Professor John Piggott

All around the world, governments are trying to get workers to work longer. Australia is no exception.

Population ageing – increasing longevity combined with lower fertility – will generate massive increases in the per worker fiscal cost of supporting people in retirement and old age, unless we work for longer. This is a calculus most governments now appreciate, at least in theory.

By 2050, the 65-plus population of Australia will have doubled, and the 85-plus group will have increased by a factor of four.

So how is it that the average Australian retirement age, according to figures from the Organisation for Economic Co-operation and Development (OECD), is lower by three years compared with 40 years ago? It now stands at 23 years for 60-year-old males, and 26 years for females, among the world’s highest, and our healthy life expectancy’s been going up too.

International experience indicates, and Australian experience supports, the idea that the single most important determinant of retirement age is the age you can access your retirement income. The OECD estimates that Australian labour force participation moves from a highly respectable 82 per cent for the 50-54 age group to 53 per cent for those aged 55-64, and then plummets to 25 per cent for ages 65 to 69.

Australia has three access ages: 55 (about to start moving to 60) for superannuation access; 65 (about to move to 67) for age pension access; and 60 for tax-free superannuation benefits. Two sticks and a carrot.

This alignment between access age and falling labour force participation is no coincidence.

To take just one cross-country comparison, New Zealand’s mature labour force participation rate climbed rapidly over the last 20 years, to 76 per cent for ages 55-64, as age pension access there increased from 60 to 65, with no widespread superannuation to buttress it. It is now higher than Australia’s, whereas 20 years ago it was lower, at least for males.

Australia is adjusting the access ages for the two sticks. But the access age for tax-free superannuation is stuck at 60. Once the standard superannuation age reaches 60, in 2024, the carrot will have lost its crunch.

The social cost of this policy paralysis is very high. Professor John Piggott from the ARC Centre for Excellence in Population Ageing Research and Senior research fellow Rafal Chomik calculate that GDP would be 4 per cent higher if our mature age participation rates were like New Zealand’s.

But there are other costs too. Mature age unemployment is lower than among the young, but duration in unemployment is much longer. Nearly half of the unemployed in their early 60s have been unemployed more than a year.

It follows that once you leave the labour force at a mature age, re-entry is likely to be difficult.

These hazards will occur much more frequently when there is a seven-year gap between tax-free superannuation and the age pension, which is where we’re heading on current settings.

Relative to 40 years ago, current mature age workers are healthier and can expect to live much longer. And for the most part, the work they do is less physically demanding. Retiring should be happening later, not earlier. And we should use the policy levers we have to make this happen.

John Piggott is Director of the ARC Centre of Excellence in Population Ageing Research (CEPAR), and Scientia Professor of Economics at the University of New South Wales.  A version of this article was previously published in The Australian Financial Review.