Actually there are two things that have to be avoided.
1. The budget deficit that will arise due to lots of non-working pensioners who don't earn to pay income taxes but do receive benefits (pensions) and demand public services, such as Medicare.
2. The reduction in the relative, and probably absolute, size of the working population. Those working will have to pay the taxes and produce the goods and services that the retired population needs. It would create a huge burden on them.
So the Productivity Commission's plan helps with both. The government does not have to support people for three extra years, probably saving about 10% on the pensions bill. The budget will be healthier as a result, with government spending being lower than it otherwise would be.
Further the size of the working population will be larger as those aged 67 to 70 are encouraged to stay in the working population. Not only does this add revenue from income taxes to the government, it also boosts Aggregate Supply. Any rise in the labour force shifts the AS curve to the right. The result is higher output and lower inflationary pressure.
The third effect worth noting is in income distribution. Here we must consider inter-generational equality. The young don't have such a heavy burden to support the old. While old age pensions have allowed a much kinder and fairer society in the past the ageing population will cause an increasingly unfair burden in the future.
Why is it urgent that action is taken now? Such a measure cannot be introduced overnight. A 66 year old cannot be told in 2014 that he/she cannot retire until they are 70. They need to plan for such a change. So if this measure is adopted the retirement age will probably rise a year at a time over a decade.
The 2012 data clearly shows how the pension crisis will hit Australia in the next 20 years
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