ISSUE 6
JUNE 2018
Retirement Affordability Index
™
JUNE 2018
the longevity issue What living longer means for the individual, the economy, health services and aged care.
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Contents
Published by: Indigo Arch Pty Ltd Publisher: Kaye Fallick Editor: Janelle Ward Copy Editors: Haya Husseini, Olga Galacho Writers: Matt Grudnoff, Peter Davidson, Louise Biti, Dan Tehan, Elayne Grace, Emma Dawson, John Daley, Scott Connolly, Des Umbers, David Glausner, Patricia Hayward, Cesar Mantilla, Olga Galacho, Janelle Ward Designer: Word-of-Mouth Creative Email: admin@yourlifechoices.com.au Web: www.yourlifechoices.com.au Phone: 61 3 9885 4935 All rights reserved, no parts of this book may be printed, reproduced, stored in a retrieval system or transmitted, in any form or by any means, electronic, mechanical, recording or otherwise, without the permission in writing from the publisher, with the exception of short extractions for review purposes. IMPORTANT DISCLAIMER No person should rely on the contents of this publication without first obtaining advice from a qualified professional person. This publication is distributed on the terms and understanding that (1) the publisher, authors, consultants and editors are not responsible for the results of any actions taken on the basis of information in this publication, nor for any omission from this publication; and (2) the publisher is not engaged in rendering legal, accounting, financial, professional or other advice or services. The publisher and the authors, consultants and editors expressly disclaim all and any liability and responsibility to any person, whether a subscriber or reader of this publication or not, in respect of anything, and of the consequences of anything done or omitted to be done by any such person in reliance, whether wholly or partially, upon the whole or any part of the contents of this publication. Without limiting the generality of the above, no publisher, author, consultant or editor shall have any responsibility for any act of omission of any author, consultant or editor. Copyright Indigo Arch Pty Ltd 2018
Our ageing population Counting the cost of health care as the baby boomer generation hits a critical life stage
4
Cost-of-living increases Increase in health-care costs puts pressure on one key tribe
6
Track your household spending Use our budget planner to calculate where your money is going
7
Super system set for a shake-up? New proposals seek to address the fact that Australians are living longer
8
Why we should work until 70 – or not Social Services Minister Dan Tehan, Actuaries Institute chief executive Elayne Grace, Per Capita executive director Emma Dawson, Grattan Institute chief executive John Daley and ACTU assistant secretary Scott Connolly have their say on pushing the pension age to 70
10
Tax cuts or health care? ACOSS senior adviser Peter Davidson explains why the Government must invest in our future
12
Beware a two-tier system The Australia Institute senior economist Matt Grudnoff examines the health-care burden
14
The tribes explained How YourLifeChoices’ six retirement tribes were born
15
The good, bad and the ugly Your views on the reality that we are living longer
16
An essential piece of the puzzle Aged Care Steps director Louise Biti tells why aged-care costs must be part of your planning
18
Government update What has changed and what is about to change?
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YourLifeChoices Retirement Affordability Index™ June 2018
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Living longer means spending more on health care We’re living longer and rising health-care costs are putting pressure on government funding and on many households.
T
he Australian Government’s 2016 Census of Population and Housing showed that about 3.7 million out of 24.3 million Australians were aged 65 or older.
The 2016 census found that:
In 1901, older people aged 65 and over made up four per cent of Australia's population. This increased to 6.4 per cent in 1921, 7.4 per cent in 1941 and 8.5 per cent in 1961, before slowly declining to 8.3 per cent in 1971. Between 1971 and 2011, the proportion increased to 14 per cent and to 15 per cent in 2016. For those aged 85 years and over, the proportion has more than tripled, from 0.5 per cent to 1.8 per cent.
• 72 per cent were overweight or obese
Compared with 2011, there are an extra 664,500 Australians aged 65 and over. By 2056, government forecasts estimate there will be 8.7 million Australians aged 65 or older (22 per cent of the population) and by 2096, 12.8 million (25 per cent). Of the current 3.7 million, those aged 65 to 74 accounted for the majority of older people (56 per cent), however the census found increasing numbers in the 75-84 years group (30 per cent) and 85 and over (13 per cent). With average life expectancy about 80.4 years for males and 84.6 for females, health has become an important factor for both the individual and for the economy.
• 92 per cent of older Australians reported not eating enough fruit and vegetables to meet the recommended guidelines • 52 per cent reported high levels of psychological distress. With longevity, one expects increasing health-care costs. The census found that in 2014–15, Australians aged 65 and over accounted for 28 per cent of the 123 million claims for GP visits. There were more than twice as many claims per person for that group than for those aged under 65 – 10.1 compared with 4.4. In addition, there were 12.5 million specialist visits claimed through Medicare in 2014–15 – 43 per cent of all specialist claims and four times as many than for people aged under 65. The three most common elective surgery procedures for people aged 65 and over were cataract extraction, cystoscopy and knee replacements. This changed slightly for people aged between 65 and 84, with hip replacements pushing out knee replacements.
Proportion of older people (those aged 65 years & over) by sex, 1911 to 2016 20% 15% 10% 5% 0% 1911 Males 4
Females
1921(a) Total average
1947(a)
1966 Census year
YourLifeChoices Retirement Affordability Index™ June 2018
1996
2011
2016
Sourced from Australian Bureau of Statistics © Commonwealth of Australia 2017.
Affluent Couple
Affluent Single
Constrained Couple
Constrained Single
CashStrapped Couple
CashStrapped Single
2009-10 - HES
7.6%
7.2%
8.0%
9.1%
4.2%
6.4%
2015-16 - HES
9.6%
9.6%
11.9%
7.7%
4.9%
4.8%
Spending on health care
A Monash University-CSIRO report in 2016 estimates that as a result of an ageing population, health expenditure per person will rise from $7439 in 2015 to $9594 in 2035 – an increase in total expenditure from $166 billion to $320 billion or an average annual growth of 3.33 per cent.
to encourage this is an expansion of the Pension Work Bonus to allow people to earn $300 a fortnight without affecting their entitlements.
Personal health costs are an issue for many retirees. In YourLifeChoices’ Retirement Income and Financial Literacy Survey 2018, 71 per cent of respondents said they had private health insurance. However, the increasing cost of private cover means that key groups are struggling to maintain their policies. An analysis of the Australian Bureau of Statistics’ Household Expenditure Survey (HES) by senior economist with The Australia Institute Matt Grudnoff shows how spending on health care by our six tribes has changed between the 2009-10 and 2015-16 HES surveys. Constrained Couples have borne the brunt of the increases. Mr Grudnoff said: “This is primarily because Constrained Couples spend the largest proportion of their income on health. Cash-Strapped Couples and Singles spend the smallest proportion of their income on health and so it impacted them the least.” Given the financial pressure on many older Australians, government initiatives for this key group in Federal Budget 2018 have been keenly dissected. Under the banner ‘More Choices for a Longer Life’, the Government delivered options for Australians who want to continue working beyond pension age, those who can tap into the equity in their home and those who fear they will outlive their financial resources. However, it did nothing significant for pensioners who rely fully on the Age Pension and do not own their home. Most of these budget policies listed here will start from 1 July 2019.
Mature-age workers The Government says it wants to help Australians work for as long as they wish. One of the measures YourLifeChoices disclaimer
Another is a one-year exemption from the work test for voluntary superannuation contributions. This means Australians aged 65 to 74 with less than $300,000 in super will be able to top up their fund for an extra 12 months after retiring.
Cash-poor, asset-rich homeowners The Pension Loans Scheme will be widened so those homeowners on a full pension and selffunded retirees can borrow from the Government. Previously, this option was open only to part-age pensioners. This initiative will allow single full-rate pensioners to boost their annual income by up to $11,799 and a combined $17,787 for couples. In other words, those eligible for the scheme will be able to access an income stream equal to 50 per cent more than the Age Pension rate. The extra income stream will be a form of reverse equity mortgage on the homes of pensioners. An interest rate of 5.25 per cent will apply and the amount borrowed will not be allowed to exceed the value of the home.
New income streams After years of talk about legislating to amend Age Pension means testing to make annuities or pooled lifetime income streams more attractive to retirees, this budget has set that ball rolling. Under a new regime, annuities will be known as Comprehensive Income Products for Retirement (CIPR). The rules will assess a fixed 60 per cent of all pooled lifetime product payments as income, and 60 per cent of the purchase price of the product as assets until age 84, or a minimum of five years, and then 30 per cent for the rest of the person's life.
YourLifeChoices Retirement Affordability Index™ June 2018
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Key tribe struggling with health costs
T
he Consumer Price Index (CPI) rose 0.4 per cent in the March quarter, compared with a rise of 0.6 per cent in the December 2017 quarter.
The increase for the 12 months to 31 March 2018 was 1.9 per cent, identical to the previous 12 months. The most significant price rises were gas and other household fuels (+6.0 per cent), pharmaceutical products (+5.6 per cent), vegetables (+3.7 per cent) and medical and hospital services (+1.5 per cent). The Australia Institute senior economist Matt Grudnoff said Constrained Couples were most affected by the health-care increases. “This is primarily because Constrained Couples spend the largest proportion of their income on health.
Weekly expenditure for retirees aged 54+ Expenditure items Housing As a percentage of expenditure Domestic fuel & power As a percentage of expenditure Food & non-alcoholic beverages As a percentage of expenditure Alcoholic beverages & tobacco products As a percentage of expenditure Clothing and footwear As a percentage of expenditure Household furnishings & equipment As a percentage of expenditure Household services & operation As a percentage of expenditure Medical & health care As a percentage of expenditure Transport As a percentage of expenditure Communication As a percentage of expenditure Recreation As a percentage of expenditure Education As a percentage of expenditure Personal care As a percentage of expenditure Miscellaneous goods & services As a percentage of expenditure Total weekly expenditure Total monthly expenditure Total annual expenditure 6
Affluent Couples
Conversely, Cash-Strapped Couples spend the smallest proportion of their income on health.” The most significant offsetting price falls were in recreation with international holiday travel and accommodation down 2.4 per cent and household furnishings, with audio, visual, and computing media and services down 6.1 per cent and furniture down 2.8 per cent. These falls mainly benefitted Affluent Couples and Singles who spend the most in these areas. In previous quarters, the largest cost of living increases have usually had the biggest effect on Cash-Strapped Couples and Singles, said Mr Grudnoff. This quarter it was, unusually, Constrained Couples who bore the brunt of the rises because of the increases in the cost of health.
Constrained Couples
Couple Couple homeowners homeowners with private on Age income Pension $179.94 $106.35 13% 13% $45.62 $34.26 3% 4% $234.53 $165.19 16% 20% $52.24 $25.63 4% 3% $30.23 $17.16 2% 2% $71.45 $31.00 5% 4% $42.10 $29.78 3% 4% $140.73 $100.30 10% 12% $189.76 $123.19 13% 15% $37.99 $26.92 3% 3% $290.38 $98.61 20% 12% $0.58 $0.21 0% 0% $29.16 $17.70 2% 2% $87.80 $47.35 6% 6% $1,432.53 $823.66 $6,207.64 $3,569.20 $74,491.73 $42,830.44
YourLifeChoices Retirement Affordability Index™ June 2018
CashStrapped Couples Couple who rent on Age Pension $201.42 29% $36.17 5% $149.37 21% $41.46 6% $9.07 1% $18.86 3% $16.09 2% $34.73 5% $58.57 8% $29.14 4% $64.12 9% $0.00 0% $12.30 2% $23.68 3% $694.97 $3,011.53 $36,138.38
Affluent Singles
Constrained Singles
CashStrapped Singles
Single Single Single who homeowner homeowner rents on Age with private on Age Pension income Pension $120.90 $89.23 $158.68 15% 20% 36% $33.00 $29.54 $25.07 4% 6% 6% $117.83 $82.82 $74.22 14% 18% 17% $25.33 $14.26 $19.33 3% 3% 4% $20.11 $8.72 $7.19 2% 2% 2% $39.10 $18.15 $14.48 5% 4% 3% $37.98 $21.47 $11.41 5% 5% 3% $80.80 $35.78 $21.17 10% 8% 5% $100.52 $51.27 $34.58 12% 11% 8% $36.77 $18.98 $14.81 4% 4% 3% $135.25 $50.88 $30.70 17% 11% 7% $0.13 $0.12 $0.01 0% 0% 0% $18.17 $9.58 $8.49 2% 2% 2% $53.29 $25.94 $16.16 7% 6% 4% $819.17 $456.74 $436.30 $3,549.76 $1,979.20 $1,890.65 $42,597.09 $23,750.35 $22,687.84
How does your spending compare? Expenditure items
Affluent Couples
Constrained Couples
CashStrapped Couples
Affluent Singles
Constrained Singles
Single Single Couple Couple Couple who homeowner homeowner homeowners homeowners rent on Age with private on Age with private on Age Pension income Pension income Pension
CashStrapped Singles Single who rents on Age Pension
Housing Rent, interest, home repairs and maintenance & body corporate fees As percentage of expenditure Domestic fuel & power Electricity, gas & oil As percentage of expenditure Food & non-alcoholic beverages Includes meals in restaurants As percentage of expenditure Alcoholic beverages & tobacco products Alcohol consumed at licensed premises As percentage of expenditure Clothing and footwear Dry cleaning, repairs & alterations As percentage of expenditure Household furnishings & equipment Outdoor furniture, floor and window coverings, linen and bedding, appliances, glassware, tableware and cutlery, tools & mobile phones As percentage of expenditure Household services & operation Cleaning and garden products, phone charges (including mobile), pest control & home cleaning services As percentage of expenditure Medical & health care Health insurance, doctor and dental fees, medicines and pharmaceutical products, prescriptions & hospital and nursing home charges As percentage of expenditure Transport Purchase, maintenance and insurance of vehicles, fuel & public transport fares As percentage of expenditure Communication Spending on telephone (including fixed line and mobile) Spending in internet services As percentage of expenditure Recreation AV equipment including TVs and pay TV, books, newspapers and magazines, camping and fishing equipment, sports equipment, internet charges, holidays & animal expenses As percentage of expenditure Education Primary and Secondary school fees (including school sport fees) TAFE and University fees (including HELP) Fees to all other private education institutions As percentage of expenditure Personal care Toiletries, cosmetics & hairdressing As percentage of expenditure Miscellaneous goods & services Stationery, watches and jewellery, interest payments on credit cards and all loans (excluding home loans), education, rates and charges on investment properties, accountant and tax fees & cash gifts As percentage of expenditure Total weekly expenditure Total monthly expenditure Total annual expenditure
YourLifeChoices Retirement Affordability Index™ June 2018
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Sponsored message from Challenger
The shift from saving to spending in retirement
New superannuation proposals seek to address the fact that Australians are living longer.
I
t’s 1991. The Wallabies have won their first Rugby World Cup. Paul Keating takes over from Bob Hawke as Prime Minister and Treasurer John Kerin announces that from 1 July 1992, under a new system to be known as the Superannuation Guarantee (SG), employers will be required to make superannuation contributions on behalf of their employees.
But a lot has changed since 1992, and the superannuation system is now starting to show signs that it is not accommodating the fact we are living on average nine years longer 1 than the system was originally designed for.
members will continue to broadly receive the same level of income from the product, even if the member lives beyond 100. Further, the Government stated that allocating 100 per cent of a member’s superannuation savings to an account-based pension (a common way of investing for retirees), would not meet the definition of a CIPR as these products are generally not designed to provide income for life.
Why do we need these proposals? Entering retirement brings with it many considerations not encountered during our working lives. Spending your savings in retirement is a fundamentally different proposition from when you are accumulating those savings. These new government proposals seek to help address these considerations.
“Our super system is more mature than most people realise. It’s doing the first part of its job, allowing people to accumulate assets through their working lives, with typical household super wealth at retirement in the $350,000–$500,000 2 range and increasing,” said Challenger Chairman, Retirement Income, The risk that over time, Jeremy Cooper. “This wealth was accumulated to provide income in retirement, but the system is not yet set up to do this next phase successfully…”
inflation will increase the cost of living can present a significant risk over a lengthy retirement.
And while our superannuation system is the envy of many countries, ranking at number three in the world 3, the Government has recognised the need to modernise the system for our ageing population.
What are the government proposals? In the 2018 Federal Budget, the Government proposed that superannuation funds will now be required to develop retirement income strategies for their members and offer Comprehensive Income Products for Retirement (CIPRs) that will provide their members with income for life, no matter how long they live. Subsequently, the Government has confirmed that superannuation funds need to ensure these products are designed in such a way that their 8
What are these retirement considerations? There are four major retirement income considerations. These are longevity risk, sequencing risk, inflation and cognitive decline.
Longevity risk All retirees are exposed to longevity risk, the risk that they will outlive their savings. Longevity risk also has another dimension – the uncertainty of how long people will live. Put simply, the longer you live, the longer you are likely to live. A 65-year old female has only a five per cent chance of dying in the year of her life expectancy (currently 90 4). This makes planning around retirement income needs all the more complicated. 1. ALT2010-12 with 25-year mortality improvements from the Australian Government Actuary 2. ABS Survey of Income and Housing 2015-16 3. Mercer’s Melbourne Global Pension Index 2017 4. ALT2010-12 with 25-year mortality improvements from the Australian Government Actuary
YourLifeChoices Retirement Affordability Index™ June 2018
Sponsored message from Challenger
Sequencing risk Sequencing risk is the risk that the order and timing of your investment returns is unfavourable, resulting in less money for retirement. When drawing on a portfolio, the sequence of returns matters. A retiree’s ability to recover from poor investment returns (or take advantage of lower market prices) is generally limited because strategies available in the accumulation phase (take more risk, keep working and contribute more) are generally not available. For more information on sequencing risk, visit www.challenger.com.au/about/Sequencing
Inflation The risk that over time, inflation will increase the cost of living can present a significant risk over a lengthy retirement. Recent low inflation rates, following an extended period of inflation at ‘average’ rates, do not make it any less likely that inflation could increase at some stage over the next two to three decades.
Cognitive decline Sound retirement income planning and advice involves the recognition that there is a likelihood that at some point along the way, one or both members of a retired couple may suffer cognitive impairment or dementia. 5. Brown, Hansnata, and La, 2017 ‘Economic cost of dementia in Australia 2016-2056’ Alzheimer’s Australia. Institute for Governance and Policy Analysis, University of Canberra
Some researchers estimate that there are more than 400,000 Australians currently living with dementia and this is projected to double over the next 20 years 5.
What’s next? The CIPR proposals are not proposed to come into effect until 1 July 2020, with the development of retirement income products to meet these requirements set to accelerate in the meantime. The development of new retirement income products, such as deferred lifetime annuities where the regular payments do not start immediately, will give retirees more choice and flexibility and are an essential building block for CIPRs. Mr Cooper says the “government proposals for a retirement income framework, including comprehensive income products for retirement (CIPRs), are a big step forward. They will be an enhancement, not a disruptive change.” To find out more about the 2018 Federal Budget and how it could affect you, read the Challenger Federal Budget Report 2018-19. DISCLAIMER: All content in the Retirement Affordability Index™ is of a general nature and has been prepared without taking into account your objectives, financial situation or needs. It has been prepared with due care but no guarantees are provided for the ongoing accuracy or relevance. Before making a decision based on this information, you should consider its appropriateness in regard to your own circumstances. You should seek professional advice from a financial planner, lawyer or tax agent in relation to any aspects that affect your financial and legal circumstances.
YourLifeChoices Retirement Affordability Index™ June 2018
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Why we should work until 70 – or not Push the ‘official’ retirement age to 70? Given the furious debate over the Government’s proposal, Olga Galacho has assembled key voices on both sides of the fence.
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n Federal Budget 2014, the Government stated it intended to push out the Age Pension eligibility age from 65 to 70 years. This so-called ‘zombie’ legislation is still on the books. YourLifeChoices asked some of the most influential voices in the public conversation to explain their positions on this proposed policy. This is what they said.
Dan Tehan, Minister for Social Services The Age Pension has the most generous indexation arrangements and is paid at the highest fortnightly rate of income support payments in the Australian social security system. Since the Coalition was elected, pensions have increased by around $100 per fortnight for singles and $150 per fortnight for couples. The Australian Government spends $45 billion each year on the Age Pension. When the Age Pension was introduced over a century ago, the pension age was set 10 years above the average male life expectancy of 55 years. It is now more than 15 years below our more than 80 years’ life expectancy. In 1975, seven working Australians supported each Australian retiree. This has fallen to five working Australians today. In 2055, this will drop to three working Australians. The simple fact is, Australians are living longer and we need to ensure that Australia’s social security system remains sustainable for future generations.
Elayne Grace, chief executive, Actuaries Institute, Australia As average life expectancies continue to increase, it is inevitable that the eligibility ages for government-funded pensions 10
will come under pressure. To keep the cost of these taxpayer-funded pensions relatively constant as a percentage of gross domestic product, and affordable over time, the future eligibility age should be linked to life expectancies. As an example, for every year increase in life expectancy, there should be a proportional increase in pension age. This link is already happening in some European countries. It occurs automatically, with appropriate transition arrangements and plenty of early warning. An important aspect of gradually raising the pension age is that it changes the mindset and expectations of our community. But, we need to do it in a sensible and compassionate way with no sudden increase. We must also recognise the need for appropriate income support for those whose bodies are ‘worn out’ because not everyone will make the stipulated age in good health. However, this issue arises whatever the age, whether it is 65, 67 or 70. Will this simply push more retirees onto disability pensions for a year or two before they transition to the Age Pension? This could mean that higher disability pension costs will partially offset the reduced Age Pension costs. There are some critical questions to consider – how willing are employers to employ a 66-year-old (for four years to age 70) either on a part or full-time basis and if they are, will it be at the expense of younger workers?
Emma Dawson, executive director, Per Capita Obviously, lifting the pension age to 70 brings economic savings to the Government. At the same time, keeping experienced older workers in the labour force can increase productivity and support economic growth. For citizens, however, retiring at 70 would bring significant problems.
YourLifeChoices Retirement Affordability Index™ June 2018
It’s true that, for many people, continuing to work beyond the traditional retirement age of 65 brings real benefits. Many older people wish to stay engaged and active at work, although, work for this group may need to look a little different, with parttime and flexible positions important.
become eligible for the Age Pension and eligible to access their superannuation.
We must also recognise that working into an eighth decade is not possible for some people. Those employed in jobs requiring a high degree of manual or physical labour often find the demands of the job become too much as they get older. Working until 70 simply isn’t an option for them, and changing to a new occupation can be notoriously difficult for older people.
These changes are in the right direction, but they missed an opportunity for much more substantial reform, and by setting long-term timetables for change, may have made future change more difficult.
At the same time, older people face significant barriers to workforce participation, including ageism and health issues. Through our research and social innovation work at the Centre for Applied Policy in Positive Ageing, we know that a worker made redundant in his or her 50s or 60s finds it much harder to re-enter the workforce. Many such citizens are already struggling to survive on Newstart while they wait to reach the retirement age and access the Age Pension. Lifting the pension age to 70 will add five more years to the wait for such citizens and drastically increase the likelihood they will enter retirement in poverty. Those able to do so will be forced to significantly deplete their superannuation savings while waiting to access a part-pension, meaning there will likely be more full-rate pensioners at 70 as a result. While supporting older people to continue to work when they are willing and able to do so is an important policy goal, enforcing a mandatory pension age of 70 is neither fair nor reasonable for all Australians.
John Daley, chief executive, Grattan Institute We estimate that increasing the pension age by three years to age 70, and lifting the preservation age to 70, would increase total workplace participation rates by an additional 1.4 per cent, increasing economic growth by around $25 billion. Obviously, reforms would need to be designed to ensure that those over 55 who cannot work due to disability are able to access a pension equivalent to the Age Pension and have unfettered access to their superannuation. Increasing the workforce participation rate of older people would mean that Australia’s GDP would be about $25 billion higher by 2022. The key policy change is to increase the ages at which people YourLifeChoices disclaimer
In 2017, the pension age increased to 65.5, and continues to increase by six months every two years until, in 2023, it reaches 67.
(Under) the current regime, people can retire at any age after 55 and live on their superannuation and savings until they qualify for the Age Pension. A later pension age would effectively encourage many to work for longer, even if they formally retire before the pension age.
Scott Connolly, assistant secretary, ACTU Increasing the pension age is yet another example of the rules being broken for working people and the Turnbull Government being out of touch. At a time when working people are struggling against near-record low wage growth and are already being forced to work longer hours for less pay, the Turnbull Government proposes to force people to work until they’re 70. A dignified retirement is a goal that is slipping away from more working people as they face stolen wages and superannuation, and a persistent gender pay-gap which is compounded in retirement. Women on average retire with 47 per cent of the balance of men, and this causes huge numbers of women to retire into poverty. The reality is that despite wages flat-lining, corporate profit growth is incredibly strong. We need to share the wealth that is being created by Australian workers, not force them to work longer to prop up the absurd salaries being handed out to the top end of town. More money and power in the hands of working people would mean better pay and conditions, more money being spent in Australian businesses and a stronger economy. It would mean that Australian workers would be able to enjoy a dignified retirement, which was the promise of the superannuation system at its inception. In America, people in their 70s work in hospitality and retail, rather than enjoy their retirement. We will not accept the further Americanisation of our industrial landscape, and we will not accept working people shouldering an unfair burden when the big banks and multinational corporations are being given an $80 billion tax cut.
YourLifeChoices Retirement Affordability Index™ June 2018
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The holiday or health care: a choice we must make A secure retirement rests on the foundation of universal access to basic health and aged care, writes ACOSS senior adviser Peter Davidson. The Australian Council of Social Service (ACOSS) believes that security in retirement is about more than having a decent income. A secure and dignified retirement rests on three pillars: an adequate income, affordable housing and quality, affordable health and aged care. The best health and aged-care systems are universal (available to all) and require little or no outof-pocket contributions. This principle was undermined by the 2014 Federal Budget decision to withdraw $10 billion a year from future hospitals funding to the states, continuing the freeze on Medicare rebates for doctors’ appointments and cuts to community-based health services. The Government has since partially restored these funding cuts, but major shortfalls in health funding remain, including gap fees for specialist appointments, a future budget crunch for public hospitals and long-standing deficiencies in dental and mental health care. People with low incomes are still having teeth pulled instead of filled because they have to wait months for public dental services.
Australia has strong public institutions and programs to share the risks associated with old age, poor health and disability across the community. They include universal access to publicly supported health care (Medicare, hospitals and the Pharmaceutical Benefits Scheme), a national aged-care program and, more recently, the National Disability Insurance Scheme (NDIS).
A key strength of these programs is that they are mainly funded from general taxation, including the Medicare levy. The compact between taxpayers and governments is that our essential health-care needs will be met if, and when, they arise. In return, people are taxed according to their ability In Australia, one-sixth to pay.
of all health spending is private (out of pocket) spending, one of the highest levels in the OECD.
All wealthy nations are increasing public health spending, so that the whole population, and not only the well-off, benefits from advances in medical treatments and drugs. This is an investment in our health and well-being, not a ‘drain’ on public budgets. The alternatives are that people have to queue longer for essential health care or that we pay more in user charges. Already, one-sixth of all health spending is private (out-of-pocket) spending, one of the highest levels in the OECD. The average out-of-pocket expense (excluding health insurance premiums) in 2012 was $1200. It’s vital that we avoid a two-tier health-care system – one for the top half of the population and another for the bottom half, of the kind that has long existed in the United States and still exists in dental care in Australia. 12
The compact between governments and taxpayers
Sharing risk across the community is not necessarily more costly for governments. Public health-care systems based on the principle of universal access, such as those in Australia and the United Kingdom, cost governments much less than the mainly private (but publicly subsidised) health care system in the US.
Closing the gaps The challenge for governments is how to pay for the inevitable increases in the future costs of existing health-care programs, while closing the worst gaps in services (including dental and mental health services and the expansion of the NDIS). The Parliamentary Budget Office estimates that to maintain existing commitments in health, aged care and the NDIS, governments will need to spend an extra $21 billion a year by 2027. Yet the Government has just committed to $18 billion in annual income tax cuts and another $14 billion per year in company tax cuts that will hit the Budget hardest in the mid-2020s, at exactly the
YourLifeChoices Retirement Affordability Index™ June 2018
time that funding for essential services will need a boost. In ACOSS’s view, committing to large tax cuts this far in advance, when we have little sense of how the Budget and the economy will be travelling, is not responsible budgeting. We should be strengthening public revenue to meet these future spending commitments, not legislating in advance to cut it by more than $30 billion a year. Raising the Medicare levy is one option. ACOSS argued for an extension of the Medicare levy surcharge for high income-earners to those with private health insurance, and the removal of opportunities for people to use tax shelters to avoid paying the levy. Nevertheless, we were disappointed the Medicare levy option was abandoned in the 2018 Budget. It doesn’t follow that personal tax rates have to increase. Tax breaks that are poorly targeted, not fit for purpose or exploited by people with ‘smart’ lawyers and accountants, should be reviewed. They include tax breaks for capital gains, negatively geared property investments, income diverted into private trusts and companies, tax avoidance by multinational corporations and over-claiming of work-related deductions. An alternative option that is sometimes raised – increasing the GST – would raise taxes regardless of people’s ability to pay. For example, an increase in the GST from 10 per cent to 15 per cent would cost households in the lowest 20 per cent by income an extra $34 a week in tax (seven per cent of their average income). Middle-income households would pay an extra four per cent of their income and the highest 20 per cent would pay an extra three per cent. That’s the opposite of progressive taxation. YourLifeChoices disclaimer
A new compact for security in retirement? Despite years of tinkering, tax breaks for superannuation and age-based rebates such as the Senior Australians and Pensioners Tax Offset (SAPTO) are still poorly designed and targeted. Only one in seven people aged over 64 pays any income tax. Superannuation fund earnings and benefits are generally tax-free after retirement, and any other income is untaxed as long as a couple earns less than around $60,000. It’s reasonable that everyone, regardless of age, who is able to do so contributes to the costs of universal essential services. That’s not happening now. While tax-free superannuation benefits can be justified on the grounds of simplicity, and the fact that contributions and fund earnings have already been taxed, the case for not taxing fund earnings in the retirement phase (once a superannuation pension is paid) is weak. Most other investment income – including bank interest and dividends – is taxed, along with wages. One option is for the Government to establish a new compact with older people: to remove or reduce the value of these tax shelters (the tax-free treatment of some fund earnings and generosity of the SAPTO) and use the extra revenue to remove or reduce user charges for essential health services, including aged care. This may reduce retirement incomes for those aiming for the so-called ‘comfortable’ retirement living standard advocated by the Association of Superannuation Funds of Australia (ASFA), including overseas holidays every two years, but it would relieve one of the greatest anxieties of retired people – whether they will be able to afford the health and aged care they need when they are older. The money (and the holidays) or the health care – that’s a choice we need to make.
YourLifeChoices Retirement Affordability Index™ June 2018
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Rising costs are creating a two-tier health-care system Senior economist with The Australia Institute Matt Grudnoff reveals who the heath-care burden is hurting the most.
H
ealth care was a key driver of price increases in the June quarter, which makes it timely to look closely at the effect on our retirement tribes. It is generally true that low-income households spend a larger proportion of their income on necessities compared with high-income households. When considering how you will spend your money, it’s likely that the priorities will be the basic living essentials. A high-income household that can easily meet the basic needs will have money left over to buy non-essential goods. When we look at our tribes, we can see this happening with a basic such as food. Cash-Strapped Couples spend 21 per cent of their income on food. Constrained Couples spend 20 per cent and Affluent Couples 16 per cent. The proportion of income spent falls as the household income rises. It is important to remember that we’re talking about the proportion of income not dollar amounts. Affluent Couples spend more dollars on food than Cash-Strapped Couples, but Cash-Strapped Couples have lower incomes and so spend a larger proportion of their incomes on food.
Weekly expenditure for retirees aged 54+ Housing As a percentage of expenditure Domestic fuel & power As a percentage of expenditure 14
Affluent Couple
Constrained Couple
This same pattern applies in Cash-Strapped households, which spend a bigger proportion of their income compared with constrained and affluent households on two essential categories: housing and domestic fuel and power. The reverse happens when we look at a category such as recreational spending. For non-essential goods, the proportion of spending rises as income rises. Affluent Couples spend the most on recreation – 20 per cent. Compare this with Constrained Couples (12 per cent) and Cash-Strapped Couples (nine per cent). The principle that low-income households spend a larger proportion of their income on essential goods breaks down when it comes to health care. Health care can easily be regarded as a necessity, but among our retired tribes, Cash-Strapped Couples and Singles spend the least, just five per cent. Affluent Couples spend 10 per cent while Constrained Couples spend the most, 12 per cent. This means that lower-income households view health care as a non-essential category that they
CashStrapped Couple
Couple Couple Couples who homeowners homeowners rent on Age with private on Age Pension income Pension
Affluent Single
Constrained Single
CashStrapped Single
Single homeowner with private income
Single homeowner on Age Pension
Single who rents on Age Pension
$179.94
$106.35
$201.42
$120.90
$89.23
$158.68
13%
13%
29%
15%
20%
36%
$45.62
$34.26
$36.17
$33.00
$29.54
$25.07
3%
4%
5%
4%
6%
6%
YourLifeChoices Retirement Affordability Index™ June 2018
can cut back on because their budgets won’t stretch that far.
Constrained tribes can afford it, but it comes at considerable cost to their budgets. This is, in large part, why they spend the largest proportion of their budgets on health care. The Affluent tribes also buy private health insurance but given they have larger incomes it represents a smaller proportion of their income.
This is concerning for several reasons. Skimping on health care is likely to reduce quality of life and, potentially, lifespan. It can also increase the total cost to the health system. If people avoid going to a specialist or other health professional early, then small easily treatable problems can turn into large expensive problems. One strange aspect of spending patterns on health care sees those on very low incomes spending very little on health care, as we’ve explained, while those on moderate incomes (Constrained Couples) spend the largest proportion of their incomes – larger even than high-income earners (Affluent Couples and Singles).
The costs of health care have risen substantially in recent decades – as much as power. In the past 30 years, health care has risen to be 3.7 times higher compared with the Consumer Price Index (CPI), Skimping on health care which has doubled.
is likely to reduce quality of life and, potentially, lifespan. It can also increase the total cost to the health system.
This is partly explained by the fact that most retirees can access bulk-billed GP visits and avoid out-of-pocket costs. And it is also due to the way government healthcare funding has evolved. In recent decades, Australia has reduced its emphasis on direct government spending on specialised health care and has increased indirect funding of that area by subsidising private health insurance. Effectively, the Government has substituted spending on Medicare for subsidies for private health insurance. Even with the subsidies, private health insurance is expensive and the Cash-Strapped tribes simply cannot afford it. YourLifeChoices disclaimer
For many, quality health care is considered essential but the reality is that it is increasingly fracturing into a two-tier system.
It might be time for the Government to consider if it is getting a big enough benefit from this strategy or if the $6.4 billion it will spend on subsidies to private health insurers next year might be better put directly into the health-care system. While the Cash-Strapped households would be better off if private health insurance subsidies were instead put into Medicare, the Constrained tribes might also benefit if they could access highquality services without having to buy private health insurance. With the cost of private health insurance continuing to rise more rapidly than the CPI, it is obviously becoming a growing burden on middle-income retired households.
YourLifeChoices Retirement Affordability Index™ June 2018
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The good and the bad about living longer In the late 1800s, life expectancy was 47.2 for males and 50.8 years for females. Now it’s 84.5 and 87.3 years respectively. We asked YourLifeChoices members to share their fears and their hopes for those extra years. Des Umbers I’ve been married for 40-plus years, been working for 50-plus years, and in a few years may be eligible for the Age Pension. I think the retirement age going to 70 is a good idea. Most of the younger white-collar workers I work with seem to have had extended childhoods into their early 30s, many leaning on their parents for financial support. Doing their stint of 40 years should be fine. I’m excited that I’ll live to witness more things, but I know from personal experience with my parents that I need to cram in as much as possible before the age of 80. Dementia is my main concern, as it would severely limit my independence, just as it did Dad’s. Along with a longer life come the associated medical bills – knees and hips, strokes and slips are all on the cards. Do I go for private health cover? And to avoid gaps do I need to go for full cover? But I can’t afford it on the pension. Do I go public and just join the waiting lists? I don’t see the waiting lists shortening any time soon, but more public finding of health care is certainly needed. I’m positive about the future, as a retiree with reasonable super to provide for a ‘mid-level’ lifestyle. I own my home and have extended family nearby. I’ve already seen the world. I’ll be able afford to travel 16
domestically during my retirement. But I really feel for individuals trying to get by just on the pension. Heating costs will rise as will most utilities. Housing affordability will mean many will have to rent. Rent and utilities are a major cost to pensioners. We need to address that as a nation going forward.
David Glauser Australia’s new growth industry – export pensioners! With living costs in Australia going through the roof, the prospect of retiring overseas becomes more and more attractive. But the Australian Government is doing everything it can to make that as difficult as possible. If we retired in Malaysia, the Philippines, Thailand, Bali or Vietnam, our financial worries for our golden years would be over. The lifestyle we would enjoy would cost the equivalent of $70,000 here in Australia. Not so fast, says the Government. First, we will reduce your Australian pension because you will now be living overseas. Keep your Australian home and we will classify it as an asset; and that extinguishes your pension. Downsize your home and assets released will reduce or extinguish your pension. Fall ill overseas and you will be on your own – Medicare and health funds won’t want to know you. If you are over 75 and try to buy private travel insurance, good luck.
YourLifeChoices Retirement Affordability Index™ June 2018
If pensioners were not disadvantaged so severely by living overseas: • there would be less demand on Australian hospitals and medical facilities • more large homes, often in city areas, would be freed up for younger families with children • there would be less demand for places in Australian retirement homes • there would also be less demand for in-home care and carers • and pensioners will no longer be worried sick on how to make ends meet! How to make it happen: • allow pensioners to keep their pensions in full overseas • allow medical claims on Medicare and health funds from overseas.
Cesar Mantilla We’re living longer in this new millennium and with that comes both good and bad news. We have extra years to enjoy the pleasures of life, maybe travel, take up a new hobby, build something for the kids or for charity. If you don’t do anything, you will end up a cranky person who whinges about everything. I’ve taken up many hobbies since I turned 65: teaching, rebuilding cars, playing music, dancing – great exercise, and you may meet a nice lady. I’m constantly looking for new adventures. I just bought a welder. After I had turned 65 and retired, I decided to have lots of fun to maintain my happiness. Whatever you do after 65, you need to plan and try new things. I’m 75 and in good health. I travel in and out of Australia to different places in Asia, enjoying the nice warm weather and meeting fun people. I only have my pension as income, but travel is cheap in economy class with only carry-on luggage.
A radical idea, yes, but it could so easily be a winwin solution for pensioners and the government.
Patricia Hayward What delights me about the prospect of living longer? I may be able to travel on the Indian Pacific, catch the Ghan, fill in the missing stamps from my collection. What scares me? Not living long enough to get my family history printed out. And the constant changes to income, whether that be from self-funded assets or government pensions, which makes it almost impossible for those over 65 to make good, informed decisions on their futures. Is it fair to lift the Age Pension eligibility age to 70? No. Many people become ill between the ages of 65 and 70. That’s no fault of their own, merely the body wearing out. After working for 50 years, people should be able to retire with dignity at 65. Do I understand aged care options and the costs involved? No, because every time I grasp what is involved, it changes again. Living in a rural area doubles the problems.
However, we do need to consider how we will manage when our health starts failing. It’s in the back of my mind – make a plan to ensure you are supported. That will cost some money whether in Australia or overseas. My advice? Plan your life activities – what you spend, where you go, what you do. Save as much as you can, then get out of Australia often and live an adventure with every trip.
Catherine* I love life and learning. There is so much to learn. Yes, there are downsides to getting older. Sometimes we have to learn to be more dependent on others, which is a rather hard thing to do if you have been an independent person. What scares me about getting older is losing my total independence or having to enter a nursing home. I think the plan to raise the pension age to 70 is appalling. The pension age should be no more than 65, and maybe less, if your health is not very good. *Not her real name.
Are health insurance and out-of-pocket costs a worry? I gave up on health insurance when the costs started spiralling through the roof and the payouts for procedures shrank. That shrinkage was bad enough but then the companies started dropping items that should have been covered. I was horrified when the government announced tax incentives for people to take up private health insurance, which was insulting to those on a full Age Pension who pay no tax. There is no way they can afford the consequent rise in the cost of health insurance. YourLifeChoices disclaimer
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Aged-care costs in retirement – an essential piece of the puzzle Calculating the potential costs of aged care is difficult, but Aged Care Steps director Louise Biti helps to make sense of the task.
The reality is that we are all likely to experience some cognitive decline or lose some of our physical ability as we age. This is a natural process, but this does not mean we will all develop dementia or lose the ability to live independently. It does mean, however, that at some point we may need to ask for help to complete our normal daily activities. This might be at-home help or help in residential care.
What do you need to plan for? Based on figures from the Australian Institute of Health and Welfare (AIHW), you should plan for about 17 to 25 per cent of your retirement years to be ‘care years’. For example, if you expect a potential of 30 years in retirement, this might include five to 7.5 care years. If asked, most of us would prefer to stay in our own homes as we age. Staying at home may be possible if we have lower care needs, if we can rely on the support of a capable spouse/family, or if we have sufficient financial resources to pay for help at home.
“How much you will need to pay … can vary roughly from $100 to $6000 a week, depending on the options chosen.” But if our care needs are too high for the people around us, or we don’t have good support networks, residential care might be a better option. In any case, planning the financial aspects of your retirement should also include an assessment of how much you will need to pay for care. This is difficult to calculate because of the unknown factors around health, opportunities and finances. Historically, the approach to retirement planning has been to decide what income you need and then calculate how much you need to save to generate this income. Most people assume a flat (or declining) 18
level of income that grows in line with inflation. However, if you consider the cost of care, the pattern is more likely to follow an upwards curve as shown in the graph below.
Pattern of income needs in reality Assumed income path
Income needs ($)
P
lanning your retirement can be exciting and absorbing. Less exciting, but equally important, is making plans for the aged-care years.
65
70
75
80
85
Age
In your early retirement years, you may spend more on leisure activities. This spending may decline as you age, but is likely to be replaced with the costs of care or in paying someone to do the activities you used to do yourself.
What does care cost? The costs of aged care have been increasing and opportunities have been expanding. The Government is increasingly focused on helping to expand and improve home-care opportunities. Australia has a good system of care compared to many other countries, with safety nets to ensure people with lower financial capabilities can still access care. But the ability to choose and the options available may be more limited if relying on the low-means concessions. How much you will need to pay is difficult to predict. Currently, it can vary roughly from $100 to $6000 a week, depending on the options chosen. This covers the wide range of options, from basic homecare packages to full-time nursing care at home. If you wanted to have 24/7 nursing care at home, you might need to employ four to five full-time nurses or carers to work eight-hour shifts.
YourLifeChoices Retirement Affordability Index™ June 2018
Access to government subsidies and rules for calculating the fees based on your finances helps to make care affordable, but having adequate savings opens up your choices and your ability to control the level and type of care you receive.
What you might pay What the Government might pay
Home care packages
Residential care
$3770–$14,600 per year*
$18,310–$45,300 per year*
Up to $50,000 per year
Up to $89,600 per year
* Additional service fees may also apply if selected and agreed to with the service provider
These figures were current to 30 June 2018 and only cover the cost of care. Regardless of which option you choose, you also have the costs of accommodation and other personal expenses. If you can afford them, top-up or additional services alongside these costs can make the difference in how comfortably you live in older age.
What you should start thinking about While we don’t know what our future holds, with some planning, we can help make our retirement a comfortable one and live it the way we choose. For example, we could:
• ensure we have a safe and secure income in place for life. This might be pension income, lifetime income streams or drawdown strategies from other investments • include our home as a financial resource available to provide a safe place to live. This might be a physical building, but it might also be access to equity to pay for our care needs by drawing regular income under an equity release arrangement, renting to generate extra income if we move into residential care, or selling to access the sale proceeds for other purposes • consider the impact on family and friends if relying on them to provide our care and allow for financial support to help them. Planning to make sure we have resources available is important. Equally important is to ensure we have an Enduring Power of Attorney in place in case we need to give someone else the responsibility of making the decisions and paying the bills on our behalf. These are all major decisions and can be too hard to make on our own, so advice from a financial planner who is experienced and accredited in aged care can help to remove some of the stress. Aged Care Steps can help you find an adviser.
DISCLAIMER: The information contained in this article is based on the understanding Aged Care Steps Pty Ltd ABN 42 156 656 843 (AFSL 486723, registered tax (financial) advisers 25581502) has of the Australian legislation at the time of writing. This information contains general information and may constitute general advice. Any advice in this communication has been prepared without taking account of individual objectives, financial situation or needs. It should not be relied upon as a substitute for financial or other specialist advice. Before making any decisions on the basis of this communication, you should consider the appropriateness of its content having regard to your particular investment objectives, financial situation or individual needs. We recommend that you see a registered tax agent or legal adviser prior to implementing any recommendations that you may make based on the information contained in this publication. Current to 30 June 2018. YourLifeChoices disclaimer
YourLifeChoices Retirement Affordability Index™ June 2018
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Government update YourLifeChoices keeps you up to date with retirement income changes. Income and assets tests From 2 July, the maximum income amount before the full Age Pension is affected is $172 per fortnight for singles and $304 combined per fortnight for couples The new thresholds are $1987.20 and $3040.40 respectively. The new asset limits are $561,250 for single home-owners and $844,000 for couples (combined). For non home-owners, the limits are $768,250 and $1,051,000 (combined).
Widow Allowance no longer available From 1 July 2018, the Widow Allowance is no longer available to new applicants. Those who would previously have claimed the allowance can now make a claim for either the Newstart Allowance, Age Pension or Special Benefit (if you’re over Age Pension age but don’t meet residence rules for the Age Pension). Recipients of the current Widow Allowance can keep the payment until 2022 or until they transfer to the pension (whichever is sooner), as long as they retain their eligibility.
End to backdated payments Claims for certain payments and concession cards will need to be completed in full before they are assessed, with the cessation of ‘intent to claim’ arrangement to enable backdated payments from 1 July 2018. You will have 14 days to complete your claim if you contact Centrelink, start an online claim or submit an intent to claim before 30 June 2018.
Payment of Carer Supplement Those eligible for the Carers Supplement will receive a payment of $600 for each eligible person in their care. If you care for a disabled child, you will receive the Child Disability Assistance Payment of up to $1000 for each eligible child. These payments will be made between 1 July and 31 July 2018.
Changes to grandparent payments From 2 July, grandparents who care for their grandchildren will face changes to the payments they receive, with the Grandparent Child Care Benefit (GCCB) being replaced by the Additional Child Care Subsidy (Grandparent) (ACCS) from 2 July 2018. If you are already receiving the GCCB, you will receive a letter from the Department of Human Services advising you of the changes. If you wish 20
to claim the ACCS (G), you will need to complete a child-care subsidy assessment via your online Centrelink account.
Downsizing super rule commences On 1 July 2018, the much-vaunted ‘downsizing’ super rules commences. This allows retirees to make a non-concessional contribution of up to $300,000 (singles) or $600,000 (couples) into super from the proceeds of selling their primary place of residence, if they have lived there for 10 years or more. This contribution applies even if the super balance exceeds the current $1.6 million cap. There could be a financial downside for those who take advantage of the program, with changes to exempt asset values possibly affecting your Age Pension.
More super changes take place As well as the downsizing rules, other changes to super rules take place from 1 July. These are: • the Superannuation Complaints Tribunal will be replaced by the industry-funded Australian Financial Complaints Authority (AFCA) • individuals whose annual income exceeds $263,157 and have multiple employers will be able to nominate that wages from certain employers are not subject to the superannuation guarantee • rules for tax deductions on personal contributions will be tightened • catch-up super contributions can be made by individuals with a total superannuation balance of less than $500,000.
YourLifeChoices Retirement Affordability Index™ June 2018
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