UNDERESTIMATING life expectancy could add 50 per cent to the cost of providing for retirement in Australia with the International Monetary Fund calling for government action to reduce this long-term threat to the budget.
The fund's review of global financial stability says that as well as increasing the retirement age, governments should help people to insure against their savings running out by supporting the development of annuities and reverse mortgages.
The recommendations mirror calls by the Henry tax review and the superannuation industry.
The IMF says countries around the world have consistently underestimated improvements in longevity by about three years every 20 years. Authorities expect the rate of improvement to slow down, but advances in medical technology mean it does not.
The Australian Bureau of Statistics shows that since 1990, life expectancy for a man aged 60 has increased by 4.1 years while for a woman it has risen by three years. The fund estimates that a three-year increase in life expectancy adds between 1 and 2 per cent of GDP a year to the cost of an ageing population.
By 2050, advanced countries would have to set aside an additional 50 per cent of GDP to cover pension liabilities.
"On a global scale, that increase amounts to tens of trillions of US dollars, boosting the already recognised costs of ageing substantially," it says.
The fund estimates that Australia households need to increase their savings by at least 73 per cent of GDP if they are to finance a retirement at 60 per cent of their working income. If their life expectancy increased by another three years, this gap would rise by a minimum of another 36 per cent of GDP.
The fund says governments should tie the retirement age to longevity. The Australian government is increasing the pension age from 65 to 67 years between 2017 and 2023, but has ruled out any matching increase in the superannuation preservation age.
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