managed DC accounts.^2 By contrast, the USA, Canada, and UK operate pub-
licly-funded DB schemes, structurally similar to those in Europe and Japan,
while New Zealand and Ireland have no second pillar schemes to speak of.
Some countries, such as Switzerland and Sweden, have public DB and pri-
vately-managed DC schemes operating in tandem.
While superannuation receives more publicity, Australia’sfirst pillar‘age
pension’is the backbone of its retirement income system. Introduced in 1909,
it is available to men and women from age 65 regardless of employment
history.^3 A generous and easily satisfied means test (the value of the principal
residence is not included, and couples can have up to almost $1 million before
they are ineligible for even a part-pension) has seen coverage balloon from
around a third of retirees in 1910 to around 70 per cent or 2.4 million people
in 2014, of which around 60 per cent receive the maximum fortnightly
payment. Rates are periodically increased so couples receive around 42 per
cent of male average weekly earnings and singles two-thirds of that amount.
While means-tested or‘targeted’ basic pensions reduce the incentive
to work and discourage saving, they do slash the fiscal cost of retire-
ment provision. Thus in 2009 Australia’s old-age pension amounted to 3.5
per cent of gross domestic product (GDP), compared to an average of 7.8 per
cent of public expenditure on pensions across the OECD.^4 Only Iceland,
Mexico, and Korea spent less. The pension makes up around 10 per cent of
total federal government outlays compared to around a quarter or more in
France, Germany, and Italy. But while Australia’s public expenditure on retire-
ment provision as a share of GDP is relatively meagre, the value of other
concessions to pensioners is surpassed only in Japan, Denmark, Norway, and
Sweden. Indeed, the value of such concessions in Australia–which include
significant discounts on medication, local and state taxes, and public
transport—are the world’s largest as a share of expenditure on retirement
provision. It is well known in Australia that retirees arrange their affairs to
receive a part-pension in order to access such concessions.
The second pillar in Australia was onlyfirmly laid in 1992 when it was
legislated to compel all employers to divert a rising share of their employees’
earnings—currently 9.5 per cent—into privately managed, individual
accounts that could not be accessed until retirement. Thus superannuation
coverage, once the preserve mainly of public servants and senior white-collar
workers, jumped from about 40 per cent of the workforce in the 1970s to
(^2) Denmark and Israel are almost in the same group, but their pillar one pensions are universal
rather than means-tested. 3
4 The eligibility age is scheduled to rise progressively to 67 years by 2023.
Such comparisons do not include the value of compulsory private savings, which in Australia’s
case come to around 5% of GDP a year. Novak (2014) argues this practice understates the cost of
compulsory saving and the size of government.
Adam Creighton