Here are a couple of statistics that definitely bear thinking about. One: half of all the people who have ever lived to age 65 are currently alive. Two: when people living longer than their life expectancy are taken into account, Australia's retirement savings fall short by more than $1.063 trillion.
Scared? You should be.
Unless you have dodgy genes or a known medical condition, you're set to live through an unprecedented period in human history when grey power becomes a real force to be reckoned with. And paid for.
In the past 100 years, the average global life expectancy has doubled. Australians are already one of the longest-living countries, and our chances of living even longer are steadily improving. Since the late 1800s, the life expectancy of children has increased by more than 30 years and life expectancy at age 65 has increased by 68 per cent for men and 76 per cent for women.
If I make it to 65, and trends continue, the odds are pretty good I'll be here to celebrate my 90th birthday. Although the life expectancy for a 65-year-old female is 86.8, if life expectancies continue to improve at their present rate, the average 65-year-old woman will live to 89. And I like to think I'm a bit above average.
This is one area where the ladies outperform the blokes, but your average 65-year-old male should still live to 86.3 if life expectancies continue to lengthen. That's the thing about life expectancies many people don't get. The official figures are merely an average. While about half the population will live to this age or less, the other half can be expected to live beyond their life expectancy. With the wave of baby boomers coming along, expect to see an explosion of wrinklies who don't act their age in another 20 years or so.
Longevity risk is something the superannuation industry has been trying to get government to focus on for some time. The $1.063 trillion figure comes from a report put out by the Financial Services Council this week. Traditional calculations of the retirement-savings shortfall focus on the money that will be needed to average life expectancies, which, as we've seen, accounts for about half the population.
That alone provides a retirement-savings shortfall of $836 billion,
or $79,200 a person, in the
working population.
But if you calculate the shortfall based on the 75th survival percentile (that's geek-speak for the average age people who live beyond their life expectancy make it to), the shortfall rises to $1.063 trillion, or $136,500 a person.
The FSC has also calculated the shortfall to the 90th percentile (the age to which 10 per cent of retirees will survive) and, not surprisingly, that's even higher. But that's probably getting a little silly.
The other figures come from the Actuaries Institute, which has produced a white paper on life expectancies, Australia's Longevity Tsunami: What Should We Do?, which is indeed the question.
As the paper points out, longevity isn't just about retirement savings. The biggest risk posed to our national finances by an ageing population is rising health costs.
Treasury's Intergenerational Report in 2010 forecast these would rise from 4 per cent of gross domestic product to 7 per cent by 2050. Age pension costs were forecast to rise from 2.7 per cent of GDP to 3.9 per cent (even after allowing for super), and the report said ageing and health pressures were projected to result in an increase in total government spending from 22.4 per cent of GDP in 2015-16 to 27.1 per cent by 2050.
And that's where things get uncomfortable for those of us planning for retirement and for governments that will, at some stage, be forced to incur the wrath of a greying population by introducing measures to prevent an age-based budget blowout.
The FSC reckons a good starting point would be to lift the retirement age, which is being increased from 65 to 67, in line with the age pension,
Most Australians retire earlier. The median retirement age is about 61. But if this trend continues, the FSC says retirees will need to live entirely off their super and other savings until they can get a full or part-pension. Or live off other forms of social security such as the disability support pension.
The actuaries also recommend lifting the retirement age, though they say it should be done gradually and to within three of five years of age pension age. In addition, they think the government should continue to increase the eligibility age for the age pension in line with increases in life expectancies.
The actuaries say the present system actually encourages older people to retire rather than keep working. Unlimited tax-free access to super at age 60 is one of the big incentives to stop working.
While the Actuaries Institute says there is little evidence that retirees are taking their money out of super, living the high life then falling back on the age pension, it is likely that at some point government will need to bite the bullet and provide incentives (or force people) to take the bulk of their retirement benefit as an income stream rather than withdrawing a lump sum.
The actuaries also recommend removing impediments that discourage older people from working, and creating more intelligent and flexible retirement-income products. To date, super lump sums have been a sacred cow in Australia's retirement system, and it would be a brave government that further restricted early access.
But someone has to foot the bills for all the future 90-year olds because, on present form, there's no way they'll be able to afford it themselves.
