The lobby group representing older Australians, Council of the Ageing (COTA), will today launch a campaign against changes to indexing arrangements for the Aged Pension, which were announced in the May Budget. From The Australian:
COTA Australia chief executive Ian Yates said the campaign, Hands Off The Pension, was in response to the feedback COTA was receiving from older people deeply worried about how they would l manage if the changes announced by Joe Hockey in the May budget came into effect…
“The first stage of the campaign will be to target all senators to ensure the changes which have already passed the House of Representatives are rejected.”
He said changing indexation from a percentage of average weekly earnings to CPI only would dramatically reduce the standard of living for over 2.4 million Australian pensioners.
Just to re-cap, the May Budget announced that the indexation arrangements for the Aged Pension would be changed so that instead of being adjusted upwards twice a year by the greater of male average earnings growth or the pensioner cost of living allowance, it would instead be linked to the consumer price index (CPI), so that it would grow in-line with overall prices and would not increase (or fall) in real terms.
Under the current arrangements, pensioners have enjoyed strong rises in incomes, with the pension increasing by 25% over the past 4.5 years – well above the 13% increase in the CPI or the 14% increase in pensioner cost of living.
Moreover, under the current low wages growth environment, pensioners are in the fortuitous position whereby their incomes will likely grow faster than average earnings. For instance, last week the ABS revealed that male average earnings rose by only 1.2% in the six months to May – below the 1.4% rise in the pensioner cost of living index. In effect, pensioners currently get to enjoy increases in line with male earnings when income growth is strong and then increases in line with the pensioner cost of living index when income growth is soft – we should all be so lucky.
And as highlighted by CommSec earlier this year, pensioners have been a key beneficiary of Budget largesse, enjoying a 65% real (inflation-adjusted) increase in the Aged Pension over the past 40 years, with the Aged Pension also growing at a faster rate than wages, increasing from 25.9% of the average wage in 1974 to 26.7% in 2014 (see next table).
In light of the above, one should rightfully question whether such generous pension arrangements are justifiable or sustainable.
The fact remains that the large scale retirement of the baby boomer generation means that there will be a shrinking pool of workers supporting a growing army of retired and aged people. This will cause the tax take to shrink just as aged-related spending is rising (see below charts).
Viewed in this light, how can COTA credibly justify increasing the real value of pensions for the bulging cohort of retiring baby boomers, as occurs under the current indexing arrangements, when there will be relatively fewer taxpaying workers to support them? And does it honestly believe that it is fair to continually increase the tax burden on the working-aged population, just so pensioners can maintain income growth well above the general level of inflation, and above average earnings growth?
Something has to give. Either indexation arrangements have to be wound-back so that the Aged Pension rate does not increase in real terms, and/or the eligibility criteria to qualify for the Aged Pension must be tightened, so that only those that genuinely need it qualify.
On the latter point, it is hard to deny that the Aged Pension is poorly targeted.
As noted by Treasurer Hockey on Budget night, “currently, an individual with a home and almost $800,000 in assets still qualifies for the age pension; a couple with a home and almost $1.1 million in assets also qualify for the age pension”.
Senator David Leyonhjelm has raised similar concerns, noting that:
Cutting wealthier pensioners out of the scheme would allow for a more generous pension for those most in need…
“People who have substantial assets in the form of a house shouldn’t be receiving pensions paid for by people who don’t even own a house.
“If eligibility for the pension can be tightened up a bit of course that frees up money for other things, and it also means that the pensions don’t have to be so low because fewer (would be) getting them.”
Clearly, access to the Aged Pension is far more generous than necessary and allows precious tax dollars to flow to those that are not in genuine need.
One obvious solution is to bring one’s owner-occupied home into the assets test, freeing-up funding for genuinely vulnerable citizens. In concert, the government could also establish a government-run HECS-style loan scheme, whereby retirees borrow funds from the government, with the loans repayable upon death from their estate.
Either way, leaving the the Aged Pension in its current state is neither fair to younger generations nor is it in the nation’s best interest. It also completely ignores the very real pressures facing the Budget as the once-in-a-century commodity boom fades and the population ages. Reforms, therefore, must be made to stop the pension rate from rising in real terms and/or to reduce access by wealthier retirees, along with reforms to superannuation concessions (discussed many times previously on this site).
COTA should not expect to have pensioner benefits continue to increase in real terms, paid for by ever rising taxes on the shrinking working-aged population, many of whom will also never get to enjoy anywhere near the same degree of home ownership.