May 22, 2019 | 06:03 AM


11.07.2018Retirement: The Australian pensions landscape

This article will explain what the Australian pension landscape looks like and who may end up paying any shortfall over time.

For many Australians under the age of 50, retirement seems like a long way off. But it’s never too early to start thinking about pensions. The sooner a worker starts contributing (and the more they put in), the better their chances of a comfortable retirement. So for all the younger workers who aren’t sure what they’ll be entitled to, it’s time to start learning about the system. This article will explain what the Australian pension landscape looks like – and who may end up paying any shortfall over time.

The Australian way

Starting with the good news, it’s worth remembering that Australia actually has a pension system that is rather well-admired across the world. In line with a lot of countries, Australia has a state contribution system. Provided no future government decides to scrap it, there will be a form of pension available for most people when they need it. But the Australian model differs from the rest of the world in some key respects.

Most Aussies have heard about superannuation, which is a major cog in the Australian system. First created 25 years ago, it was introduced as an anti-inflationary measure. Instead of giving pay rises in the here and now, Australian employers were told to contribute generous amounts to employee pension pots. Today, it’s illegal not to contribute. By 2025, Australian bosses will be paying 12% of salary per year.

This system has paid off, allowing Australia to become relatively well-resourced when it comes to pension funding. As of 2017, Australia had one of the four largest pension pots in the world. Only America, Japan and the UK beat it in terms of size. In total, the Australia pot sits at AUD $2.3tn. So in some ways, there’s plenty for Aussies to look forward to as they retire.

Demographic trends

But like most western nations, Australia also faces a pension crisis – and that’s down to trends that are a little more out of control than the employer contribution issue. Australians are now living longer than ever. And while that’s great when it comes to quality of life, family health and much more, it’s also a problem when it comes to funding retirement. Studies carried out by the World Economic Forum show that in the year 2035, nearly 20% of the Australian population will be aged over 65. Despite the large national pension pot, there may not be enough cash to cover everyone.

What can be done?

There are several possible ways forward. So far, the suggestions being made have depended largely on the political perspectives of the people making them. Many have proposed that employers shoulder more of the burden in the interests of ensuring that their employees don’t have work into their old age. But given that employers already contribute a relatively large amount of salary compared to other nations, this looks unlikely.

Whether or not individuals would be able to contribute enough is another matter. While some workers likely could, there would still be a shortfall unless everyone sacrificed a big chunk of salary. It’s possible that the eventual shortfall will have to be met by the state, which could lead to more state borrowing in the long term. 

Given the fact that it requires forward thinking, the outcome of any pension debate is always hard to predict. But one thing is certain: even though Australia has one of the world’s largest pension pots, demographic trends mean that this may not be enough. Thanks to the country’s standard of living and good healthcare, Australians are living long lives. This results in more people requiring pension cash for longer. Who will pick up the shortfall, however, is almost impossible to know. Whether it’s the government, employers or individuals, it’s clear that somebody will need to step in – and sooner rather than later.

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