Pension privilege in the crosshairs

Age pension policy ineffectiveness has become so obvious Canberra can no longer ignore it. The sooner Joe Hockey revisits his approach, the better.

Comments by the Business Council of Australia and Treasurer Joe Hockey suggest that welfare and entitlements for older Australians are now on the agenda for the May budget. Pension and superannuation policies will need to be addressed, among other things, if the government wishes to create a sustainable budget balance and avoid an increasing budget imbalance.

Budget forward estimates are rarely accurate, frequently revised and political fodder for both political parties but they possess one undeniable truth: with an ageing population the current long-run budget is not sustainable.

Increasing shares of Australians are hitting retirement age and unless policy changes this will lead to a blowout in both health and welfare spending. The Productivity Commission indicates that health care expenditure, as a share of GDP, will increase by 4.3 percentage points by 2059-60, while spending on the age pension and aged care will increase by a further 2.8 percentage points.


Graph for Pension privilege in the crosshairs

As such the ageing of the Australian population is set to add around 7 percentage points of GDP to government spending over the next forty years. But the real effect on the budget balance will be larger since a higher share of retirees will also narrow the tax base and limit expenditure on productivity improving infrastructure, reducing growth in income taxes and GST revenues.

The recommendation by the BCA is notable because its president, Tony Shepherd, is also heading up the Coalition’s National Commission of Audit. As such it is reasonable to assume that the recommendations will form part of the broader recommendations provided by the Commission before the Coalition lays down its first budget in May.

This follows recent statements by Treasurer Joe Hockey that unless we make changes to our health, education and welfare system ‘we will run out of money to pay for them’. While that isn’t strictly true, it is notable that the discussion has suddenly changed tack - and quickly.

First, the government needs to look at lifting the retirement age towards 70 years of age in non-physically demanding roles; up from 67 years of age for those born in 1957 onwards. The Grattan Institute estimates this will save the budget $12 billion annually. But such a move would also have to be met with greater education on the capabilities and productivity of older Australians and perhaps even business incentives to create hiring and reduce ageist hiring practices.

Second, the primary residence should be included in the means test for the age pension. Housing accounts for a majority of Australian wealth and yet it is mostly ignored for the purpose of determining who should receive the pension. The Grattan Institute estimates that this will save around $7 billion annually.

Many older Australians owe much of their wealth to being in the right place at the right time. The sharp rise in house prices over the past 25 years has dramatically changed the wealth distribution, with those lucky enough to buy in the 70s, 80s and early 90s generating massive returns not through their own ingenuity or hard work but simply because they were born at the right time.

Why should an older Australian be able to cash out their substantial superannuation holdings via a lump sum, use it to purchase a million dollar house and then also receive the age pension? And this while also receiving generous superannuation concessions and housing wealth they did little to generate.

Does that seem fair? Is that really a desirable use of our superannuation and welfare systems?

The BCA recommendations are evidence that welfare policies in Australia no longer meet their objectives - and this has become so obvious that even politicians cannot ignore it. Rather than protecting those most in need, they too often accrue to the already wealthy. 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).

Some will argue that addressing the aged pension is unfair – after all, how can you take entitlements away from those who have paid taxes for forty or fifty years? But recommendations from the BCA are not about taking money from those who need it, but addressing inequities in the welfare and superannuation systems that accrue to those who don’t need the money. As my column history will attest, I support strengthening the safety net for poorer Australians young and old alike (Australia’s inequality shame can no longer be ignored, January 22).

It is, however, important to recognise that addressing welfare is not the only way to address our budget imbalances. Age pension and superannuation reform will not be enough unless the government also addresses tax revenues and the tax base. Our budget deficits owe as much, if not more, to revenue rather than the expenditure side and I am buoyed that the BCA recommendations reflect this.

Despite the BCA’s recommendation and recent comments by Hockey, I am still doubtful whether age pension reform will be achieved when the Coalition lays down its budget in May. Although reform is needed to address superannuation, the retirement age and the age pension, the Coalition has lost significant political capital since winning the election in September and a straight-up attack on its voter base will not play well publically. But I am more optimistic than I was.

Nevertheless, these are the discussions that need to take place and so far they are being undertaken in a reasonable manner, without the theatrics that we might expect. An ageing population is a big deal and among the greatest economic challenges we will face. And a proactive approach will be the best way to address it.