In March, the federal government released the “2015 Intergenerational Report”. The purpose of this report, released every five years, is to determine the long-term economic feasibility and sustainability of current economic policies over the next 40 years, factoring in expected changes in Australia’s population, demographics, age profile and the like. Some of the key findings of this report were as follows:
- Life expectancy is projected to increase. Male life expectancy is projected to increase to 95.1 years from 91.5 years today and female life expectancy is projected to increase to 96.6 years from 93.6 years. Australia is actually expected to have one of the longest life expectancies in the world. In fact, it is projected that over 40,000 people will live beyond 100 compared to 5000 today.
- The demographic shift will continue to occur in that the number of people over the age of 65 will double and the number of people in the workforce and of working age (15-64) for every person over the age of 65 is expected to fall from 4.5 people today to 2.7 people. This is a drastic reduction in the workforce participation supporting the retired via the payment of taxes, which help supplement the payment of the age pension.
- The population is expected to increase to 39.7 million from 23.9 million today.
These alarming statistics simply highlight the fact we are expected to live longer, work longer and hence put a heavy reliance on our superannuation benefits to fund our retirement. Life expectancy, population growth and the demographic shift will continue to put unsurmountable pressure on the government as to how to continue to fund the age pension and other social security entitlements. The report highlights that the government plans to respond to the challenges of an ageing population by putting in place a number of structural reforms. Some of the reforms being discussed include a review of the current tax system, reform of government service deliveries and better use of technology. However, as an industry, we also need to plan for the future.
One of the challenges for clients in planning for their retirement is projecting how much income and capital they will need. Throw in the forecast on longevity and this makes it not only a real concern for clients, but an even more complicated task on advising. Longevity risk will be a very high priority and not only will retirement products need to be reviewed or created to handle this risk, but the old mantra of “it is never too early to start planning for your retirement” will be never truer. Plans and decisions around retirement planning will need to shift to factor in whether clients plan to work beyond 65, longer than average life expectancies and if they’ll have enough capital to support this fact, less reliance on the government age pension, the increased cost in aged-care expenses, and cognitive ability to make sound investment decisions in the future.
Cognitive ability and longevity go hand in hand. Based on recent statistics released by Alzheimer’s Australia, currently more than 343,000 Australians are living with dementia and this is expected to increase to 900,000 by 2050 without a medical breakthrough. Financial decision-making requires not only cognitive ability, but also knowledge. As humans, our decision-making ability peaks at 53 and then starts to decline. With life expectancy increasing, dementia on the rise and the cost of living skyrocketing, it is critical for clients to make and put in place key decisions and plans as soon as possible. Even though superannuation is expected to tip $9 trillion by 2040, it will still not be enough. It is up to the industry and us as advisers to factor in this changing world and come up with strategies that will complement this demographic shift.