Will Abbott take on the “BMW pensioners”?

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By Leith van Onselen

The AFR has today called on the Government to introduce greater means testing of the Aged Pension, whose benefits are increasingly flowing to retirees that “live in big houses, drive new cars, and holiday in Europe”:

…even though many public policy experts and even some pensioners say the rules for the age pension are loose and the scheme too expensive, both main political parties are enthusiastic supporters.

Former treasurer Wayne Swan boasted on Twitter last week that “Labor delivered the biggest age pension increase in history”. When a lobbyist representing pensioner groups complained to Social Services Minister Kevin Andrews recently that the government had raised the huge cost of paying for retirees, he said Andrews assured him the age pension wasn’t up for review…

Eighty per cent of Australian families over the age 65 with about $1 million in assets get it or another welfare benefit, according to the Grattan Institute, a ­Melbourne-based think tank pushing to make the pension less expensive.

“People are deliberately structuring their affairs to qualify for the pension and that’s relatively easy to do,” says Grattan Institute chief executive John Daley. “Unless you are really very, very well off, you can qualify”…

It’s great to see more and more articles questioning the efficacy and sustainability of the Aged Pension. Any discussions around ending the “Age of Entitlement” and returning the Budget to surplus simply cannot ignore one of the the biggest and fastest growing drains on the Budget, whose $36 billion of outlays last year has ballooned by $13 billion over the past decade and now makes-up around 10% of the Budget.

Moreover, without reform, the growing burden from the Aged Pension is likely to worsen significantly as the large scale retirement of the baby boomer generation pushes the ratio of working-aged Australians supporting dependents (mostly the aged) lower, slashing the tax base at the same time as age-related outlays expands.

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According to the Grattan Institute, without corrective action, the Federal Budget deficit could hit $60 billion per year by 2023, or up to 4% of GDP, due mostly to rising health and welfare costs. Grattan also argues that the only part of the tax and welfare system that is not well targeted is for old people – a view supported by researchers from Curtin University, who recently found that welfare policies across the period 1984 to 2010 overwhelmingly favoured the elderly at the expense of the young.

While there are no doubt many genuine pensioners scraping by on $20,000 a year, the loose eligibility requirements for the Aged Pension also means that there are many well-off “BMW pensioners” unnecessarily receiving assistance. For the sake of equity and Budget sustainability, assistance to these types of people must be cut-off, so that benefits only flow to those genuinely in need.

That said, it is simply not enough to only focus on the overly generous nature of the Aged Pension. Just as bigger lurks lie with superannuation, although politicians and the media are largely quiet on this issue.

While the superannuation system was originally designed so that a younger generation could pay for its own retirement, it has instead 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.

Given that the main rationale behind superannuation is to both adequately provide for retirement and take pressure off the Aged Pension, the 15% flat tax system is inherently flawed and designed to fail. By providing massive taxation concessions to those on the highest incomes, the Budget loses billions of dollars of forgone revenue. At the same time, the super system is unlikely to relieve pressure on the aged pension, since those that are most likely to need it – lower and middle income earners – receive minimal (if any) concessions, which both hinders their ability to build-up a retirement nest egg and discourages them from making additional contributions.

A simple reform that would greatly improve the equity and sustainability of the retirement system would be to abolish the flat 15% tax on superannuation contributions and replace it with a flat concession (e.g. 15%) that is the same for all income earners. A reform of this nature would not only improve equity, since all taxpayers would receive the same taxation concession, but also boost lower income earners’ super savings, thereby reducing reliance on the Aged Pension and relieving pressures on the Budget.

The exclusion of the family home from the assets test for the aged pension and the ability to withdraw one’s super as a lump-sum (instead of an annuity) also creates an incentive for households to borrow to purchase an expensive home in the lead-up to retirement, retire at 60, withdraw their super tax-free as a lump sum, use the money to pay-off their mortgage or to fund consumption, and then go on the aged pension from 65 years of age. In such instances, the taxpayer is left wearing the cost of superannuation concessions throughout the individual’s working life, and then again once that same individual goes on the aged pension.

In fact, the latest Retirement and Retirement Intentions survey by the Australian Bureau of Statistics found that “of those who had made contributions, 55% had received all or part of their superannuation funds as a lump sum payment”. It also found that “many of those who received a lump sum payment used it to pay off or improve their existing home or purchase a new home… or to buy or pay off a motor vehicle”.

Given the above issues, obvious reforms that would improve the integrity, fairness and sustainability of the retirement system include:

  • Increasing the eligibility age for the Aged Pension to 70 years (from 65 currently and 67 from 2023);
  • Increasing the access age to superannuation (from 60 years currently) so that it more closely matches the pension access age;
  • Reducing the ability to draw superannuation as a lump-sum;
  • Providing everyone with the same superannuation concession (e.g. 15%); and
  • Including one’s owner-occupied home (or part thereof) in the assets test for the Aged Pension and/or  reducing the eligibility thresholds for income and financial assets, so that welfare flows only to those in genuine need.

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 wealthier older Australians drawing unreasonable tax concessions and benefits.

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Unconventional Economist

Leith van Onselen is Chief Economist at the MB Fund and MB Super. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.

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Comments

  1. Excellent article Leith, it is just one chunk of the pie.

    Was also impressed with The Fin piece which didn’t beat around the bush for once. The MSM always seem to sit on the fence regarding pensions and not offend the vocal seniors organisations.

    Sadly I think neither major party has the political fortitude to do what is in the long term interest of the country.

    There’s just too much short term political pain, watch these groups go berserk if Abbott actually walks the talk about welfare reform and raises the pension age. Shorten will just oppose it for the instant vote winner it is.

  2. It highlights what is wrong with the wonderful ‘us vs them’ approach being taken by our modern political parties.

    Big ticket items like this should be addressed by both (all) parties working together, delivering it together and backing it publicly… together.

    Then there is no political fallout and the country benefits by addressing structural problems that are going to cause pain for future generations

      • ceteris paribus

        Yes, Hector, I think for a high percentage of honest battlers, 70 years is an unrealistic and punitive call.

      • Whist I might agree that “no Super until 70” is not the answer, my point is that these sort of discussions will never happen in the current political climate as they are vote destroyers.

        So the issue will continue to be avoided until the system breaks down completely and at that time the pain will be far greater than if we approach it sensibly now.

      • Ceteris, yes, punitive is the word.

        AB3, you are right in having a constructive approach, but solutions such as these are narrow diktat, based largely on some very spurious premise’s. Western social programs are purported to be collapsing. But are they just being collapsed?
        It is easy to find ‘unsustainable rort’ claims in the press and think tank reports; much harder to find empirical data to support them. Drill down, even cursorily, and the vagueness or contradictions appear in the source material.
        For example, “55% of retirees take/spend SOME or all of a lump sum payment”. Key word in all caps. No breakdown of ACTUAL FIGURES is given in the ABS report. $1000 or $1million? Who knows No data given. Is it bad for a retiree to buy a new car for retirement? Where is the data on say, BMW v. Hyundai?
        And regarding Health Care costs, is it not possible that they will be reduced by advanced technology rather than increase? But every societal crisis, I have noticed is not now, but 30, 50 or 100 years hence. Thanks to the nowness of the internet, all of the fear scams have to be projected to some point in eternity, where somehow, the results of exponential technology growth doesn’t exist.
        Not buying it. Credible data and thoughtful projections are absent; anecdotes alone don’t cut it on this.

      • Yeah Hector, I think a lot of these young people are going to run out of puff way before 65 let alone 70.

        Apart from that, the whole argument is really a waste of time because of Financial Repression, which will last at least another 30 years.
        Real interest rates will be below inflation for a very long time.
        Everyone will be on some sort of pension from age 65 onwards, because inflation will beat the Baby Boomers.

        For the doubters, please go to the RBA’s inflation calculator and clock in the dates between 1973 and 1983 to see what 11.4% inflation every year for 10 years will do to your capital.

        It is way too late for the United States… But for outright default (and the US has practised plenty of that in the last 40 years) financial repression is the only way out.
        The rest of us will follow.

    • Hector, an interesting ABS Household 2012 fact is that of couples between 55-64 years, only 57% own their own home.

      Then, suddenly, of couples 65 and over, 84% own their home… so 27% need their super to pay the rest of their mortgage.

      • Well spotted.
        There are numerous other conclusions to be drawn from that report. It’s like a Japanese logic puzzle.
        That of course also means 73% AREN’T using super for that purpose.

      • Mining BoganMEMBER

        …or that the oncoming bunch of retiring baby boomers weren’t as frugal as their parents.

      • @MB

        The Greater Depression that began in 2008 and its financial repression that will redistribute money to government will have us all being frugal.

        The days of affluent mindlessness are over.

        @ x and y generations

        I can only guess from your comments above that you all have very greedy and thoughtless parents.
        Most of the boomers I know have worked very hard to provide their children with a good home and education, and quite often have sacrificed to give their children a bit of a boost to help with their first home.
        I’m sorry that you got stitched up with the bad ones.

  3. sydboy007MEMBER

    I can’t believe the Seniors card cut off is $50K for a SINGLE pensioner.

    $961 / week (possibly with NO TAX) puts you in the 7th income decile (863-1,054)

    Seriously, we need to start targeting welfare at the needy, and we need the LISC brought back in to make super worthwhile to the MAJORITY.

    • I’ve made that comparison myself.

      The cutoff og homeowners befoer they start to get a reduce pension is about $293k in assets.

      At a deeming rate of $12k, and a top up for the couple of $28k per year, they live better lives than most working families.

      it’s bizarre when non workers get a better life than workers.

      before we used to call them aristrocrasy, now we call call them born between 1946-1960-ish (I’ll make a concession that the very youngest of the boomers are having the gangway removed fromt hem too).

  4. ceteris paribus

    Strong public policy piece, UE.

    The AFR is little more than a shill for superannuation and the financial services industry (as well as big mining etc). So we can’t expect to see any condemnation of the inequity and unsustainabilty of that rort from them.

    Had to smile when they ran an hysteria campaign at the time Swan was hinting he was looking for pennies from super to lower the deficit in the 2013 budget. The AFR ran this heart wrenching profile of a retiree from a statutory Government agency in a wealthier Melbourne suburb who had two million in super and was worried that his planned series of ocean cruises might have to be trimmed by any change in tax rules.

    I think editors at the AFR should leave advertising to the advertising agencies.

  5. Back from meltfund and his comments on the weekend thread…. what a genius, and I’m not being sarcastic.

    This ain’t going to happen, for the same reason LVT won’t happen. it also harks back to my comment about virtually every client I encounter.

    “We’re all greedy”.

    Some may quell that urge somewhat and even to some extraordinary degree.. such as Tim Costello, but that is a variation of scale, not a variation of kind.

    The same as we all aspire to be little landlords, we all aspire to be BMW owning retirees with the youngin’s on the hock for our extravagence.

    You can point out the folly of such an outcome, that its impossible, and the widescale pursuit will kill the economy.

    be it little landlords, or too many retirees….

    When a narcissitic society has you believe you are above avergae, that you will outwit the system, you don’t care.. it’s other peoples children who will wear the brunt.. not yours.. you will provide….

    yet another prisoners dilemma.

    Accept your mortality,accept the death of Australian, and western civilisation. Be happy in our ever increasing mediocrity.

    This is where violence, and only violence, makes a difference, and we’re all emasculated and frightened that we won’t commit to it.

    Your children are doomed to a horrible life, because you’re less of a man than your grandfather… and you let the likes of Steinem, Greer and Dworking convince you that was a good thing.

    • RP,

      While that is true, and a bit depressing, one of the advantages of democracy is that if a bunch of selfish players shouting ” ME!!!” all the time want to get anything they have to cooperate, or either the very strongest individuals get everything, and the rest of the society gets scraps. The more those at disadvantage in society ‘opt in’ and cooperate, the more they can match the larger power players.

      So when you have had seniors, well versed in the cooperation and alliance techniques, sure, they will be a strong voice amongst all those shouting “ME!!”.

      The problem for gen x and y has been that they seem to not want to buy into the necessary strategies required. The result in a society where success follows those who scream loudest and have built strong coalitions, is pretty predictable. But that’s democracy.

      Housing is a prime case. You’d think that gen X and Y would be screaming bloody blue murder at election times, fielding single issue candidates and lobbying like hell. The religious right, car clubs and other odd groups have been able to do it, and get national action on agendas that are much narrower than affordable housing. Yet apart from some of you guys banging on here (and good for you too), the rest is society can be excused for assuming that it is not an issue given the zero amount of noise made about it. The means for providing large amounts of affordable housing is very close at hand should society ever want it to happen. It was done on an industrial scale in the fifties. We could do exactly the same again IF WE WANTED. The resources boom is coming to an end, so there is a lot of construction plant and equipment, engineers, surveyors, environmental consultants soon to be looking for work. Three years of industrial scale land development would be cheap, and good quality if done on that scale.

      Well gen x and y. The stars for cheap housing are never going to align better in your lifetimes. If you want it, start screaming, or by the very nature of democracy you will see the chance fade to nothing.

      • No, not all generations were about “ME”

        Those that came back from WWII designed a better society for “US”.

        Full employment and keynesian policies.

        Whilst understanding that each and everyone had an inkling for “ME”, keynes put it succinctly that we’re all in this together.

        So whilst we felt like doing the best for ourselves individually, we understood we had to get societal best outcomes… only for them to be dismantled by the boomers.

        You keep repeating this mantra, about what you perceive to be a lack of militancy about younger generations…I know the language, it’s a shaming language to assert because they haven’t done enough (in your eyes) that they don’t really deserve it.

        Those generations are enraged and they are expressing it, your media channels don’t expose you to it for a reason.

        And here is the cut of real moral fibre. You yourself have heard enough here on MB, that previous generations volunteered to step aside, to make things better.

        Ben Chifely himself expressed in parliament that whilst elders don’t understand the youth, they must ensure their wellbeing because they are our future.

        Your generation still perceives themselves as part of our future.

        You are barely the persent, and in all honesty, you are now.. the past. You shouldn’t need to be convinced any further, so please, stop asserting that younger generations just need to do a little bit more.

        It isn’t about a little bit more, it’s about a never ending entitlement from the other side who will collect that margin, and repeat ‘more’ once again.

        Gen X and Y are screaming for cheaper housing, and all they see in return is obstinance, arrogance and shaming language attacking their moral fibre. That causes disconnect, and all it ever leads to is impairing of society.

      • Exactly why should the younger generations have to play the same tired old game of who can yell the loudest to draw attention to their plight?

        We employ politicians to ensure that the imbalances that creep into a society over time are kept in check and rebalanced somewhat.

        Instead they seem to have developed a superiority complex in which they see themselves as greater beings lording over the masses of uneducated sheep. Not all of us know what is good for us, but our elected ‘leaders’ sure haven’t covered themselves with glory in performing that duty.

        Of course they are aided and guided by a media with an agenda that largely ignores the worthwhile opinions of those frequenting sites like this, while trumpeting the interests of its wealthy owners and benefactors.

      • I’m reading The Fourth Turning right now and the authors put forward a solid forecast and reason that Gen X wouldn’t be screaming ME like the Boomers did. Expecting Gen X to behave live the Boomers is completely missing the point why it was called Gen X in the first place….because we’re *definitely not* like the Boomers.

      • RP,

        There is just so much wrong with what you say, I scarcely know where to start. Frankly I just see you as a bitter individual for whom the song “Haters gonna hate” is spot on. From that POV, there is nothing really that anyone can say to you have that will make a difference.

        However, in the hope that others might be persuaded that your bile is not only misled, but likely to mean that those who follow the hate mantra and miss out on the opportunity to actually DO something, I make the following rebuttal of one of your points. The generation after WW2 did shout “ME!!” a about housing. It was actually that generation that actually built and lived in the massive war service and Housing Trust schemes. Yes RP, those guys actually went out and made it happen for their generation. You have the opportunity to do it for yours…or won’t mummy and daddy let you. Sheesh.

  6. Jonny G Banger

    UE,
    I agree that wealthy retirees collecting the pension is unfair and not in the spirit of what the pension was designed for however when you repeatedly use that graph to so how big a tax break high income earners get you conveniently forget to mention that there is a cap of 25K on annual super contributions before you incur your nominal tax rate. another point is that employers are only required to put in a maximum of approx 16-17K for individual contributions. The rest is to come out of your own pocket. Yes you do get a bit extra in tax concessions but it is not anywhere near the rort you imply in the graph
    Why should a high income earner pay more tax on the revenue they are putting away for the future

    Shouldn’t we be focussing on who can access the pension and getting that aspect right ?
    I thought we should be encouraging people to put money away for the future regardless of who they are. This bashing of high income earners is becoming pretty tiresome. I suspect a lot of people on this forum are on significantly more than 50-60K per year. Why work harder if you are going to be penalised for it all the time.
    As I said the focus should be on tightening the access to the pension not penalising people for trying to be self supportive in their retirement.

    • ceteris paribus

      Yeah, we pay the higher tax so it is just claiming what is rightfully ours in the first place. No such thing as the common wealth or public goods like education, health, research, policing hospitals, airports, etc. etc.

      In fact, I work so hard and pay so much tax, every chance I can, I duck into the hospital, whip a few patients off the dialysis machines and flog them off to this medical supply dealer – the machines, that is, not the patients.

      I’ve never been working harder in all my life.

  7. I work as a high school teacher in NSW and from my own experience, I can tell you that this country is being ripped off royally by the baby boomer cohort. In my school alone, there are a whole swathe of “retired” teachers who thanks to their generous age of retirement (55) years are now “retired” and receiving 80 percent of the wage they finished on, until they die. But here is the kicker. They are forced to retire at that age, and then the following week are re-employed on contracts and are earning $80,000 plus a year. So here we have a babyboomer now earning $160 000 dollars a year to work 6 hours a day with 12 weeks holidays. Meanwhile, young teachers cant find work.

    It really does make you sick. The same people get around boasting about their latest euro jaunt and how well their negativeley geared IP is going. I just want to punch them in the face..

    • There seems to be a lot of this type of thing going on, especially with the old CSS type schemes and Govt ‘downsizing’ its workforce only to rehire many of those same workers on contract.

      Unfortunately many of them are too thick to keep quiet and not feed the class divide.

    • I know how you feel.

      it’s the sort of looming shadow that emess alluides to, but he should really be careful what he wishes for.

      That type of mindset has only been eradicated in times like extremely violent revolutions.

      French revolution, Russian revolution, Chinese civil war etc.

      If they don’t yield, the aggreived have to put themselves in a really dark place as to ensure their ensuing violence goes all the way.

      it’s not one or two muggings, it’s genocide… or in this case wanton geronticide.

      As i said, you have to transform yourself to be in a really dark place to fulfil this, and ones normal stance is to vie away from it.

      • If you actually had the energy and drive for geronticide RP, you might direct that energy to freeing up the land supply.

        The fact that you would rather propose murder than do actual work on freeing up land availability says volumes about you RP.

        Truly pathetic.