Mar 27, 2015

Our unsustainable age pension must be addressed, sooner or later | The Australian

There are plenty of big claims made about the federal budget these days but one of the biggest came from Labor’s Jenny Macklin on ABC radio on Wednesday morning.
“The pension is sustainable,” the opposition families spokeswoman told interviewer Marius Benson. “If you compare the amount that Australia spends on the age pension relative to similar countries overseas, we spend a very low amount. It’s heavily targeted to those who need it most.”
Macklin is not only one of the most genuine people in parliament but one of its sharpest politicians. But while there is truth to part of her argument — yes, Australia’s pension system is better than some overseas — her central claim is dubious at best and dangerous at worst.
What is sustainable about a pension that costs 2.9 per cent of gross domestic product but will rise to 3.6 per cent by mid-century if nothing is changed? The increase seems a mere fraction but it amounts to a big chunk of future deficits.
More to the point, what is fair about policies that offer generous superannuation tax breaks to wealthy workers who own their own homes but does not do enough to help ordinary workers who will have to use their pensions, one day, to pay for rent and everything else? Both sides of politics are wrestling with this issue but only one is denying the problem. Unlike Labor, the Coalition is attempting a solution. The great shame is it is easier for the rest of the parliament to wave it away.
As the population ages and “grey power” gets more powerful, it will be a brave government that tells older Australians their pension and super arrangements are too generous. That makes earlier action less painful than a delay.
After a year of agitated warnings about the problem, the government cannot seem to get people to listen. This is mostly its own fault, given the mistakes it has made with its rhetoric. Its message has been an endless heavy metal concert, all bombast with an occasional bloodcurdling scream. Labor offers soft rock with gentle guitar and harmonies.
Scott Morrison is trying to soften the government’s plan to index the pension at the rate of inflation rather than the more generous approach today, which increases the payment at inflation or wages, whichever is higher.
There is no sign the Social Services Minister’s compromise — a review every three years — will break the impasse. It may have come too late, given the way the government was caught out in this month’s Intergenerational Report adjusting the modelling for its policy because it was too risky to reveal the full impact of the saving across four decades.
Things could have been different a year ago if the government had listened more closely to the National Commission of Audit. Rather than suggest a trim to all pensions, the commission spoke up for changes to eligibility instead — including whether the family home remained exempt from the pension assets test.
For all the attacks on the commission at the time, its approach was fairer than the across-the-board saving the government chose in the budget.
Labor is at odds with independent experts when it claims the pension system is sustainable. Grattan Institute chief John Daley says the family home should be included in the assets test. Deloitte Access Economics director Chris Richardson also believes the pension needs action and eligibility is the priority.
The Parliamentary Budget Office notes spending on the pension has outpaced the growth of the economy and the growth of government spending over time.
The easiest way to dodge the problem is to turn it into a bigger one. That is the tactic used so often by Labor, and others, when taking a question about pensions and turning it into an answer about superannuation. Both are aspects of retirement income policy but you cannot ignore one by focusing on the other. Asked about the age pension on Tuesday, Bill Shorten said the best way to make sure fewer people relied on the pension was to lift super and undo the government’s freeze on the super guarantee levy. This was hokum. The super system is one of Labor’s greatest achievements but it is not doing enough to ease pressure on the age pension. In the Intergenerational Report, Treasury found 70 per cent of retirees were getting the age pension and this would fall to only 67 per cent by mid-century. While more will get a part-pension rather than the full payment, it is dangerous to assume super will do a lot to cut the pension bill.
Shorten suggested a return to Labor’s policy on the super guarantee levy but this would deepen the deficit. The government saved about $2.6bn across three years by slowing the increase in the levy from 9 per cent to 12 per cent (it gets there in 2025). Is Labor actually proposing to reverse this?
A common complaint is that tax breaks on super are too generous to the rich, but governments have squibbed that problem. Labor considered scaling back the tax breaks in 2012 and it was Shorten, as financial services minister, who lined up against the change — something his shadow cabinet colleagues remember. Labor considered things again in early 2013 and came up with a narrow solution that Treasury found unworkable.
Whether there is a tax goldmine from super is disputed, but a future government will have to address the $30bn in revenue forgone from tax breaks in a system that does not leave ordinary workers with a nest egg they can retire on. Fairness will need to be the central principle.
What solution can there be if older Australians can take all their super as a lump sum, then fall back on the full pension anyway?
How is it fair that those who could never afford to buy their own house will get the same age pension — and have to pay rent out of it — as those who worked hard for a $1 million home?
While politicians cannot admit this needs fixing, former politicians can. “There is now a large group in the middle class who plan their assets in order to get the pension,” says Amanda Vanstone, a cabinet minister in the Howard government and a member of last year’s National Commission of Audit.
“People have entitled themselves to the pension,” she says. “It’s not the lower middle class but the middle class, and sometimes the upper middle, who are arranging their affairs that way.”
There are fears Tony Abbott’s promise of a “pretty dull and pretty routine” budget in May means the government will squib action on this front and others.
Bob Officer, the economist who led the Howard government’s commission of audit in 1996, worries the Prime Minister has “given up the game” because it is too hard. Officer believes the number of people who qualify for benefits has simply got to be reduced. He says the next term of government will have to address super tax breaks and eligibility for the age pension. He rejects the argument from the Opposition Leader and Macklin, and says the age pension is not sustainable in its present form.

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