Anyone who’s planning to rely on the pension to fund their retirement is making a big mistake.

Don’t take my word for it – just look at the hard demographic facts.

Australia’s population is ageing. That means proportionately fewer and fewer taxpayers are being asked to support more and more pensioners.

Why are there fewer taxpayers? Because we’re having fewer babies.

Why are there more pensioners? Because we’re living longer.

That means future governments will be faced with three unpleasant choices:

  1. Leave pension rates unchanged – which means each taxpayer will pay more
  2. Leave tax rates unchanged – which means each pensioner will receive less
  3. Raise taxes and cut pensions

So there’s a big chance future pensioners will have less money to live off than today’s retirees.

That’s a scary thought when you consider how tough it already is to be a pensioner. Here’s the current maximum pension:

  • Singles – $873.90 per fortnight or $22,721.40 per year
  • Couples – $1,317.40 per fortnight or $34,252.40 per year

Hard demographic facts

Our demographic position worsened between 1995 and 2015 – as shown by these figures from the Australian Bureau of Statistics:

  • Australia’s median age rose from 34 to 37 years
  • The proportion of people aged 65 and over rose from 11.9% to 15.0%
  • The proportion of people aged 85 and over rose from 1.1% to 2.0%

Between 2010 and 2015, growth in the working-age population (aged 15-64 years) was only 1.2%, while growth in the non-working-age population was 2.3%.

Superannuation is no silver bullet

But isn’t superannuation meant to solve the retirement problem? It is – but for many Australians it won’t.

Many retirees will run out of superannuation (and thus be forced onto the pension) before they die. That’s because the current employer contribution rate of 9.5% is too low.

This rate is scheduled to climb to 12% by 2025, but that might still be insufficient. Some experts argue that 15% is necessary to fund an average retirement.

As a result, the proportion of Australians eligible for the full or part-rate pension is expected to remain at 80% over the next 40 years, according to a National Commission of Audit report.

The solution is…

Do everything you can to avoid being part of that poor 80% who will have to rely on the pension.

Your goal should be to become part of the comfortable 20%.

But how?

The answer is to start planning for retirement immediately. Spend less, save more and invest the difference.

The power of compounding is amazing. Guess what happens if you save $10 per week over a 30-year period and get a conservative return of 5%? It magically turns in to $36,065.

Saving $50 per week turns in to $180,323. Saving $100 per week turns in to $360,645.