Why our government’s plan for your retirement matters


by Aiden Beford.

When we think about how well-off we are going to be in retirement, it is only a product of how much money we have in our savings accounts, how much the aged pension pays or how much Superannuation we have accrued. If you have enough money, you will be fine. This focus on money itself, as if it is a finite resource, has distorted the picture and caused policymakers to miss the entire point of how we actually provide for people in retirement, and that with our coming demographic shift, drastic steps need to be made now to avert future problems. This lien of thinking, while it seems reasonable on a case-by-case basis, falls apart when we look at the aggregate picture. The story that this bigger picture tells us is that Australian are having fewer children and that all the baby boomers are retiring. While this may seem inconsequential, the ramifications are deeply problematic. We have kissed the point that bin real terms it has noting to do with how much money people have in retirement. The real question is whether we have a system which ensures that the real resources are produced to a sufficient level to ensure a good standard of living.

The problem came to demonstrated as such: if we have an economy with two workers and one idle customer, and one of those workers retires, in order to provide the same standard of living as when the ratio was 1:2 workers, the reaming workers must now increase their productivity by 100% to produce the same output as when there are two workers. In this example, as people spend their superannuation or receive their pension in retirement, if there is no increase in productivity the inflation pressure will occur as 50% more demand by non-workers is now chasing 50% less output. Which leaves us with several choices. On the one hand, we could ensure that the increase in productivity occurs. Otherwise, the government (in order to prevent inflation) has to either (a) cut the workers’ consumption through tax increases, to provide space for the retirees to consume, (b) tax the retirees’ spending or (c) some combination of both.

Focusing on raising productivity, however, has not been the major policy pursued by the federal government in relation to this problem. Instead, successive governments have pursued high net immigration to provide new labour sources to increase output and lower dependency ratio. Australia currently has a dependency ratio of 1:2 one non-worker for every two workers. The imagination of policymakers on this topic seems to be grossly limited, with all the talk simply being about immigration. Its short term thinking that only succeeds in deferring the problem to future generations, where again we are faced with a glut of retiring individuals, and that is without considering the social and environmental implications of a “Big Australia”. Policymakers need to get creative. Even with pour immigration policy, projections indicate that in best-case scenario of a Big Australia in the next 16 years, this ratio will only be pushed to 13:20. In order to keep up with the growth in dependents alone and maintain the current level of aggregate output, total factor productivity would have to increase by at least 1.32% annually. This is challenging as average growth for this measure has only been 0.8% on average over the past 15 years, especially as overall investment and outlook in Australia remains depressed as the housing market enters troubled waters.

The close-time horizons involved with this major demographic shift indicates that the current Federal Government should be taking steps now to remedy this problem. Amongst the simplest changes that could be made is to end the tax incentives for speculative investments into unproductive assets like real estate, which do nothing to increase total future output. Another simple measure would be to ensure full employment. With labour under-utilization sitting at record high levels, putting currently idle labour to work can be done by investing in infrastructure. Out current austerity-lite policies with regards to critical infrastructure and public research should also be reversed. Infrastructure investment ensures that the resources people use in retirement are well-provided. Cutting into healthcare budgets and investing less (as higher demands sits just a little way down the road) is the opposite policy to what is required. If you expect high future demand, you invest now to meet that demand. Likewise, public research is critical in that some of the most important efficiency gains that were made in the latter half of the 20th century have been the results of state-sponsored research fields such as computer science and telecommunications.

It is a big challenge, but not an impossible task. All we require is some bold policy making to take us in the right direction.