The Entitlement of Age

by Emily Millane

Executive Summary Australia’s retirement income system is becoming unsustainable. This is not because too much money is spent on the age pension. Australia spends an average of 3.5 per cent of its GDP on age-related spending against an OECD average of 7.8 per cent.

Per Capita’s detailed analysis shows that unsustainability and inequality are the two emergent trends in Australia’s retirement income system. The changes being proposed by the federal government will make both of these problems worse because they ignore the role of private wealth in shaping people’s chances later in life.

The proposals currently in the budget will make the pension inadequate, and the retirement income system more regressive. This will stoke inequality and undermine the sustainability of Australia’s pensions and superannuation system, which has been regarded as world leading.

Our analysis shows that Australian life expectancies have consistently outstripped official projections due to rapid declines in mortality. A comparison between average life spans and official projected life expectancies using steady mortality rates produces a difference of approximately 8 years for men and 12 years for women.

Superannuation savings will be insufficient for certain groups in society under a mature system and on the generous assumption that people work until 70. A woman who spends a significant proportion of her life outside full-time work will have a superannuation balance of approximately $516,000 compared to approximately $874,000 for a man working full-time until retirement.

The system of superannuation taxation favours the wealthy. Over 50% of superannuation tax concessions go to the wealthiest quintile of income earners. At the same time, people in higher income groups consider that tax concessions are the preferable way to pay for longevity. The results of the Per Capita Tax Survey show that the majority of people earning $200,000 and over believe that the way to pay for longer life expectancies is further tax concessions, in preference to working longer or saving more for retirement.

The age pension is not sufficiently targeted to assist those most in need. People with significant assets are being paid an age pension while those who rely exclusively on the pension and have minimal asset wealth live in poverty.

The answer to the challenge of longevity is to make the retirement income system fairer and more flexible by targeting public support more clearly at people who need it, while increasing incentives to save for the future.

Our recommendations show how this can be achieved, by guaranteeing a decent income for everyone in later life and making sure that private assets beyond the family home are counted in working out who can contribute to their own income. This change is reinforced by reforming superannuation rules to ensure that those who most need superannuation ‘those on low and insecure wages’ can build up decent private savings, and that subsidies to those who can afford to provide for themselves do not run out of control.

We propose a government loans scheme based on a tighter pension assets test. These loans would be up to the value of the pension a person would have received, but for the new assets test and would be secured against the person’s assets. They would accrue a nominal rate of interest in line with the Treasury 10 year bond rate. Loans would be payable out of the estate.

For homeowners, we consider that there is considerable merit in the recent Australian Council of Social Service (ACOSS) proposal that new limits for assets other than the home should be set at $100,000 for singles and $150,000 for couples, with an increased taper rate of $2 for each $1,000 above the assets free zone. Tightening the pension means test in this way represents a public saving of approximately $1.3 billion for 2014-15.

To ensure that the welfare system is protecting those most in need from poverty, we recommend that the government consider increasing the full rate of the age pension over time to align with accepted standards of a ‘modest’ lifestyle. For those on a full age pension who are in the rental market , the government should consider additional assistance to the current rental supplement that falls far below estimated income needs of pensioners who rent.

Superannuation contributions should be taxed progressively, assisting low-income Australians to save and tightening concessionality for high income Australians. The Low Income Superannuation Contribution (LISC) should be reinstated, contributions tax be increased for the top two income brackets2, and the concessional contributions caps reduced to $25,000 for all ages. The combined elements of this proposal represent a net public cost of approximately $350 million for 2014-2015.

To address longevity risk, we propose that half of a person’s superannuation lump sum be allocated to a pension income stream or to purchase an annuity, at the discretion of the individual. We also propose that the government support the annuities market by issuing long-dated government securities, and through removing tax and regulatory barriers to the take-up of annuities.

We recommend that the government provide grants for a best practice program incorporating flexible work practices, training and staged retirement. The public benefit of programs which increase participation among older Australians by 5% would result in approximately $48 billion in extra GDP.

Finally, we propose that the government invest in technologies which educate younger Australians about superannuation and the retirement income system.

Although the purview of this report is the retirement income system and longevity, the issues of income, taxation and welfare which permeate it are relevant to a broader discussion about the role of government in Australian society. We hope that this report contributes to that debate.

Thank you to First Dog on the Moon for his permission to use his cartoon

Download the full paper