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Projections of key aggregates for Australia's aged: Government outlays, financial assets and incomes

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George Rothman
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Conference Paper 98/2

Paper presented at the Sixth Colloquium of Superannuation Researchers, University of Melbourne, July 1998.

RIMGROUP is a comprehensive cohort based lifetime model developed by the Retirement Income Modelling Unit. This paper uses the RIMGROUP model and its key outputs to project both medium term and long term aggregates for Australia's aged.

Overall, over the medium term the current fit with administrative data and forward estimates seems very adequate, with RIMGROUP slightly overestimating age and veterans pension costs by an average 0.5% and underestimating numbers by an average of 0.2%; the model therefore seems to be at a suitable stage for analysing medium term retirement policy differences. However it should be noted that the growth of pensioner numbers and the relative number of full and part pensioners is very sensitive to the exact values by gender and decile allocated to initial asset values, the levels of non superannuation assets upon retirement and drawdown patterns. A considerable amount of adjustment was needed to achieve the degree of fit shown in the paper.

Based on RIMGROUP analysis over the long term to 2050, the costs of aged and veterans pensions will rise as a proportion of GDP to about 4.5% of GDP. In isolation, the base case may well be affordable constituting an increase of about 1.5 percentage points of GDP in the very long term, say $8b in today's terms. A universal pension, however, would constitute a rise of about 3.5 percentage points of GDP above the current base case and this is likely to be prohibitively costly. A scenario where the full age pension rises from its current benchmark of 25% of average male wages to 30%, would generate a rise in outlays of about 2.3 percentage points of GDP in the long term above the current base case.

Sensitivity studies show that pension costs are quite responsive to the level of funds dissipated (not invested in income producing assets) and drawdown patterns in retirement. Aggregate pension costs may be about 10% higher than the base case if both dissipation levels and drawdown rates are high.

Projections of the aggregate long term cost of Health in Australia are provided which illustrate the potential of RIMGROUP to provide a useful analysis tool for a range of longer term studies, drawing inter alia on the strength of the population, labour force and GDP projections. If the long term rise in Health costs per person in a given age group can be held to 1% above inflation, the rise in Health costs in percentage points of GDP is comparable to the rise in Age and Veterans Pension costs. If recent trends prevail, the rise in aggregate Health costs for Australia may exceed 8 percentage points of GDP, which would clearly require a substantial change in fiscal and/or health funding arrangements.