Baby boomers to win from retirement reform

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By Leith van Onselen

The Commission of Audit (COA) has released its much anticipated report, which recommends some sweeping changes to Australia’s retirement system, although baby boomers would be spared any Budget pain (surprise, surprise!).

Without changes to Australia’s tax and expenditure system, the COA claims that Australia “faces 16 consecutive years of budget deficits with net debt rising from $190 billion today to $440 billion by 2023-24″.

The COA’s 86 recommendations are designed to save the Budget between $60 to $70 billion per year within ten years, with additional savings from the reduction of debt.

With regards to the Aged Pension, the COA recommends lowering the indexation rate to 28% of Average Weekly Earnings (from 28% of Male Weekly Earnings currently), which should improve long-term sustainability without pensions falling in real terms. Below is the explanation provided in the report:

Expenditure on the Age Pension is currently growing at 7 per cent per year. Age Pension expenditure is expected to continue to increase largely as a result of an ageing population, increased life expectancies and benchmarking to the Male Total Average Weekly Earnings benchmark.

The features of the Age Pension means test, such as a 50 per cent taper rate and high income free area, can mean pensioners with relatively high levels of income (up to $47,000 in annual income) are able to access a part-rate pension…

Even allowing for a decline in the proportion of people receiving the full pension, a rise in the number of people receiving the part-rate pension will see the proportion of older Australians eligible for the Age Pension remaining constant at 80 per cent over the next forty years or so.

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The Commission considers that changes are needed to ensure that the cost of the Age Pension remains sustainable and affordable and well targeted to those in genuine need…

The rate of the pension is currently linked to Male Total Average Weekly Earnings. The policy rationale for using this benchmark is weak… Average Weekly Earnings is a more appropriate benchmark for the rate of the pension, given that women are a major part of the labour force. Benchmarking to Average Weekly Earnings still recognises that pensions should have regard to community standards through benchmarking to wages.

It is proposed that the maximum base rate of the Age Pension be changed over time to be equal to, and then grow in line with, 28 per cent of Average Weekly Earnings [rather than 28% of Male Weekly Earnings currently]…

The re-alignment over time could be achieved by indexing the current maximum base rate of the Age Pension to the higher of the growth in the CPI or the Pensioner and Beneficiary Living Cost Index until it reaches the new benchmark.

As shown in Chart 7.2 below, on current trends the transition can be expected to be completed by around 2027-28 (that is in just under 15 years time).

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The recommended re-benchmarking of the Age Pension will ensure that Australia’s Age Pension programme is more sustainable over the long-term. The proposed transition to the new arrangements will ensure that a person’s pension entitlement does not fall in either real or nominal terms.

The COA also recommends tightening means testing around the Age Pension, so that the value of one’s principal place of residence is included above $500,000 for a single and $750,000 for a couple, along with increasing the access age to 70 by 2053. However, no existing recipient of the Aged Pension would have their access reduced, with changes to means testing not kicking in to 2027-28, effectively excluding the baby boomers from cuts.

…the Commission considers that there is a strong case to re-examine other aspects of Australia’s Age Pension system including tightening eligibility requirements to improve its targeting to those unable to support themselves in retirement.

Consistent with the approach outlined above any changes to eligibility should only affect new recipients and even then there should be a reasonably long lead time recognising that people need sufficient notice given the importance of decisions that are often taken ahead of retirement. No existing recipient of the Age Pension will have their eligibility or pension amount reduced as a consequence of any of the Commission’s recommendations in this area…

The Commission considers that people born before 1965 should not be subjected to this change or any other further changes to the eligibility age to ensure they have adequate time to plan for their retirement.

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The Age Pension could also be better targeted by introducing a simpler single comprehensive means test.

The move to a comprehensive means test could apply from 2027-28, to new recipients of the Age Pension, to allow people sufficient time to adjust to the new arrangements.

A new single comprehensive means test could replace the current arrangement which is underpinned by dual income and assets tests. The existing assets test could be abolished and the income test extended by deeming income from a greater range of assets.

The deeming rates could be based on the returns expected from a portfolio of assets held by a prudent investor. Under this proposal, there would be a single income test based on a combined measure of employment income, business income and deemed income on assets…

The principal residence is currently exempt under the means test. This allows for high levels of wealth to be sheltered from means testing. The Commission considers that a proportion of the value of the principal residence should be included in the means test, such as the value over a relatively high threshold. The means test would capture the value above $500,000 for single pensioners and $750,000 combined for coupled pensioners.

Exempting the principal residence from the means test is inequitable as it allows for high levels of wealth to be sheltered from means testing. For example, under current rules a single person who owns a $400,000 house and has $750,000 in shares ($1.15 million in total assets) would not be eligible for the pension, while a similar person with a principal residence worth $2 million and $100,000 in shares ($2.1 million in total assets) would be able to claim a pension at the full rate…

With any changes recommended to apply from 2027-28 onwards and only to new recipients of the Age Pension, no current pensioner would be affected by this change. That is, no existing recipient of the Age Pension would have their eligibility or pension amount reduced by the proposed inclusion of the principal residence in the Age Pension means test.

The COA also attacks superannuation concessions, and urges to Government to address these in its White Paper on tax reform [tax expenditures were strangely excluded from the COA's terms-of-reference]:

The Age Pension and superannuation are interrelated elements of the retirement income system and should be considered in parallel when changes to one or the other are proposed.

In regard to reform of the broader retirement income system any longer term consideration of superannuation tax concessions would be best considered in the context of the Government’s White Paper on Tax Reform. The Commission notes that many superannuation tax concessions disproportionately benefit higher income earners, when compared to taxation at marginal tax rates under the progressive income tax system.

Nevertheless, it does recommend an increase in the superannuation preservation age to 5 years below the Aged Pension access age, so that by 2027 it would reach 62, and rise proportionately with the pension thereafter:

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Finally, the COA recommends restricting access to the Commonwealth Seniors Health Card “to improve targeting to those most in need by adding deemed income from tax-free superannuation to the definition of Adjusted Taxable Income used for determining eligibility for the Commonwealth Seniors Health Card.”

While I support the COA’s recommendations on retiree entitlements, and have argued along similar lines for the past year, as a 36-year old member of Generation X, it does irritate me that the proposed reforms would not apply until 2027-28, effectively exempting the large (and wealthy) baby boomer generation from shouldering any Budget pain, and pushing the burden instead on to the younger generations.

The baby boomers are, and will likely remain, the lucky generation.

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41 Responses to “ “Baby boomers to win from retirement reform”

  1. Gunnamatta says:

    Thats good to know. The babyboomers have put in for this great nation and deserve to be looked after in their golden years.

    Almost certainly they will pass on their accrued wealth to subsequent generations and many of them will gallantly labour on in the workforce, including those serving on a part time basis, with a view to passing on their skills to newcomers to the workforce.

    To give and not to take, that’s their mantra….

    We owe it to them.

    • danna says:

      They’re so humble too. They never try to assert that it’s through their superior work ethic, but acknowledge the effect their demographic weight has had on economics and politics throughout their life.

      Thank you boomers.

    • NMT says:

      we don’t owe them ANTYHING. I get to pay ever increasing taxes to pay for their cosy retirements, meanwhile i’ll be pushing a zimmer-frame around when I’m still working, thats assuming I’m not dead before I’m even allowed to retire….

      what a crock!

    • Strange Economics says:

      And behold the Lord Tony answered their prayers, and the babyboomers children will be also saved, as the pension will keep them from reverse mortgaging the capital gains tax free, unmeans tested riverfront mansion, and their tax free super payments will pay for their lifestyle, and the 1 year internship for the graduate children will help them get the job, that those without means won’t be able to self support. And pay the deposit on the unaffordable first home for each.
      Other peoples children can just work in part time jobs, if the 457′s haven’t already got them, and rent !

      • athalone says:

        I never thought of it that way…yes, perhaps the X- AndY- generations will be truly blessed.

    • squirell says:

      bang on Gunna. And it just goes to show how important it was that if any generation was to get free tertiary education it was these guys – their shared collective intellectualism has only amplified their ultruistic contributions to our society.

      we owe so much, perhaps the ANZACs could have learned a thing or two from this generation.

      • athalone says:

        Yeah, sounds good ‘squirrel’, I graduated Dentistry Syd Uni 1975 with 2/5ths of my degree paid by government and 1/5th by my gaining a scholarship with the regular Army … And I gave back 4 years service ( I only owed 2 years).

        Later on in the early 80s I had top marginal tax of 60%.Even further on I paid 30% superannuation tax for 10 years for contributions to help pay the $96,000,000,000 federal debt.

        And I’ll match my ultruism with yours on this forum any time you like.
        Dr Stephen Nordstrom BDS

    • ceteris paribus says:

      Nice thoughts Gunna- but I prefer neither to glorify nor vilify any generation. Each generation has its saints and sinners, often in one and the same individual.

      I think we need to be guided by the principle that each person has the value of 1.0. VP=1.

      As for the COA call, they don’t give a stuff about individual need and adequacy of support. What they have done here is read the politics of the aged and gone very, very soft for the foreseeable future, because 1. The baby boomers are a large voting block 2. Aged people are “deserving”, as distinct from the “underserving” disabled, unemployed, Family Carers, Sick, Students. Same old shit.

      Yep, as a group, the boomers did nicely today. But much of this neoliberal rubbish will be pulled back when a future Labor Minority Government is told by the Greens to right the ship again for the benefit of people in the next generation.

      Australians will not tolerate a US economy, with untaxed mega rich and people sleeping in cardboard boxes. I have faith that while most are concerned about money, they will not sell out their fellow countrymen for love of it.

      • Rusty Penny says:

        Australians will not tolerate a US economy, with untaxed mega rich and people sleeping in cardboard boxes. I have faith that while most are concerned about money, they will not sell out their fellow countrymen for love of it.

        I wouldn’t be so sure of that.

        We are less down the rabbit hole than they are because of a federation and Chifley era legacy, but Australians are a much more despicable people than Americans.

        There are many generous and warm more hearted Americans than Australians as a percentage of the population.

      • Bluebird says:

        Gen x and y are too moronic to see how they’re being sold down the river via mass immigration, in fact they cheer it on.

        By 2050 or maybe earlier I’d say we’ll be just like the USA.

        The more people there are, the far easier it is to treat employees badly.

      • Jason says:

        Australians will not tolerate a US economy, with untaxed mega rich and people sleeping in cardboard boxes. I have faith that while most are concerned about money, they will not sell out their fellow countrymen for love of it.

        Well the trick is to make subtle changes over a long period. Not many people are going to go out and march against half-measures.

      • drsmithy says:

        Australians will not tolerate a US economy, with untaxed mega rich and people sleeping in cardboard boxes. I have faith that while most are concerned about money, they will not sell out their fellow countrymen for love of it.

        I used to think this myself, but have become far, far less convinced of it over the last five years or so.

    • arescarti42 says:

      Nice, so the boomers wont have to bear any of the cost of fixing a problem that they created in the first place…

  2. Rusty Penny says:

    Boomers gunna boom.

    Look at this one people.

    “budget deficits with net debt rising from $190 billion today to $440 billion by 2023-24″

    Say a measly cash rate of 4% in 2023… that’s still $17.6 billion just on interest… twice what the current dole expenditure on every person on newstart is.

    But tell them minor top ups, $6 outlays for GP visits or paying $12 instead of $3.80 on PBS prescriptions, and they’re criminally oppressed in their $1.2 million homes….

    If you’re young, leave. There is no future here.

    • Ortega says:

      Yes, that’s the message.

    • Slambo says:

      “If you’re young, leave. There is no future here.”

      You got it half right RP. Boomers eat their own.

      There is no future here.

    • Mining Bogan says:

      It’s not just the young. The middle-aged are planning an exit too. Their kids won’t be here so why would they stay?

      Australian society could become a nightmare for the Boomer. it will just be them and the immigrants that they’re so frightened of.

    • arescarti42 says:

      But where do you go if you want to leave? Most other countries aren’t exactly all that different.

  3. Bluebird says:

    Lucky? Or just not idiots?

    Both I think.

    The oldies played gen x & y like a piano. I take my hat off to them.

    Given the poor quality of our peers we deserve to lose.

  4. moderate mouse says:

    Saw it coming a mile off. Pension changes 10-plus years down the track to minimise voter blow back. Boomers get their negatively-geared asses feathered again while gen X and Y will suffer the full effects of Joe’s razor. I fully support reigning in the largesse, but have some balls Joe and reign it in NOW!

    ps. Where’s Lef-tee to tell me….. no this is all going to be implemented in the current budget/electoral cycle? Yeah right.

  5. adoxographer says:

    Their children will be incentivised to stay at home, hold their breath, and wait for the parents to move into an aged care facility so that they can take over the family home.

    • mark7 says:

      My take on this situation is not as you see it. Is it not the case that much inheritance will be eaten up by nursing home fees and legal costs when the relative dies. The people who make any decisions in government are baby boomers they are not 25 years olds…………and therein lies the biggest rort. The biggest gun the young have in retort is not to buy a house and handover what the baby boomer selfishly seek (the big payout). The game has been rigged to suit our elders by the our elders………….it’s time to share pain grandad. You can oppress and tighten the rules but you cannot order me to attend my bank and hand over the your lotto sized payout…..f&$k you.

      • Deo says:

        I wholeheartedly agree with your point but it gets harder when you’re older Gen X like me. The retirement game has been rigged to ensure you want to have your home due to asset-test exemption for your home. In addition, there’s always “bail-in” risk ala Cyprus down the line when this country bankrupts if you keep your cash piled-up at the bank.

        So, let me add one line to your scream: F$$$ YOU BB Gen…make yourself fat on the hard-works and sufferings of younger gens and stupid migrants ..

  6. Researchtime says:

    Gosh – can I say that I take an entirely different view. I have always avoided this subject line because the vitriol, which is pretty self serving and hard to take. I am neither a baby-boomer, nor probably will I ever need the pension – but for a married couple, its currently $1,154.80 a fortnight (or around $29,000 pa) !!!

    Seriously, do all of you take exception for a retire getting $14,500 pa??? What planet are we on here??? That is not even a subsistence wage! I pay double that on rent per annum – and it’s a crappy house to boot. Heaven help any of you the day you need a pension to survive…

    An interesting article came through my inbox today on the subject. James Green notes that older people want to work longer, at least those who enjoy their work, which in turn is directly correlated to how much education a worker has. So baby boomers, who are more highly educated than previous generations, are working longer. The generations that follow the boomers will be even better educated, and so are more likely to work even longer and for the same reasons. In fact evidence suggests that greater employment of older persons leads to better outcomes for the young — reduced unemployment, increased employment and a higher wage.” Moreover, these “patterns are consistent” for both men and women and for groups with different education levels, and were no different during the financial crisis, or Great Recession if you prefer.

    • Rusty Penny says:

      Durr, after you have paid off your house, and the kid have left, how much do you spend on food and petrol?

      $29,000 per annum.. $570 per week on food an petrol with margins for utility bills?

      I too am a member of a nuclear family, and I don’t spend that much outside of my mortgage.

      This $570 a week isn’t a costless exercise, it is a gratuity borne by others working.

      Stop eulogising the boomers, every generation before them worked harder, the generations following them are working harder. Their is no virtue in their efforts.

      • Researchtime says:

        Crazy. That is an entirely unjustifiable and biggotted statement – borne out of malice. A judge of a good society is how it looks after its elderly and sick. If only because one day you will be part of that dependency too. One day you will have to rely on someone else taxes looking after you.

      • Spot on RP. I have a wife and two kids to support, and I wouldn’t spend that either outside of my mortgage.

      • Rusty Penny says:

        WTF… is English your second language or something?

        How is anything I stated unjustifiable or bigoted?

        The pension amount.. comes from you.

        The reasonable outlays… umm, most of us working earn for for purpose of capital accrural, and also saving for retirement

        A transfer payment isn’t costless?

        Seriously, is English is not your first language and its lost in translation.

        $570 a week as income SUPPORT, is higher than most people on the planet get as income.

        How are they not being looked after? How can that not meet their food and energy requirements?

        “someones taxes looking after me’

        Therein lies the problem.

        I’ve been a front runner here and other economic blogs of pushing for reform of the old aged pension. 2-3 years ahead for most economists to get to where my insights are.

        This here is another behavioural angle I’ve been asserting.

        The old aged pension is viewed as eternal long service leave. Taxes are meant to be a wealth transfer to the old.

        There is not view of self sufficiency, and this as a safety net. It’s an obligatory cash grab. …

        ….. *RELY* on others’ taxes…..

    • The problem with the Aged Pension is not so much its level, but that too many wealthy retirees receive it, so it is poorly targeted. The COA report does nothing to address this imbalance, at least not until 2027.

      As for your argument about the pension being too low, spare a thought for Newstart recipients, who receive a measly $13,273 per year (versus around $20k for the single Aged Pension). And yet, the COA has launched a much bigger assault on Newstart, while leaving baby boomers in peace to enjoy their relatively generous pension benefits (not to mention their superannuation lurks). How is this fair?

      So much for sharing the burden of adjustment.

      • The Lorax says:

        Very well said Leith.

        I would prefer to see both Newstart and Aged Pension payments increased, which would probably be affordable if we stopped paying it to retired milliionaires.

      • balkanghost says:

        +1 Growing differential much due to demographics. Although Australia has supposed high population growth, it’s mostly temps who have neither voting rights nor access to state benefits vs ageing permanent population (bubble).

        Accordingly, we’re becoming a quasi democratic dictatorship run by and for the ‘oldies’ and ‘baby boomers’ who vote……. Oz seems to become more and more conservative appealing to these demographics….

        PS I’m arse end baby boomer….

    • AB says:

      “Seriously, do all of you take exception for a retire getting $14,500 pa???”

      If they own own a multi-million dollar house? Yes.

    • Jason says:

      Seriously, do all of you take exception for a retire getting $14,500 pa??? What planet are we on here??? That is not even a subsistence wage! I pay double that on rent per annum – and it’s a crappy house to boot. Heaven help any of you the day you need a pension to survive…

      That’s the problem with the age pension system, those who own their own home are far more well off than those who don’t.

      Many of the baby boomers who will start retiring in droves soon will have significant superannuation balances to fall back on, as well as significant property holdings.

  7. The Claw says:

    The Commission considers that people born before 1965 should not be subjected to this change or any other further changes to the eligibility age to ensure they have adequate time to plan for their retirement.

    That’s my favourite line. Notice the year?

  8. 3d1k says:

    I don’t really see a problem – boomers are closest to retirement age and least able to buy time to adjust to change.

    I’m not a boomer but it looks as they’ve raised demanding offspring.

    • Rusty Penny says:

      Yeah, the temerity of wanting to afford children, or paying of your house in 7 years as was the norm a generation ago so you can then engage in risky activity such as owning your own enterprise.

      Some people’s expectations truly need to recalibrated huh?

  9. yogiman says:

    Joe Hockey is ending the Age if Entitlement, but NOT the Entitlement if Age!

  10. aj. says:

    So so predictable. This doesn’t even deserve a rant, it’s like the sun coming up in the morning.

    The best financial position is one that mimics the boomer circumstances – don’t swim against the rip.