Beware blunt response to age pension debate

April 17, 2014

The Drum Unleashed, 17 April 2014

The proposed increase to the pension eligibility age makes for some easy sensationalist fodder.

The Government breaks its election promise not to touch the age pension. Joe Hockey purports to fix the budget by cutting welfare spending and attacking the nation’s most vulnerable. Intergenerational warfare is foreshadowed as Gen X and Gen Y stare down the barrel of working until they drop. The Boomers, by contrast, are on cruises along the Danube eating pheasant.

It is worthwhile looking more closely at what Hockey said in his speech last week, and what he is trying to achieve.

The principles outlined in his speech to the Reinventing Bretton Woods Committee Conference in Washington are reasonable in a number of respects. The Australian Government does need to make some difficult decisions as a result of ageing and increasing life expectancies.

It does need to have its sights set on pension eligibility as one part of the policy response. It does need to direct public payments to those who are most vulnerable.

However, when you trace back through to the IMF report that Hockey’s speech closely referenced, you find that it cited some other important features of a sustainable pension system. The IMF nominates the main challenge of the pension in advanced economies like Australia is improving long-term sustainability without undermining the ability of the system to alleviate old-age poverty.

It supports expanding access to pensions and the health care system when needed, and redistributing contributors’ lifetime savings in a fair manner.

The other point the IMF makes is that social and political preferences will dictate whether cost control, protection against old-age poverty and redistribution of lifetime savings receive the most emphasis. The reason Hockey has prioritised cost control? If we are to take him at face value, it is because he is trying to achieve fiscal sustainability.

This is where Hockey’s argument comes unstuck.

The increase to the pension age is being suggested because we are living longer. So the logic goes, if people work for longer then they accumulate more private savings and drawdown on the pension for a relatively shorter period of time.

The trouble is, increasing the eligibility age does not, of itself, keep older workers in work. The ABS Retirement and Retirement Intentions series shows that while people intend to keep working until the pension eligibility age, the majority of people retire earlier (currently 58.5 for men and 50 for women).

As National Seniors chief executive Michael O’Neill has repeatedly pointed out, if you are aged 55 or over and you go out of the workforce, it will take on average 72 weeks for you to find a job. Note the term “a job”; there is no guarantee that it will be a job that makes use of your skills and education, or where you work the number of hours you wish to. Also note the age: 55.

The IMF noted that the adverse increases in retirement ages disproportionally affect the poor. This can be mitigated by enhancing labor regulations protecting older workers and by strengthening disability and social assistance programs for those approaching retirement age. Unless we see these sorts of measures also included in the Government’s legislative agenda, the increase to the retirement age will be a blunt and regressive measure.

It remains the fact that Australia is one of the wealthiest developed countries and its share of age pension spending is comparatively low. Australia’s age-related spending in 2013-2014 is estimated to be 2.6 per cent of GDP, against an average spend among developed economies of 3.9 per cent. The idea that we have a budget crisis at the behest of welfare spending, primarily on the age pension, is bogus.

There are other measures that Hockey could take before further increasing the eligibility age. The most obvious is to include the family home in the pension means test. For the purposes of the test, people who are asset rich in their primary residence are currently on the same footing as people who rent and will never have the option of drawing down on any equity to fund their retirement.

This change would cut back on pension payments and provide a more efficient allocation of public benefits to people who most need them.

A comprehensive suite of policies is required to restore integrity and sustainability in our retirement income system. People should be encouraged and supported to work for longer. Increasing the pension eligibility age is only one part of this.