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Government too optimistic about age pension costs

Government too optimistic about age pension costs

Tim Stewart
— 1 minute read

The government has under-projected the cost of the age pension by 13 per cent, according to an academic report.

The report, written by Capital Markets Cooperative Research Centre (CMCRC) researcher Jack Ding, found the age pension would cost the government $96.4 billion in the 2035/2036 financial year – $11 billion more than estimates based on Treasury’s intergenerational report 2010.

Mr Ding said his estimates differ from Treasury’s because he takes behavioural factors into account. Specifically, people behave differently when they have more money – and they will take advantage of public policy in order to maximise the amount of part pension they receive, he said.

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In order to optimise their age pension entitlements, people who retire with higher balances are likely to draw down their superannuation savings faster and allocate more money to owner-occupied properties (which are exempt from the assets test), Mr Ding said.

“It makes sense that future retirees will invest more of their retirement savings in their homes, thereby optimising pension entitlements. When we look at the numbers through this lens, the Treasury estimates fall short of the mark,” he said.

The government report is also overly optimistic when it comes to the effect of the increased superannuation guarantee (SG) on future age pension liabilities, said Mr Ding.

Based on CMCRC modelling, the savings in future pension payments achieved by increasing the SG to 12 per cent will be nearly half Treasury’s estimates.

Mr Ding’s scenario found there would be savings of $2.3 billion (nominal) in age pension payments due to the increased SG, as opposed to the $3.8 billion (nominal) estimated by Treasury.

The cumulative total saving in pension payments for every year from 2012/2013 to 2035/2036 is estimated by Mr Ding to be $16.6 billion, which is less than half of the Treasury’s estimate of $41 billion.

“The government is always too optimistic about the budget every year … This is one item that will be a shock to them in the future,” Mr Ding said.

One way for the government to reduce costs would be to index age pension payments to price inflation, he added, but this would be at the risk of reducing quality of life for many pensioners.

 

Government too optimistic about age pension costs
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