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Australian Government Department of Family and Community Services NEW AGE PENSIONERS – TRENDS IN WEALTH Paper prepared for the Australian Social Policy Conference 20-22 July 2005, Sydney The opinions, comments and/or analysis expressed in this presentation are those of the authors and do not necessarily represent the views of the Minister for Family and Community Services or the Department of Family and Community Services, and cannot be taken in any way as expressions of government policy. Hazel Lim-Applegate, Peter McLean, Phil Lindenmayer and Ben Wallace Seniors and Means Test Branch 2 NEW AGE PENSIONERS-TRENDS IN WEALTH INTRODUCTION Australia, like other OECD countries, is experiencing an ageing of its population, driven by declining fertility and mortality rates. Since the mid-1970s, the total fertility rate of Australian women has been well below the rate needed for population replacement. Over the same period, life expectancy has increased, partly due to high standards of public health (Commonwealth of Australia, 2002). The Australian Government’s Intergenerational Report (IGR) (Commonwealth of Australia, 2002) projected that over the next 40 years, the proportion of the population aged over 65 years will almost double to around 25 per cent. The recent research report by the Australian Government Productivity Commission (2005) confirmed this projection. At the same time, growth in the population of traditional workforce age —15 to 64 — is expected to slow to almost zero (Commonwealth of Australia, 2004, p.3). Over time, the ageing of our population will result in a greater demand for Age Pensions and health and aged care spending. The IGR projected that, without changes to previously existing trends, spending by the Australian Government would exceed the amount it raised in taxes by around 5 per cent of GDP by 2041-42. To put this into perspective, the 2003-04 Budget forecast was for a surplus of $4.6 billion. A budget deficit of 5 per cent of GDP would mean that for 2003-04 the deficit would be around $40 billion (Commonwealth of Australia, 2004, p.3). The Productivity Commission report (2005) forecasts that by 2044-45 in the absence of policy responses, the aggregate fiscal gap will be around 6.4 per cent of GDP, with an accumulated value over the next forty years of around $2,200 billion (in 2002-03 terms). Between 1980 and 2005, the total number of Age Pensioners increased from 1.3 million to 1.9 million. The increase in the Age Pension population has been mainly due to growth in the eligible population, partly offset by a decline in the proportion of the population in the eligible age group receiving a pension. These trends have been forecast to continue1 (Commonwealth of Australia, 2002). However, the IGR also projects that the proportion of pensioners receiving a full Age Pension will decline, while the proportion with a part Age Pension will increase significantly. These projections reflect a growth in wealth for older Australians of Age Pension age and the impact of the maturing superannuation system. Since the mid-1980s, the distribution of wealth across the Australian population has shifted markedly towards older Australians (Harding, King and Kelly, 2002). The share held by those aged 65 or over increased from 17 per cent in 1986 to 27 per cent in 1997. For those aged between 55 and 64 (those heading towards and just on the verge of Age Pension age) the estimated average net wealth per adult (by age of family head) rose from just under 1 The number of Service Pension and War Widows Pensioners has been stable around 300,000 for some time and is expected to decline as veterans from the Second World War age (Commonwealth of Australia, 2002). 3 $150,000 in 1986 to around $210,000 in 1997 (Figures are in 1998 dollars, so they reflect real increases in wealth) (Harding, King and Kelly, 2002, pp.4-5). In addition, the effects of Superannuation Guarantee legislation are starting to impact on the wealth of Australians at retirement. Superannuation Guarantee has been in place since 1 July 1992 and requires employers to contribute to superannuation for their employees. For the 2002-03 financial year and beyond, the Superannuation Guarantee requires employers to contribute 9 per cent of each eligible employee’s earnings base to a complying superannuation fund or retirement savings account (RSA). By 2050, with a fully mature Superannuation Guarantee, it is expected that no more than 75 per cent of people aged 65 or over will receive Age Pension (or service pension equivalent) (FaCS, 2003). It is also expected that around two-thirds of pensioners will receive a reduced pension because their income or assets exceed the free areas, compared with around one third of all Age Pensioners in 2002-2003 (FaCS, 2003). Workers with superannuation are projected to have an average potential spending replacement rate of over 66 per cent2, that is, spending power in retirement that is 66 per cent of that before retirement (Commonwealth of Australia, 2004, p.11). Of great interest to policy-makers, and to Australians as a whole, is whether the projected trend towards greater self-reliance among Age Pensioners is becoming evident. As well as the environmental changes surrounding Australia’s retirement incomes system mentioned above, there is an emerging opportunity from the maturing of two key data sources, SuperSTAR cubes (which provide point in time data on income support recipients) and the FaCS Administrative Longitudinal Data Set (LDS) (which provides longitudinal data on a sample of income support recipients), that allows us to look more closely at this question. These data sources contain information drawn from the systems (managed by Centrelink) that administer the provision of income support to Australians. The LDS now contains confidentialised, detailed information about asset holdings for Age Pensioners from 1999-2000 to the present - 5 years of longitudinal data - sufficient to allow some analysis of change over time. This paper uses the LDS 1% sample (covering 1% of the pensioner population). There is also a LDS 10% sample, which is considerably more demanding to use, but gives a larger sample size and more statistical significance. Of equal interest to the issue of the wealth of Australians reaching Age Pension age is the complementary issue of whether (or how quickly) Age Pensioners draw on their savings in retirement. The LDS provides a similarly valuable source of information on this issue, allowing analysis of change over time in the asset holdings of Age Pensioners. This is an interim paper, drawing on the early stages of research into wealth trends for Senior Australians. The broader research plan is outlined under “Further Research” later in this paper. This paper seeks to answer two main questions: • Are Australians reaching retirement with greater wealth than in the past? and • Are Australians drawing down their wealth in retirement, and (if so) how quickly? 2 This includes retirement income from the Age Pension, compulsory superannuation and additional voluntary savings (Commonwealth of Australia, 2004, p.11). 4 Both of these questions are explored in detail using data drawn from the LDS, with some supporting and contextual information drawn from SuperSTAR cubes. The relevant group for which there is detailed information held in the LDS is those senior Australians who receive Age Pension, either maximum rate or part rate. Government has a strong need to understand the circumstances of Age Pensioners over time, as they are the group who call most heavily on Australia’s income support system, and, particularly for part raters, the group where increasing wealth over time would have the greatest potential to reduce demands on the public purse. Age Pensioners also form a high proportion of all senior Australians, with roughly 78% of all Australians of Age Pension age eligible for at least a part rate Age Pension (or service pension equivalent)3. There is some information on the LDS, although without detail on asset holdings, for moderate-wealth self-funded seniors. These seniors are eligible for the Commonwealth Seniors Health Card (CSHC) and certain other benefits and incentives in recognition of their funding their own retirement. FaCS Seniors and Means Test Branch has a companion project examining the characteristics of this group. There is no data on the LDS for high-wealth retirees, as they are not eligible for financial support under Australia’s Age Pension means testing framework (explained in more detail below) and are therefore not included in Centrelink’s data stores. However, these high- wealth self-funded retirees will only impact the public purse if, later in life, through reducing income or assets, they become eligible for the CSHC or income support. At this point, they would be captured by Centrelink’s systems and included in the relevant data sets. Other key data sources, particularly the Household Incomes and Labour Dynamics Australia (HILDA) survey Wealth module, provide point-in-time data that covers the wealth holdings for the whole Australian population, and therefore information on the highest wealth groups. Longitudinal data will become available when HILDA repeats its Wealth module in coming years. There are significant technical issues related to methodology for this project. These are explained in Attachment A. This leaves two major specific questions: • Are selected cohorts of entrants to Age Pension wealthier than earlier corresponding cohorts, and (if so) by how much? and • What are the longitudinal patterns of change in asset values for a recent cohort of new part-rate Age Pensioners? 3 Sources: Centrelink Superstar Pensions database, June 2004. Department of Veterans Affairs Pensioner summary statistics, June 2004. Australian Bureau of Statistics Populations Projections for Australia, 2002- 2101, Catalogue No. 3222.0 5 RETIREMENT INCOMES POLICY Australia’s retirement income system provides a strong basis to generate sustainable and adequate income for all Australians in retirement. It combines a publicly funded pension, compulsory superannuation and incentives for people to provide for themselves in retirement. Australia’s system comprises three complementary pillars: • the Age Pension – a publicly funded, means tested payment that provides a modest but adequate income (or income supplement) for people in retirement. The Age Pension is a flat rate payment, set at least 25 per cent of Male Total Average Weekly Earnings4. Currently almost 78 per cent of people of Age Pension age receive the full or a partial Age Pension (or service pension equivalent); • compulsory superannuation contributions under the Superannuation Guarantee - an earnings-related scheme that provides benefits in retirement greater than Age Pension alone can provide. Superannuation Guarantee savings are supported by taxation concessions; and • private savings, including voluntary superannuation supported by taxation concessions, private investments and other savings (including investment in the home). For the purposes of discussion, it is proposed to characterise Australians as passing through three “stages” relating to retirement income. First, the accumulation stage. During a person’s working life they may contribute to superannuation and accumulate other savings, including, for many, the purchase of a home. This is reinforced by policies aimed at boosting workforce participation, by taxation concessions for superannuation, and by incentives to remain in the workforce after reaching Age Pension age5. Throughout this stage a person is generally self-funded and only calls on Government assistance in times of financial stress. Second, the transition from the accumulation stage to the draw down stage. This may entail either a complete or phased withdrawal from the workforce and the beginning of a reliance on superannuation and other savings. Some people do not need Age Pension and begin ‘retirement’ as fully ‘self-funded retirees’, but may qualify for the Commonwealth Seniors Health Card, while others may qualify for Age Pension immediately. 4 The Government guarantees that the maximum single rate of base pension is at least 25 per cent of Male Total Average Weekly Earnings (MTAWE). Whenever pensions are adjusted for increases in the CPI, and the new pension rate falls short of 25 per cent of MTAWE, then the Government tops up the pension so as to be equivalent to 25 per cent of MTAWE. The pension rate is never reduced as a result of indexation. If the single pension rate increases, the partnered pension rate also increases. 5 As at June 2004 some 9 per cent of people over Age Pension age (about 246,000 people) were engaged in paid employment. Of these, about 32 per cent (about 78,000 people) received a pension and about 17 per cent (about 41,000 people) had deferred claiming pension and had registered under the Pension Bonus Scheme. 6 Third (for some individuals), an increasing reliance on the Age Pension. This may entail a progressive transition to higher part-rate or to full-rate Age Pension as superannuation and other private savings are drawn down or as other income reduces6. This paper examines the “destination” of Age Pensioners at the second stage in terms of their level of wealth, and then provides some initial analysis of the third stage. RESEARCH AND ANALYSIS IN AUSTRALIA Trends in Wealth Incomes Whiteford and Bond (2000) report that from 1982 to 1997–98 the real average income of older couples in Australia increased by 5.7 per cent, while the real average income of older single Australians increased by 6.7 per cent, compared to a real increase of 4 per cent for the population as a whole. As a result, the average incomes of older Australians increased as a proportion of the average incomes of the Australian population as a whole (Whiteford and Bond, 2000, p.23). Over the same period, there was a significant decline in the proportion of older couples for whom government benefits were the principal source of income, and correspondingly a significant increase in the role of other private income (from property and investments) (Whiteford and Bond, 2000, p.23). For older couples, the proportion for whom government benefits were the principal source of income dropped from 74.7 per cent to 65.4 per cent; while for older singles the reduction was from 82.1 per cent to 79.7 per cent. (Whiteford and Bond, 2000, pp.26-27). Assets The assets test on pensions was introduced in 1985 to better target assistance to those with greater needs, and to ensure the effective operation of the income test (Whiteford and Bond, 2000, p.18). The rate of pension is calculated under both the income and assets tests, with the test that results in the lower rate being the one applied. While the majority of pensioners have payments assessed under the income test, the proportion directly assessed under the assets test increased from under 2 per cent in the late 1980s to just over 6 per cent in 1999 (Whiteford and Bond, 2000, p.18). From 1999 to 2002, the proportion of Age Pensioners assessed under the assets test remained relatively stable. In 2003 it rose to 7.5 per cent, and then to 7.6 per cent in 2004 (Centrelink Superstar Pensions Database, 1999-2004). While acknowledging that the interaction of the social security income and assets test, and fluctuations in the rate of returns on investments, may influence under which test a person’s pension is assessed, it is interesting to note that the increase, from 1985 to 1999, in the proportion of Age Pensioners assessed under the assets test, corresponds with a shift in the 6 Pension data shows that as at June 2004 more older senior Australians receive an Age Pension than younger senior Australians, and that more older senior Australians qualify for the maximum rate of pension (as opposed to a part rate of pension). 7 distribution of wealth across the Australian population towards older Australians. The share of wealth held by Australians aged 65 or over increased from 17 per cent in 1986 to 27 per cent in 1997 (Harding, King and Kelly, 2002). Over the same period, the proportion of the Australian population aged 65 or over increased only from 10.5% to 12.1%7. For those Australians heading towards and just on the verge of Age Pension age (those aged between 55 and 64) the estimated average net wealth per adult (by age of family head) rose from just under $150,000 in 1986 to around $210,000 in 1997. These figures are in 1998 dollars, so they reflect real increases in wealth (Harding, King and Kelly, 2002, pp.4-5). Trends in Asset Holdings and Draw Down Table 1 below (from Whiteford and Bond, 2000), provides details of the average value of assets held by Age Pensioners at June 1998, as well as the proportion of those with assets who owned their own home. As can be seen from the table, the average value of assets held begins to decline around age 70-74 and continues to be less for each of the age categories until the 85–89 category where average asset holdings again increase (Whiteford and Bond, 2000, p.19). Table 1 From: Whiteford and Bond, 2000. Understanding trends in this area is important for retirement incomes policy. Data on household wealth made available from the Wealth Module in Wave 2 of the Household Income and Labour Dynamics Australia (HILDA) Survey (run by the Melbourne Institute and funded by the Department of Family and Community Services) provides the opportunity to examine more closely the overall financial circumstances, and particularly the asset holdings, of senior Australians. Table 2 (below) shows the mean values of assets held and household income for senior Australian households in 2002. The HILDA data shows a similar trend to the Age Pension data shown in Table 1. The average value of assets held tends to decline around Age Pension age, with small but noticeable upturns, in some assets, in later years. (The upturn in asset 7 Source: Australian Bureau of Statistics Catalogue No.3201.0 Population by Age and Sex, Australian States and Territories. TABLE 9. Estimated Resident Population By Single Year Of Age, Australia(a) 8 wealth for older age cohorts shown in Tables 1 and 2 is most likely due to an increased prevalence of single senior Australians, through mortality, and resultant asset transfers8.) Table 2: Selected wealth variables for Households with at least one member 50 or over by Mean by Age 2002 Data source: HILDA Wave 2 Age Home Equity Bank Accounts Superannuation Shares, Managed Funds, Property Trusts Other Non-Home Equity Household Final Year Income 50-54 235916 26669 141896 43161 150417 73827 55-59 236809 37399 138829 63649 178910 62376 60-64 245146 31918 132536 66909 170928 44878 65-69 253346 34728 89443 76589 110568 35915 70-74 226389 35993 49015 53789 72212 26447 75-79 187805 38212 27137 41725 61228 24618 80-84 201159 39174 6532 52945 29860 19319 85+ 183505 45313 4391 28986 20893 16766 TOTAL 229837 34277 96766 56383 123179 45940 Note: the HILDA data is based on 2002 values. Increases in property and other portfolio values since that time may impact on these findings. Figure 1 below expresses the same data graphically and shows the cohort differences clearly. Figure 1: Selected Wealth Variables for Older Households by Age (Mean) 0 50000 100000 150000 200000 250000 300000 50-54 55-59 60-64 65-69 70-74 75-79 80-84 85+ Age $Au(2002) Home Equity Bank Accounts Superannuation Shares, Managed Funds, Property Trusts Other Non-Home Equity Household Final Year Income These data provides some insight into what mechanisms senior Australians choose to hold their wealth and how assets may be drawn down during retirement. Any conclusion or finding of this nature is of course caveated by the fact that this is point in time data and not longitudinal; and that the more elderly senior Australians may have had less opportunity or inclination to accumulate wealth and to participate in superannuation schemes. 8 Superstar Pensions database (March, 2005) shows the ratio of partnered Age Pensioners to unpartnered Age Pensioners at age 65 is two to one, dropping to one to one at around age 78, and to about one in six by age 90. 9 INTERNATIONAL EXPERIENCE Extensive searching has turned up little recent international longitudinal research on the question of Seniors’ wealth, especially that which concentrates on the relationship between trends in assets holdings and trends in their subsequent draw down in retirement. Ando et al (1993) studied asset ‘decumulation’ by the elderly, finding that the rate of decumulation was much lower than “would be implied by a life cycle model without uncertainty or bequests” (the life cycle model implies that the elderly should decumulate assets at a rate sufficient to achieve zero wealth by the time of death) (Ando et al, 1993, p.2). In other words, the pace of decumulation is too slow to be accounted for by death uncertainty alone. Ando also cites similar findings reported by Modigliani (1988), Kotlikoff (1988), Brugiavini (1987) and Ando and Kennickell (1987). While these studies varied in the reasons for the observed slowness of decumulation, they indicate that older people decumulate in a rational fashion. However, all these studies are over ten years old and do not inform current trends. Haider et al (2000) also examined trends in ‘dissaving’ (decumulation) in the 1980s and early 1990s by population characteristics - marital status, age, education, health, initial wealth and others. For the 1980s, changes in wealth were fairly flat. Mean wealth grew by just under one per cent a year for the nine years of the sample period, while median wealth declined by about a quarter of a per cent a year. For a relatively young sample, aged 61 to 69, wealth stayed relatively constant. Other data showed dissaving does not begin until after the age of 70, and the age at which dissaving commences, appears to have risen over time. The 1990s data showed sample members overall enjoyed wealth increases – possibly due to a dramatic rise in stock prices for the two years of the sample period. Overall there was heterogeneity in dissaving patterns across households. The less well-off households, whether measured by wealth, income, education, or health, dissaved more rapidly than better-off households. Important to this paper was the finding of substantial shifting of assets by older persons from housing wealth to equities, providing evidence that older investors do not passively spend their wealth but manage their portfolios actively (Haider et al, 2000). The study concluded that many of the important economic trends noted for the general population over the period had similarly affected older persons (Haider et al, 2000). Pedersen (2004), in his study of the interplay between public and private components in the income packages of pensioners in OECD countries, used data from the Luxembourg Income Study (LIS) databank between 1980 and 1995 to examine, as one component of his research, whether it was possible to identify a general trend over time towards an increasing share of private income. Although Pedersen’s research concentrated on slightly different aspects of retirement wealth to the ones in this paper, his findings do inform the question on trends towards greater self-reliance in retirement. Whilst acknowledging that there are significant problems comparing the different pension regimes across the different countries, Pedersen (2004), in data displayed in Figure 2, shows that from 1980 to 1995 there was a general reduction in the proportion of pensioners’ income from ‘public transfers’ (public pensions), and an increase in the proportion from private income (made up of capital income, earnings and occupational pensions [superannuation]) (Pedersen, 2004). As the countries compared have different pension systems (some with and 10 some without means tested benefits) it is not possible to say categorically that this shows that each generation of pensioners is successively wealthier than the last, but it is an indication that there is a general trend towards greater self-reliance. Australia (for reasons explained later), Denmark and Canada appear to be the exception. From Pedersen, 2004. Canada experienced a very different development to most – a rather consistent decline in the proportion of private income - over the 15-year period. Pedersen (2004) cites the continued maturation of the second-tier of earnings-related public pensions (The Canada and Quebec Pension Plans) as the probable explanation for this. Figure 2 11 For Australia, there does not appear to have been a general trend in either direction. Pedersen (2004) notes that in Australia there is a preference for private sector occupational pensions to be paid as lump sums rather than annuities, and lump sum payments are not recorded in the Luxembourg Income Study (LIS). Lump sum payments will only make themselves felt indirectly in the data if the money is invested in financial assets or converted into a private annuity. Therefore, the LIS data will tend to strongly underestimate the role played by occupational pensions in the Australian retirement system. Different findings about the make-up of Seniors’ incomes and the trend towards privatisation were reported in the United States by Hungerford et al (2002), in their study: Trends in the Economic Status of the Elderly, 1976-2000. Despite finding that income from assets was the second most prevalent source of retirement income and made up the second largest share of aggregate income for the elderly, they also found that there was a general upturn in the level of dependence on social security by the elderly over the period 1990 to 2000. However, Hungerford et al (2002) say that these trends, in the elderly's reliance on social security, show that these other sources of retirement income have not kept pace with social security benefits. Hungerford’s study found that the proportion of the elderly receiving asset income increased from 56 percent to 68 percent between 1976 and 1984, but fell to 59 percent in 2000. A similar picture emerged with the make up of aggregate income for the elderly. Asset income grew in importance until 1984 - increasing from 18 percent to 28 percent of aggregate income - before falling back to 18 percent by 2000. Hungerford et al (2002) cite portfolio experts as saying that, in the United States, older investors invest more heavily in safe, interest-bearing assets, such as bonds, than in assets with higher but more variable returns, such as stocks. Accordingly, it appears that the elderly are sensitive in their private savings to fluctuations in interest rates. Part of the explanation for the pattern in the receipt and importance of asset income may be the fluctuations in nominal bond yields over the period studied. Nominal interest rates and bond yields were high in the early 1980s and relatively low in the 1990s. The yield for 30-year Treasury bonds was about 12 percent in 1984 and 6 percent in 1999 and corporate bond yields followed a similar trend (Hungerford et al, 2002). The receipt and importance of asset income to the elderly increased in the early 1980s and declined over the mid-1990s, when interest rates were low. Draw down of Assets – International Concerns In New Zealand there is growing concern about how current and future retirees will access their accumulated wealth (St John, 2004). According to St John, in New Zealand the decumulation or draw down phase has been relatively ignored in discussions on retirement. St John says that New Zealand has few mechanisms for annuitisation of accumulated capital or for the release of home equity, but that this is beginning to be addressed – but only by the private sector and only in the form of new home equity release products (St John, 2004, p.3). The primary worry for New Zealanders, according to St John, is insufficient income and the associated danger of outliving capital. Mitchell and Piggott (2000) say that, unlike in Australia where pension saving is mandated and pension preservation is pre-eminent, in the United States, pensions are optional, and those employees with a fund are granted substantial access to the assets. This includes the ability to borrow up to half the pension money prior to retirement, and the opportunity to cash out the fund if the job terminates. Like Australia, participants have the option to take the fund 12 accrual as a lump sum at retirement, and most appear to do so (Mitchell and Piggott, 2000, pp.5-6). Stock (2004) says that banks in the United States are starting to recognise this and are starting to develop networks, marketing and products to accommodate retirees’ needs for investment of lump sums and income security. In the past, the focus has been on accumulation. But now banks are realizing there are two phases of retirement - accumulation and distribution – and are expanding their product offerings to enable bank-based advisors to manage their customers' entire life cycle. Still, according to Stock, the products tend to be more for the accumulation side, and there is till a need for better fixed-return protection and investment products (Stock, 2004). Key findings from published research Australian and International evidence shows a very general trend in the later part of the last century of seniors having or acquiring greater wealth; both in the form of income and income producing assets; and subsequently, a trend towards greater self-reliance. However, the evidence is not conclusive and does not inform whether the trend has continued into the twenty-first century. Australian cohort data (pensions administrative data and HILDA references) also show, as might be expected, that the older cohorts of Age Pensioners (and older Australians in general) tend to have lower assets and incomes than younger Age Pensioners. What this data does not show is the degree to which this is due to differences in the accumulation of assets prior to retirement, and to what extent it relates to draw down of assets in retirement. Recent Australian and International evidence, although abundant on the question of asset accumulation is, on this particular aspect, scant; lending itself to the conclusion that, as was found in the case of New Zealand and the United States, the relationship between pre- retirement asset accumulation and the decumulation or draw down phase of retirement has been relatively ignored. ANALYSIS OF ADMINISTRATIVE DATA Wealth changes between cohorts The application of the income and assets test for grants of Age Pension ensures that eligibility for and rate of Age Pension is based on an applicant’s wealth (income and assets). Eligibility for and rate of Age Pension can therefore be used as a proxy for wealth. To study wealth changes between cohorts, data has been drawn from the Superstar Pensions database for the years 1999-2000 to 2003-2004 on the number of Australians turning Age Pension age granted Age Pension, and whether that grant is at maximum rate or part rate. Figure 3 shows these data as a proportion of all Australians turning Age Pension age during the same period. 13 As noted at Attachment A, there are significant methodological complications to the selection and comparison of cohorts. One complicating factor is that Age Pension age for women has been progressively increasing - from 61 in 1999 to 62.5 in 2004. Figure 3: New Age Pensioners9 of Age Pension age as proportion of estimated population reaching Age Pension age by rate of payment, 1999-2000 to 2003-04 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 2000 2001 2002 2003 2004 Year Percent Non AP Part rate Max rate Source: Centrelink, Superstar Pensions database, 1999-2004. Australian Bureau of Statistics Catalogue No.3201.0 Population by Age and Sex, Australian States and Territories. TABLE 9. Estimated Resident Population By Single Year Of Age, Australia(a) Figure 3 indicates that a significantly smaller proportion of the total population turning Age Pension age were granted Age Pension in 2003-04 (51.2%) than in 1999-2000 (57.4%), and that this reduction is evident year on year between. The corollary of this is, over the period 1999-2000 to 2003-04, a trend toward greater financial self-reliance among Australians reaching Age Pension age, manifesting as a greater proportion not requiring Age Pension and a smaller proportion receiving maximum rate. There are a number of factors not related to wealth or increased wealth accumulation that might have influenced this trend. A discussion on the respective influence of three factors identified as potentially significant to this trend, namely the effects of Service Pensioners, workforce participation and the indexation of Age Pension, follows. Effects of Service Pensioners In this interim paper, the effects of new applicants for Service Pensions have been excluded from the analysis (as the qualification rules for Service Pensions are substantially different from those for Age Pension, and data access is more complex). Service Pensioners have, in effect, been treated as self-funded for the purposes of this analysis. 9 ‘New Age Pensioners’ are defined as those who have been in receipt of Age Pension for less than one year. 14 However, there are comparatively few new grants of Service Pensions in any year, and the numbers of new grants of Service Pensions are declining year on year. It is expected that the inclusion of Service Pensioners in the analysis would therefore have little effect on the apparent trend to greater financial self-reliance, and that any effect would be to strengthen this trend. It is hoped that this can be analysed in future papers. Workforce Participation The trend may have been influenced by an increase in workforce participation by people over Age Pension age, that is, due to an increase in income (rather than assets) for New Age Pension age cohorts. A relatively small proportion of Age Pensioners are in the workforce, although this has increased slightly in recent years. At June 2004, 6.1% of male Age Pensioners and 7.4% of female Age Pensioners who turned Age Pension age during that year were in the workforce. The corresponding proportions for June 2000 were 5.1% for men and 6.2% for women (Centrelink Superstar Pensions Database, 2000-2004). Similarly, across the population as a whole, workforce participation by Australians over Age Pension age has been increasing at a significant rate. In June 2000, around 12.8% of Australians between the ages of 65 and 69 were in employment. By June 2004, this had increased to around 16.2%10 (ABS, 2005). This small but significant increase between cohorts in the proportion of the Australian population remaining in the workforce beyond Age Pension age may result in a larger proportion continuing to be self-funded, and a smaller proportion qualifying as maximum rate Age Pensioners. This does not necessarily negate the proposition that the trend to greater financial self- reliance is (also) due to increases in asset holdings for New Age Pension age cohorts. A proportion of this group could have sufficient income while in work to be self-funded, but hold few assets and therefore be more reliant on Age Pension when they eventually leave the labour force. It is counter-intuitive however, to consider this proportion to be large, as people who remain in the workforce longer could be expected to have accumulated greater assets and therefore be, on average, less rather than more reliant on the Age Pension. In fact, as at March 2005, the average assessed assets for people who were first granted Age Pension more than one year after they reached Age Pension age were 40% greater than the average assessed assets of people first granted at Age Pension age (Centrelink Superstar Pensions Database, 2005). These later entrants are correspondingly less reliant (rather than more) on the Age Pension. As would be expected, the increasing workforce engagement of Australians beyond age 65 not only enhances their short-term wealth (income), but also contributes to and enhances future gains in accumulated wealth (assets). Indexation of Age Pension Eligibility for and take up of Age Pension will also be influenced by the indexation of Age Pension rates and Income and Asset test thresholds. Indexation applied to Age Pension rate is linked to the higher of the Consumer Price Index (CPI) and 25% of Male Total Average 10 Note: Analysis of this data shows extreme volatility month by month – which probably reflects the survey size. Despite this volatility, there is still a general trend towards higher workforce participation rates for senior Australians. 15 Weekly Earnings (MTAWE). If, as has happened with the growth of the Australian economy over the last several years, MTAWE growth exceeds CPI growth, the income and assets test thresholds for eligibility for Age Pension increase in real terms. If later cohorts had exactly the same wealth in real terms as earlier cohorts, these later cohorts would have greater eligibility for (and take up of) Age Pension. Figure 3 shows that this is clearly not the case. As a result, subject to confirmation from further analysis, it can be concluded that the most recent cohorts of Australians are reaching Age Pension age with significantly greater real wealth than earlier cohorts. COHORT ANALYSIS OF NEW AGE PENSIONERS Another indicator of wealth is mean asset holdings. To determine whether Australians are reaching retirement with greater wealth, the mean assessable asset holdings of new entrants to the Age Pension system of Age Pension age have been analysed by yearly cohorts. Since they are all of Age Pension age in each cohort, such analysis facilitates grouping of people who would have faced similar opportunities and, to some extent, have similar preferences for asset accumulation. Data was drawn from the Superstar Pensions databases. It is important to note that non-assessable assets under the social security asset testing rules are excluded, such as equity in the residential home and asset-test-exempt (ATE) income streams11. With the recent increase in real estate prices and the incentives in the social security and taxation systems for these income-streams12, these two asset types have become an important form of asset holdings for retirees. Table 3 shows that the mean assessable asset holdings, generally, successively increased with each cohort of New Age Pensioners. Table 3: Mean assessable asset holdings for corresponding cohorts of New Age Pensioners, 1999-2000 to 2003-04 Cohort All Men Women 1999-2000 $44,500 $46,200 $41,200 2000-01 $50,400 $51,600 $49,400 2001-02 $53,300 $54,100 $51,900 2002-03 $52,700 $55,300 $50,300 2003-04 $57,100 $58,400 $54,600 Source: Centrelink SuperSTAR Pension database 2000 – 2004 Note: Includes both partnered and single new Age Pensioners 11 The asset-test exemption of certain “non-commutable” income streams purchased beginning 20 September 2004, changed from 100 per cent to 50 per cent. Since the sample only includes entrants to the Age Pension system from 1999-2000 to 2003-04, none of their holdings of such income streams would have been affected by this change. As a result, all of their holdings of such income streams would not have been captured. 12 In addition to the asset-test exemption, a generous income testing under the social security system also apply to these income streams where a portion of the capital used to purchase the income stream is deducted from the assessable income. Tax concessions include a 15 per cent tax rebate on the taxable portion of the pension and access to the higher reasonable benefit limit (RBL) where at least 50 per cent of a person’s superannuation is taken as a complying income stream.

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