Missed opportunities on coherent pension policy reform

For every $1000 of assets the pension will be reduced by $3 a fortnight, under changes proposed in the federal budget. AAP Image/Alan Porritt

Changes to the pension foreshadowed by Social Services Minister Scott Morrison have been enacted as a flagship policy of the 2015-2016 federal budget.

Mr Morrison has said the changes, which still need the support of the Senate cross-benchers to become policy will allow more than 170,000 pensioners with modest assets to have their pensions increased from January 2017 by an average of around $30 per fortnight.

The proposed changes contrast sharply with last year’s unpopular proposal for pension indexation on the basis of CPI instead of average earnings, which interest groups said would leave pensioners worse off.

It would be nice to think that this marks a turning point for a government in electoral trouble, one that is now charting a path for towards a more mainstream response to population ageing.

But while these proposed changes have been welcomed by interest groups, they represent a missed opportunity to craft a coherent approach to retirement incomes policy.

What appears on first blush to be a better policy than the one proposed in last year’s budget is, in fact, part of a piecemeal approach that risks taking Australia backwards.

Fairer… but not fairest

Mr Morrison and his government argue that the pension is being made fairer and more sustainable through tighter income and assets tests, along with targeting expenditure to those most in need.

These words resonate with mainstream Australian values. They represent an improvement on the indexation proposals advanced by the National Commission of Audit, which would have drastically reduced the incomes of pensioners over the coming years relative to community incomes.

The Intergenerational Report 2015 projects substantial rises of real incomes over the coming decades. The Australian mainstream was never going to accept redistributing such amounts away from older people of modest means to reduce the fiscal pressures of population ageing.

Yet, as Morrison suggested recently, there is a case for more modest indexation than the current one based on average earnings. That case has for now been lost because of the lack of a coherent overall approach to retirement incomes.

This year’s budget proposal presents a good news story for the government. Overall expenditure will still be reduced over the coming years (modestly) as the means testing of both assets and incomes applies more sharply.

The “winners” will be pensioners of modest incomes with continuing protections on the wealth in the family home. The “losers” will be those facing pension reductions as a result of having relatively more assets outside of the home and relatively more self-funded income.

This may appeal to enough of the cross-bench to overcome the political gridlock in the Senate. The changes have provisional support from COTA (subject to a retirement incomes review), from ACOSS, and acceptance from National Seniors Australia.

From the perspective of coherent retirement incomes policy, however, the proposal presents two serious weaknesses.

First, the new assets test involves a very tough “wealth tax”. At the margin,for every $1000 of assets the pension will be reduced by $3 a fortnight, or $78 a year, much more than those assets can deliver in income. Assets of $823,000 may sound a lot but, even if drawn down over retirement, they can only deliver an income of around $40,000. That’s not a lot.

Second, the losers are the current aged. Most of them have not benefited much, if at all, from the superannuation reforms of the last 25 years, yet the excessive tax assistance to those who will benefit will continue.

Ironically, the government’s new pension policy sounds a bit like strategies from the Keating and Howe Labor governments of the early 1990s. They managed to maintain expenditure control while increasing pension and welfare benefits by tightening means tests.

But those measures were also part of a wider strategy including expansion of occupational superannuation, which is emerging as the major factor redistributing private and public income to later life and cushioning future costs of population ageing.

The traditional poverty alleviation aims of the age pension now sit aside income replacement goals. But particularly since superannuation benefits became tax free, government support has increasingly flowed to the more advantaged workers and retirees.

More to be done

Policy think tanks and advocates are joining the electoral mainstream in recognising the substantial inequalities inherent in relying only on expenditure cuts to achieve fiscal sustainability.

This government appears to have ruled out any changes to superannuation tax breaks in the current term. That represents a missed opportunity to boost revenue and to make the superannuation system more effective.

The budget reforms do little to address the severe disadvantage of some younger and older people, nor the policies that accentuate inequalities over lifetimes and generations.

Social Services Minister Scott Morrison should now commission a comprehensive, high-level government review of retirement income policies that looks at taxation of superannuation as well as expenditure on the age pension. It should tackle head-on the major intergenerational issues well before the next election.