When it pays to pack-up and leave our shores

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By Leith van Onselen

The Fairfax dailies ran an article over the long-weekend claiming that Aged Pensioners are increasingly moving overseas as the pension and their superannuation savings fails to keep pace with Australia’s rising cost of living:

…government data shows there was a 30 per cent increase in the number of people claiming the Australian age pension living overseas between 2007 and 2012.

Over the same time, the total number of age pensioners grew only 17 per cent…

About 3 per cent of these pensioners live overseas.

The government slashed $2.1 billion from pension spending in last month’s budget.

The pension qualifying age will be lifted from 67 to 70 by 2035. And from 2017, pension rises will be pegged to the consumer price index, and the value of income test and assets test free areas will be fixed for three years.

The article then goes on to cite examples of so-called “economic refugees” – i.e. pensioners who have moved abroad to places like Thailand, Italy and Greece, where the cost of living is cheaper – presumably in a bid to highlight that pensioners are struggling and that cuts to the Aged Pension are ‘unfair’.

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Regular readers will know that I don’t buy these arguments, and believe that the pension is unsustainable in its current form in light of the ageing population and the projected decline in the proportion of workers supporting the aged. Combined, these forces will cause the tax take to shrink just as aged-related spending is rising (see below charts).

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Moreover, an objective examination of the Aged Pension shows that it has been a key beneficiary of government policy over the last decade – policy changes that were never sustainable in the long-term, given Australia’s ageing demographics.

In particular, the Howard Government relaxed the income and asset tests for access to the Aged Pension, whereas the Rudd Government in 2009 granted a $30 weekly increase in the pension, along with more generous indexation arrangements. The change to indexation arrangements, in particular, meant that it now gets increased twice per year by the greater of male average earnings growth or the pensioner cost of living allowance. As a result, the Aged Pension now grows much faster than the general cost of living – as evident by the 25% growth in the Aged Pesnion over the past 4.5 years, versus the 13% increase in the CPI or the 14% increase in pensioner cost of living index.

Combined, policy changes impacting the Aged Pension have led to a marked increase in benefits paid to the aged, as noted last year by Curtin University’s Alan Tapper, Alan Fenna and John Phillimore:

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What stands out is the recent surge in net benefits, which took place mostly under Coalition government. Critics might argue that in this period the long Australian tradition of relative restraint on expenditure on the elderly, under both Labor and Coalition, was here abandoned…

The Curtin University study also found that assistance provided to the elderly is often not based on need, but purely aged-based, with elderly Australians tending to be quite well-off when compared against younger Australians:

Given that equivalent final incomes for the elderly are now close to the average for all households, and that the net-worth distribution is skewed in favour of older households, we can reasonably infer that an integrated measure would show that households headed by persons 65 and over are better off than the average for all households under that age.

If all this is right, the Australian system of social transfers to the elderly is much more than a safety net. Viewed in ‘lifecycle’ terms, it shifts resources from the income-rich but asset-poor stages of life to the asset-rich but income-poor stage. Viewed in terms of the ‘vertical’ dimension, it is a system of upwards redistribution from the less well off to the better off…

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Analysis by the University of Canberra’s National Centre for Social and Economic Modelling has also found pensioners to have been key beneficiaries of changes to government policy, which is obviously being funded by the diminishing pool of working Australians:

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”…

Finally, as highlighted by CommSec last month, aged pensioners have enjoyed a 65% real (inflation-adjusted) increase in the Aged Pension over the past 40 years, with the 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). Many pensioners have also experienced massive growth in the value of their homes, which are obviously excluded from the assets test.

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Clearly, 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, is both inequitable to working Australians (who would be called upon to pay ever-increasing amounts of tax), and is ultimately unsustainable. Viewed in this light, the Budget’s announced changes to the Aged Pension are eminently sensible.

Fairfax’s article also ignores the growing army of working Australians leaving Australia on a permanent or long-term basis. Despite Australia’s economic out-performance over the past decade, a record number of Australians have left our shores, in part driven-out by Australia’s sky-high cost of housing (see next chart).

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The irony is that these trends would likely accelerate if the Aged Pension was allowed to continue growing at a rate that is much faster than the cost of living, paid for by continual tax increases on younger, working Australians.

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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.