Influencing decisions to retire

Kai Swoboda, Economics

Key Issue
The decision to retire is typically made with reference to age-based thresholds for access to the means tested Age Pension and superannuation. Changes to these thresholds need to consider a range of issues, including how demographic changes impact on the economy and government finances as well as broader social impacts.

What is retirement?

Retirement is generally viewed as a withdrawal from the labour market and/or paid employment. Retirement can also be viewed as a process, whereby an individual scales down employment—such as by transitioning to part-time employment or unpaid/volunteer activities—and moves into a period of leisure that is a ‘reward’ or ‘benefit’ earned through participation in employment or as a contribution to society.

Statistics on the age of ‘effective retirement’—the average age at which people withdraw from the workforce—show two, distinct periods of trends in the average retirement age in Australia since 1970. The first period, which ended in the early to mid–1990s, saw the average retirement age falling (Figure 1). However, since this time, the broad trend has been for the average retirement age to increase. While this trend is replicated in most other OECD countries, the average effective retirement age for men and women in Australia is lower than in New Zealand.

Figure 1: Effective retirement ages for men and women in Australia, 1970 to 2014

Effective retirement ages for men and women in Australia, 1970 to 2014

Source: OECD, ‘Ageing and employment policies - statistics on average effective age of retirement’, OECD website.

Broader impacts of retirement

Individual decisions to retire have broader economic and societal impacts including:

the loss of skilled employees to the economy
the ability of retirees to devote more time to (unpaid) caring activities
for tourism and leisure businesses that provide goods and services to people in retirement, and
the funding of retirement by superannuation funds and/or governments.

These broader impacts are of particular relevance given the significant ageing of the Australian population due to the decline in fertility rates and increase in life expectancy—changes that are occurring across most advanced economies. Most of the concerns about the impact of ageing have related to the sustainability of government finances due to increasing health, aged care and pension expenditures.

Reasons for retirement and changes in the age at which people retire

There are a number of factors that affect retirement decisions including health status, involuntary redundancy and accumulated savings. For those who have already retired in Australia, the most common reason given in a recent survey by the Australian Bureau of Statistics was having reached eligibility age to access the age pension or superannuation. This was followed by sickness, injury or disability, and being retrenched or dismissed with no other work being available.

Age-based thresholds influencing retirement decisions

Key policy levers regarding the age pension and superannuation that frame the retirement decision are:

the eligibility age for access to the means-tested Age Pension—currently 65, increasing to 67 between 2017 and 2023 (Social Security Act 1991)
the superannuation preservation age (the age at which superannuation savings can generally be accessed)—currently 55 increasing to 60 between 2015 and 2024 (regulations under the Superannuation Industry (Supervision) Act 1993) and
the age at which superannuation benefits can generally be accessed tax free—currently 60 (Income Tax Assessment Act 1997).

During the previous parliament, the Government introduced legislation to further lift the eligibility age for the age pension to 70, to take effect between 2025 and 2035. However, this proposal did not pass into law.

A number of OECD countries have also increased the eligibility age for public pensions in recent years. For example, Belgium and Canada have lifted the eligibility age to 67. Some OECD countries have taken the further step of directly linking eligibility to life expectancy. These include the Netherlands and Portugal.

There have been a number of proposals to change the superannuation preservation age, including increases to align it with the Age Pension eligibility age.

Addressing other reasons that can lead to early retirement

Apart from changing the age-based thresholds mentioned above, policies to encourage later retirement need to address the other factors that influence retirement decisions. For example, addressing retirement decisions based on matters that may be outside an individual’s control—such as their own poor health or retrenchment—require more complex policy responses that may include programs to address specific barriers or labour market issues that prevent many Australians from continuing to work as they age.