Grey gouge goes nuclear

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ScreenHunter_90 Oct. 24 08.28

By Leith van Onselen

Prime Minister Abbott last week warned the electorate about upcoming cuts to entitlements in this year’s Budget, claiming that “everyone” had to live within their means:

“Everyone has to live within their means, whether it’s a company, whether it’s a family, whether it’s an individual, whether it’s a government. And that’s what this government is on about and that’s what our budget preparations are aiming for.”

One segment of the population that is well placed to make its contribution is Australia’s retirees who, thanks to increases in the Aged Pension and more generous indexation arrangements implemented under the Howard and Rudd Governments, have found themselves joining the ranks of the middle-class:

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The analysis by the University of Canberra’s National Centre for Social and Economic Modelling found that 26.2 per cent of age pension recipients were in the middle of five income brackets in 2012, up from 15.2 per cent in 2007…

Pension payments are growing strongly as a result of the ageing population, an indexation linked to wages rather than the Consumer Price Index and the one-off increases in the pension in 2009 following the Harmer review.

The aged account for about 57 per cent of the growth in welfare over the forward estimates to 2016-17, according to last year’s mid-year economic and fiscal outlook…

NATSEM principal research fellow, Ben Phillips, said aged and disability pension costs grew strongly over the past decade because of the ageing population and large increases in the payment rate.

“Pensions are linked to average weekly earnings, which usually grow at a much faster rate than the consumer price index, which most other government benefits are linked to,” Mr Phillips said…

“With the generous increases in the pension through the last decade and favourable tax treatment, pensioners are increasingly joining the ranks of middle income Australia”.

A part of this movement up the class ladder is an increasing proportion of older Australians are also using their principal place of residence – which is excluded from the assets test for the Aged Pension – as a tax shelter, buying the biggest home possible in order to receive welfare:

With baby boomers aged over 45 estimated to receive 15% of their income from superannuation, 14% from investments and 66% from government pensions, it’s notable that the family home isn’t counted when undertaking a pension asset test.

Baby boomer home ownership is at the high figure of 82.8% for over-65s, compared with 67.5% across all households…

IBISWorld Australia general manager, Karen Dobie, said that many are sitting on significant wealth in their home, while drawing a pension.

“Currently, a retiree investing all of their superannuation into housing can access the pension, while another retiree opting to rent will have to live off their superannuation. This is encouraging those who do not own houses to purchase property and those that already do to upgrade to more expensive properties to stay under the asset limit,” said Dobie.

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Clearly, the Aged Pension system is in need of reform. What was once meant to operate as a safety net for older Australians has become a widespread rort.

If the Government’s “ending the age of entitlement” is to be equitable and consistent it will need to place the retirement system front-and-centre, incorporating the growing army of wealthy retirees drawing unreasonable benefits.

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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.