As the 2014-15 budget nears, Australians are hearing that the government must mount an urgent repair job to address the looming structural crisis that will see the budget in deficit for decades to come. The “budget crisis” is a convenient narrative – but how true is it?
In the second piece of our series, Ben Spies-Butcher argues that budgets are about choices, and that the choice the government is really making isn’t about balancing the budget – it’s about inequality.
It seems every few years our governments tell us that we are in such dire financial straits that we need to suffer cuts to services and payments. Such warnings inevitably come with even more drastic tales of woe for the future – usually based on the impact of an ageing population. The problem is, the evidence to support these claims is weak and points to alternative (often opposing) policy solutions.
The latest round of this gloomy budgetary talk comes from federal treasurer Joe Hockey and the government’s Commission of Audit. Already, Hockey has confirmed that the pension age will rise to 70 by 2035, affecting all Australians under the age of 50.
As with Labor’s previous changes to the pension, and other reforms introduced by the Howard government, these changes are justified by Australia’s ageing population. This is a story dating back to the 1980s and 1990s internationally and continued by a series of Intergenerational Reports produced by the Australian Treasury.
Yet most of the evidence simply doesn’t show the crisis that is being claimed in the lead-up to the May 13 budget. Australia’s pension system is very efficient by world standards. It costs less than almost any other.
Our main challenge has been aged poverty. This is why Australia recently increased the pension.
What’s more, existing moves to raise the pension age are one of the main drivers of increased numbers of disability support payments. This is not surprising given disability is linked to age. So, for many, this change will simply move them onto more miserly payments and force them to look for jobs they are unlikely to get.
Why are super tax concessions untouchable?
The most perplexing part of this debate is that reforms meant to tackle the problem can make it worse. Compulsory superannuation, introduced partly as a response to population ageing, has led to massive tax concessions that are eroding the tax base. Super is not taxed like other income, so as super contributions increase, the tax take reduces. These concessions now rival the cost of the public pension.
Superannuation tax concessions also do a very inefficient job of achieving the policy outcomes governments claim to be pursuing. Unlike most income, all super is taxed at the same rate. That means super is a great deal for the rich, but not for many low-income workers.
Super is open to abuse as a tax lurk by those still on high incomes later in life. And super has a profound gender bias: it penalises those (mainly women) who spend considerable time out of paid work (and without super contributions) caring for family and friends. Super provides an active disincentive to care for others.
That is not to say super should be abolished. Governments should help people save. But tax support for superannuation should be the target of any reform.
A recent report by the Australia Institute outlines the scale of the issue. Tax concessions are so large and poorly targeted that their abolition (taxing super like normal income) would fund a universal aged pension, allow for an increase in payments and for a lower retirement age, and still have money left over.
Yet as the government proposes to crack down on the pension, it is also proposing to wind back Labor reforms that made super (modestly) fairer, increasing effective tax rates for low-income retirees, while abandoning reductions for the highest paid.
One alternative to raising the pension age is tighter means-testing of the pension. However, changes to superannuation will do far more for the budget bottom line than any changes to means-testing.
It is true some relatively wealthy retirees continue to access some pension benefits. But these pale in comparison to the benefits gained through the tax system. As Treasury notes, current policy provides most financial support to the wealthiest retirees, those denied the pension but provided with tax concessions worth far more.
Benefits limited to the poor are most vulnerable
Means tests suffer from a second challenge. History shows if only the poor get a benefit, then that benefit will be vulnerable – as the sale of public housing in Sydney and cuts to payments for many single parents and those with disability demonstrate. Defending the current aged pension has broad public support, evidenced by recent polling. Tighter means tests narrow the support base of payments to those with the least political power, making them much easier targets for further cuts.
People are not forced to retire (judges excepted). If 70-year olds are offered meaningful and rewarding work that they are able to perform, they will likely take up the offer.
Early retirement is closely linked to age discrimination in the workplace. This is the real challenge of an ageing workforce. Making workplaces inclusive of the growing numbers of older people would not only be more effective, it would do much less harm to those older workers unlikely to gain work and who might instead face a significant reduction in living standards if they cannot access the pension.
Nor does retirement mean freeloading. A greater number of retirees means more volunteers, carers and active community members. The current discussion has an implicit assumption that only paid work is valuable, yet for most of us unpaid care is perhaps the most valuable form of labour we encounter. In a world of longer working hours for many parents, retired grandparents are increasingly the safety valve that relieves work-care pressures.
Budgets are about choices. Who should pay, for what, and who should benefit. When governments present policies as if they are not choices, then we should be rightly sceptical. What are the choices they have ignored?
In this case, the choices we do not consider include more fairly taxing superannuation. And so the choice we are making is not really about whether to balance the budget, but about inequality. Perhaps that is why we never hear what the choices really are.
Further reading: Australia’s economy is healthy, so how can there be a budget crisis?