Pension cowardice puts Canberra in a pickle

Following a week of heated debate, Prime Minister Tony Abbott has taken pension reform off his budget agenda (PM to put pension reform on hold, April 16). It is a step back for a Coalition government which only last week seemed to finally grasp the magnitude of the budget challenge facing Australia over the next few decades.

Abbott has once again declared his desire to “put the budget back onto a path to a sustainable surplus” but without addressing rising pension and aged-care costs he is instead only focused on short-term issues. Australia does not have a short-term budget crisis, we never did and we are at absolutely no risk of defaulting in the near-term, but we do have considerable long-term issues.

The long-term sustainability of the budget comes down to three fundamental issues: tax reform, healthcare spending and aged-care/pension expenditure. Everything else is just window dressing. 

The Productivity Commission estimates that by 2059-60, government spending on aged-care and the pension will rise by 2.8 percentage points of nominal GDP. Recent estimates suggest the cost of the aged pension will rise from $39.5 billion a year to $72 billion in a decade.

Increasing the pension age is an obvious approach to address rising costs, as acknowledged by previous governments. The retirement age is already set to increase gradually from 2017 until it reaches 67 years in 2023 and Treasurer Joe Hockey wisely flagged the possibility of raising the retirement age to 70 beyond that point (Raising the pension age is just the beginning, April 11). Hockey received flak for his comments but they were undeniably on the mark and displayed an appreciation for the long-term structural issues facing the budget that has often been lost among the political theatrics.

The Grattan Institute estimates that the government could save $12 billion a year simply by raising the retirement age to 70. Unfortunately increasing the retirement age has no immediate effect on the budget.

Nevertheless there are a range of options available to the Coalition to address near-term costs that will have benefits for decades to come. Importantly, reform need not harm low-income earners and in several cases savings could be made by the government while simultaneously improving conditions for the poor and reducing inequality.

First, there needs to be more stringent means testing for the aged pension. It should be directed towards those who most need it. As it currently stands, it is possible for a retired couple to receive a part-pension while sitting on $1.1 million of assets plus the value of the family home.

Second, the family home should be included in the asset test for the aged pension. Housing accounts for a majority of Australian wealth and yet is mostly ignored for the purpose of determining who should receive the pension. The Grattan Institute estimates that this would save the government around $7 billion annually.

Third, superannuation reform is needed to address the fact that a majority of superannuation concessions accrue to the already wealthy. As it stands the higher your tax bracket the greater your superannuation income concessions. The less you need those concessions the more likely you are to receive them.

The superannuation system is designed as a replacement for the pension system. That is what it exists for. The people who need the pension the most are low-income earners, so a logical way of addressing rising pension costs is to provide greater superannuation concessions for the poor, right? As it stands superannuation policy actually increases the burden on the aged pension and tax payers, while directing billions of dollars annually to the already wealthy. Instead, tax concessions on superannuation income should be set so that low income earners receive a higher concession per dollar.

By providing the age pension and generous superannuation concessions to wealthy older Australians, government policy is pulling a reverse Robin Hood – it robs the poor (and young) and gives to the wealthy (and old).

I’ve suggested three simple reforms – in addition to raising the retirement age – that could generate billions of dollars in revenue for the government annually. More importantly this could be achieved without hurting low income earners and older Australians who genuinely rely on the pension to make ends meet. Furthermore, some of those savings could be used to improve the living standards of those who rely most on the pension.

Fixing the budget isn’t necessarily hard, the Coalition has a range of options, but the changes required are going to be politically difficult. The comments by Abbott suggest that instead of making tough choices the Coalition will look for short-term solutions to a long-term problem and in the process simply kick the can down the road.