10.4 per cent of GDP by 2060. In contrast, Australia’s government pension expenditure is relatively low and projected to decline — from 2.6 to 2.1 per cent of GDP over the same timeframe.
“Globally, pressures on fiscal sustainability are building and many countries in the OECD face politically challenging reforms to repair their retirement systems,” said ASFA chief executive Dr Martin Fahy.
“In contrast, Australia’s retirement system is well placed to face challenges to fiscal sustainability, due in large part to our high levels of private superannuation savings helping to reduce government pension spending.”
The report noted that while many OECD countries, including Australia, offer tax concessions to encourage private saving for retirement, it is difficult to compare the fiscal cost of concessions across countries. However, even taking this into account, the overall cost of the system still remains low.
But with the government recently announcing a consultation to define the objective of superannuation, including the possibility of introducing a super balance cap, the cost of tax concessions could fall further.
For the OECD as a whole, the proportion of the population aged 65 and over will increase from 17 to 27 per cent over the next three decades.
While Australia is not immune to population ageing, it is occurring to a lesser extent than the average across OECD countries. Treasury’s 2021 Intergenerational Report: Australia over the next 40 years projected that the proportion of the population aged 65 and over would rise from 16 per cent (in 2020–21) to 23 per cent (in 2060–61). The rebound in immigration to pre-COVID-19 levels will also help reduce demographic pressures.
Australia’s superannuation guarantee (SG) contribution rate is scheduled to reach 12 per cent in 2025, which will result in people who reach retirement having received SG contributions at higher rates, for longer periods of time. This will in turn lead to higher balances for workers at retirement.
“Australia’s unique defined contribution super system is arguably the best in the world. At a time when most advanced economies are grappling with the fiscal burden of the age pension, Australia’s will continue to be among the lowest of our OECD peers,” Dr Fahy concluded.
