Labor moves to protect the grey gouge

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By Leith van Onselen

The Australian’s Judith Sloan warned over the weekend that payments to the Aged Pension will surge over coming decades, despite decades of compulsory superannuation:

The big one [Budget expense] is the age pension, which will rise from 2.7 per cent of GDP to 3.9 per cent in 2050, based on projections contained in the latest intergenerational report.

And here’s a scary figure — there is hardly any shift in the next 40 years in the proportion of people of age-related pension age who will be completely self-reliant. After decades of compulsory superannuation, just over 20 per cent of older Australians will receive no pension in 2050, based on present policy settings.

Something has to give. Expect some recommendations from the commission [of Audit] in relation to various entitlements of senior citizens, including altering pension indexation arrangements and restricting the uptake of the healthcare card.

Sloan’s quoted projected rise in the pension is of course comes from the Productivity Commission, which also projected sharp rises in health care spending, partly due to population ageing.

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What Sloan doesn’t mention, however, is the massive Budget tax expenditures spent on superannuation, which were supposed to relieve ageing’s pressures on the Budget, but are clearly failing to achieve this goal. Instead, superannuation has become a mechanism whereby older people pay less tax given their income than everybody else, with the lion’s share of benefits also overwhelmingly going to richer people.

Under the current system, all employees that contribute compulsorily into super pay a flat 15% contributions tax, which effectively means that the amount of concessions received increases as one moves up the income scale (See below table).

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For example, someone that earns in excess of $180,000 per year receives a 30% tax concession for each dollar that they contribute into super (i.e. 45% marginal tax rate less the 15% flat tax). At the other end of the scale, someone that earns less than $18,200 per year in effect gets penalised 15% for each dollar that they contribute into super.

According to the Australian Treasury, concessions on superannuation contributions were estimated at $16.5 billion in 2012-13, with concessions on superannuation earnings valued at $15.5 billion. Moreover, the Treasury estimated that the top 5% of contributors would receive 20.3% of contribution concessions, with higher income earners also receiving the lion’s share of the earnings tax concessions.

While the Coalition has shown next to no willingness to change superannuation – even taking the retrograde step of abolishing the reforms introduced by Labor that would have improved the equity of the system – it has at least muted that it might reform the Aged Pension, refusing to rule-out changes over the weekend:

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Tony Abbott has left the door open to making changes to the aged pension after reports the Commission of Audit recommended it be indexed differently.

The prime minister refused to rule out changes when directly asked…

The age of eligibility for the pension could be raised to 70; indexation could be changed so it does not increase too much faster than inflation; and the family home could be included in the asset test if it is worth more than $1m, the Daily Telegraph reports.

When asked if he was concerned about the size of the aged pension and if Australians need to accept that changes should be made, Abbott replied: “Obviously, as we have known for quite some time now, there is a demographic issue that our country is grappling with”…

Abbott said former Liberal treasurer Peter Costello had introduced intergenerational reports to alert people to the fact that the workforce was shrinking.

The Daily Telegraph report, also claims that the Commission of Audit reveals that the “cost of the $40 billion-a-year age pension threatens to increase by 80 per cent in the next decade to more than $70 billion”, and that “a stunning 94 per cent of Australians over 70 qualify for either a pensioner concession card or a seniors health care card for self-funded retirees”, costing the Budget $5 billion per year.

Raising the pension age to 70 is a no brainer, and could save the Budget around $12 billion a year according to the Grattan Institute, but only if the superannuation access age was also raised to 70.

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Changing the indexation arrangements for the pension also makes sense. Under current perverse arrangements, the single aged pension is pegged to 27.7% of male total average weekly earnings, whereas unemployment benefits (Newstart) is indexed to the consumer price index (CPI). This has meant that the Aged Pension has risen at a faster rate than Newstart, with the differences between the two welfare payments widening to a record $6,643 per annum ($19,916 for the pension versus $13,273 for Newstart), with the Henry tax review also finding that if existing arrangements continued, by 2040 a single pensioner would be paid “more than twice as much as a single unemployed person”.

The current indexation arrangements for the Aged pension are, therefore, not only inequitable but unsustainable, and should be brought into line with Newstart.

Finally, including some portion of the family home in the assets test for the aged pension also makes sense, although the $1 million figure seems a bit arbitrary, and would disadvantage pensioners living in expensive cities (e.g Sydney) over those living in cheaper areas (e.g. Hobart). A fairer approach would be to only include values above the city/region’s median house price in the assets test; although such a system could be too complex to administer, and some trade-offs might be required.

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Disappointingly, Labor’s shadow minister for families and payments, Jenny Macklin, attacked Abbott for refusing to rule-out changes to the Aged Pension, arguing that the Government had manufactured a Budget crisis that does not exist, and claiming that Australia spent only 3.5% of its GDP on the aged pension, compared with 7.8% across the OECD in 2009:

“As well as flagging pension cuts, we are once again seeing the government deliberately fabricating facts to create a sense of crisis as cover for its cuts,” she said. “Make no mistake – any change to the pension would be a clear broken promise, and a betrayal of Australia’s pensioners.”

Macklin demanded the government rule out any changes to the pension.

Clearly, Ms Macklin is blind to Australia’s shrinking tax base and growing army of retirees, which is set to worsen in the decades ahead:

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Macklin obviously also endorses creating a nation of working tax slaves, as today’s generation Xers, Ys and Zs are forced to pay more tax (and consume less) in order to fund the growing army of retired Australians, many of whom also enjoy generous taxpayer entitlements and are in much stronger financial positions than their children?

She also fails to mention that many nations in the OECD commenced their ageing tsunami a decade or so before Australia, which helps to explain why Australia’s expenditure on pensions was so much lower in 2009:

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Perhaps Ms Macklin would like to see Australia’s Budget deteriorate to the same degree as many of those nations as well?

Labor’s comments on the Aged Pension ignore what is a genuine fiscal and social problem facing the nation. Such partisanship is precisely the opposite of what Australia needs if it is to successfully navigate the challenges ahead.

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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.