Sunday, April 27, 2014

What's worse for the budget? Super or pensions

Is the cost of the pension really soaring beyond control? Or is that just the sort of talk we hear in the lead-up to every tough budget? Isn't the cost of superannuation growing even faster? And why all the talk about super and pensions just after the Coalition won office promising no change to neither?

IS THE PENSION THE CAUSE OF JOE HOCKEY’S BUDGET WOES?

It doesn’t help. At present, the age pension accounts for 9.6 per cent of government payments. It is expected to climb to 10.6 per cent over the next four years but, after that, the Commission of Audit says it’ll stay steady at 10.6 per cent for the rest of the next decade.

SO IT’S NOT UNSUSTAINABLE?

Longer term it will climb much further. Over the next 40 years, the number of Australians aged 65 or over will double. And, on retirement, almost all will get at least a part pension or an associated benefit. Right now four out of every five retirees get a pension, and almost half of the rest get a Commonwealth health card and seniors’ supplement.

IS GIVING THE HEALTH CARD TO SO MANY SENIORS EXPENSIVE?

You bet. According to the Treasurer, nearly 80 per cent of spending on the Pharmaceutical Benefits Scheme is directed to Australians on concession cards.

WHO CAN GET A SENIOR’S HEALTH CARD?

Millionaires can get it – there is no assets test. The income test is one of the weakest ever devised. Singles earning more than $50,000 can’t get the card, nor couples earning more than $80,000, but superannuation isn’t counted as income meaning an Australian raking in as much as $100,000 or more a year from super (plus $50,000 from elsewhere) are still entitled to cheap medicines.

WHAT ABOUT THE PENSION? IS THAT EASY TO GET?

It is, if you put your money into your house. Couples earning up to $70,000 with up to $1.1 million in assets can get the pension, and their family home isn’t included when calculating assets, meaning they can use their assets into their homes and have $1.1 million to spare and still get the pension.

ARE WE GETTING THE PENSION TOO EARLY?

By historical standards, yes. When it was introduced in 1909 less than half of all newborn boys could expect to live until 65. Today half will live beyond 92. That’s a quarter of a century on the pension if the qualifying age stops at 67, something its designers never envisioned.

WOULD IT HELP THE BUDGET MUCH IF THE PENSION AGE WAS LIFTED TO 70?

Over time, yes. And it would help indirectly as well. Australians who are working longer feed economic growth for longer and pay taxes for longer. They will lift our standard of living.

BUT NOT EVERYONE CAN WORK UNTIL THEY ARE 70 CAN THEY?

Not everyone can work until the present pension age of 65. Many physically backbreaking jobs aren’t possible beyond 50. These people either change to less demanding jobs or rely on their savings and Newstart to tide them over. In extreme cases they go on the disability support pension. But most jobs aren’t like that. Thiry years ago one in every four Australians were employed in manufacturing and construction. Today it’s one in every six, and many of those jobs are becoming more mechanised.

AREN’T SUPERANNUATION TAX CONCESSIONS >BIGGER AND FASTER GROWING THAN THE PENSION?

On one measure they will become bigger in 2015, and they are much faster growing, climbing at the extraordinary rate of 12 per cent per year. That’s partly because the earnings in funds are compounding and partly because compulsory superannuation contributions are scheduled to climb over the rest of the decade.

It’s unclear why we offer concessions – lower tax rates on funds earned in super compared to wages, for example – to encourage something that is compulsory. If concessions were really thought to be necessary to boost private saving, they would be better directed toward voluntary extra saving. The Australia Institute proposes removing all tax concessions from super and instead giving every retiree an enhanced pension. It’s calculations suggest the switch would save the government an astounding $52 billion per year.

BUT WOULDN’T THIS PUNISH SELF-FUNDED RETIREES?

Only to the extent that government-funded tax concessions would be removed. And those concessions would be replaced by a decent government-guaranteed income on which they could build.

THEN WHY THE FOCUS ON PENSIONS RATHER THAN SUPER TAX CONCESSIONS?

Because tax concessions are invisible. They don’t feature in the Audit Commission's list of ''large and fast growing programs'' because they aren’t programs. And perhaps because superannuants are often better educated, more politically astute and in a better position to lobby than pensioners.

WHAT CAN WE EXPECT?

The first Commission of Audit report will be released on Thursday. It’ll provide clues. The budget is on May 13.

In The Age and Sydney Morning Herald