Coalition embraces the grey gouge

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ScreenHunter_90 Oct. 24 08.28

By Leith van Onselen

The Coalition’s vow to “end the age of entitlement” has taken a serious hit, with Prime Minister Abbott seemingly ruling-out making changes to Aged Pension arrangements until after the next federal election. From The Australian:

“If there is one lesson to be learned from the political quagmire that the former government got itself into, it is: keep your commitments. So we will keep them,’’ Mr Abbott said.

“But one of the most fun­damental commitments of all was to get the budget back under control, to put the budget back on to a path to a sustainable ­surplus.

“So we’ll be doing that but, as for pensions and pensioners, I am confident that pensioners will be better off because under this government they will lose the carbon tax, but keep the ­compensation.’’

So the biggest and fastest growing area of welfare spending – the Aged Pension – will be spared from Budget pain, and in fact pensioners will have their situations improved as the carbon tax is removed but compensation remains.

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The Aged Pension will be allowed to continue growing at a rate well above inflation (i.e. roughly 28% of male earnings), which has delivered 25% growth in the pension over the past 4 1/2 years, versus 13% inflation. Meanwhile, other forms of welfare, such as Newstart, which are already significantly less generous ($13,300 for a single versus $21,900 for the Aged Pension), will continue to grow at only CPI.

And the lax means testing for the pension will remain, which already means that 70% to 80% of the mature aged population passes the test and receives at least a part pension, as noted by Peter Martin yesterday:

Included are couples earning $70,000 (untaxed if it’s from super) with up to $1.1 million in assets, plus their “family home” which they are allowed to expand or upgrade knowing it won’t be caught in the assets test.

Anyone who fails this test is by definition well off. But the well off aren’t left out. About half of them get the seniors supplement and Commonwealth health card, which entitles them to cheaper prescriptions. There’s no assets test, millionaires can get it. There is an income test, but it comes with a hole. Singles with more than $50,000 and couples with more than $80,000 in taxable income can’t get the card. But income from superannuation isn’t taxable, so it isn’t counted. It is possible to receive $200,000 a year from super (plus $50,000 in other income) and still get the card. Almost certainly an unintended consequence, it makes a joke of the tight rules that apply to younger Australians who actually need help.

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Meanwhile, under current arrangements, the cost of the Age Pension will continue to rise from $39.5 billion a year to a forecast $72 billion in ten years’ time, with the funds having to come from significantly higher taxes on the working-aged population, and/or major cutbacks to other government programs.

Today’s AFR gives a sense of what to expect, with the Government flagging that it plans to raise taxes and charges in the May 13 budget, with the Family Tax benefit also facing the axe (my emphasis):

Government sources say there will be “nothing pretty” about the revenue increases, but they will be made in an environment where the government believes the scope to take an axe to ­welfare spending in the short term is constrained by the impact this would have on the economy…

Federal cabinet’s expenditure review committee has been meeting in Canberra to flesh out across-the-board spending cuts that will include everything from Howard-era middle-class welfare to the defence budget.

Sources say Australia simply “can’t afford” Family Tax Benefit B in its current form that was introduced by the Howard government as a political sop to single-income families with stay-at-home parents. The policy is forecast to cost $4.9 billion a year by 2016.

A range of welfare supplements and additional payments that have proliferated over the past decade are also in the razor gang’s sights. “Every Australian is going to be asked to contribute to the budget repair,” Treasurer Joe Hockey said on Sunday.

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Except the growing army of aged pensioners, who look as if they will continue to enjoy their generous benefits.

While I have no issue with raising taxes and cutting back on Family Tax benefits per se, such moves should only be undertaken in concert with major reform to retiree entitlements, which are by far the biggest and fastest growing areas of welfare spending, and which have also benefited the most from recent Budget largesse.

Otherwise, the Government is simply shifting the tax burden further onto the working aged population, in the process turning generations X, Y and Z into tax slaves.

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Genuine entitlement reform is about shared sacrifice, not sacrifice by the working-aged population only.

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About the author
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.