The Australian Government should tighten the welfare system for older Australians, adding the family home to the assets test for the age pension and limiting tax concessions on superannuation contributions, argues a new report from the Grattan Institute.
The report, entitled “Balancing budgets: tough choices we need” also supports the Productivity Commission’s recent suggestion that the eligibility age for the age pension be lifted to 70, a suggestion hosed down by the government on Friday. The report’s authors argue the age for access to superannuation should also be lifted.
The Grattan Institute’s package of suggested reforms to help balance the budget also includes broadening the GST to include fresh food and private spending on health and education.
Report author John Daley said Australian governments must make tough choices now to balance the budget, rather than waiting for a crisis to act.
“It is not sustainabile to be running a budget deficit, which we have for the last 6 years, which every indication says will get worse,” Dr Daley said.
“We don’t have a budget emergency in the sense of flashing blue lights and cardiac arrest, but we do have a very substantial budgetary problem – we’re unfit, we’re overweight, we’re eating too much cheese and we all know where that ends.”
The Grattan Institute has calculated increasing the age of access for the age pension and superannuation, limiting tax concessions for superannuation, and including owner-occupied housing in the age pension assets test would collectively improve budget balances by A$27 billion a year.
“The issue that we’ve got is that our tax and welfare system, and that includes superannuation so far as it affects older people, is by and large age-based not needs-based,” Daley said.
“It essentially says if you are older we will give you welfare and tax breaks even if you don’t really need it.”
Current superannuation taxation arrangements mean workers over 60 pay substantially less income tax than younger workers with a similar income.
“Someone who’s 60 years old and on $75,000, more or less an average wage, pays about $5,000 less tax than a 30 year old with children on exactly the same wage,” Dr Daley said.
“It’s not clear to us that the 60 year old is so much more needy than the 30 year old.”
At present employees are only taxed at 15% for the first A$25,000 – or A$35,000 for those aged 59 and over – that they put into their superannuation account each year. The Grattan report suggests reducing these thresholds to A$10,000. It also suggests taxing superannuation earnings of those over 60 at 15%, as is currently the case for younger taxpayers. When combined, these measures would contribute A$9 billion a year to the budget.
Dr Daley said the original idea behind super was that it would promote intergenerational equity, encouraging one generation to save rather than putting a burden on the next generation.
“It’s become a device for transferring liability from the older generation to the younger generation, which is the precise opposite of what the entire system was designed for.”
Helen Hodgson, senior lecturer in taxation at UNSW agreed the super system wasn’t intended as a way for people to increase their super without paying any tax on it.
“We’re the only country in the OECD that uses the model of tax we do, which is concessional tax on earnings and tax exemptions for withdrawals by members over age 60. All of the other major economies apply tax when you withdraw it from the fund.”
Chris Lloyd, a statistician at the Melbourne Business School said it was debatable whether the current tax incentives made any difference to the amount saved by retirees.
“If people have a target amount in mind, then increasing tax or decreasing tax concessions might lead them to save at higher rates, or work for longer. It may have very little effect on the amount saved,” Professor Lloyd said.
“Reducing the threshold for the lower 15% contribution tax may lead to people putting more money into standard investments rather than superannuation. But there is no reason to assume their total savings would reduce.”
Dr Hodgson said the Grattan Institute recommendations would hit all groups of older Australians, including those on a full pension, part pension, or drawing down from their super to fund their retirement.
She said this would make implementing such a package of reform a political problem for the government.
“The number of older voters that are going to be voting on the government as Australia ages is growing. The skew to older voters will limit the government’s appetite for reform that’s going to hurt older people,” Dr Hodgson said.
Targeting the family home
The report’s authors say including owner-occupied housing in the calculation of a retiree’s eligibility for the age pension would contribute about A$7 billion a year to the budget, and encourage people to downsize to housing which may be better suited to their needs, enabling more efficient use of existing housing stock.
“There are a large number of people who are sitting on a million dollars worth of assets and yet almost all those people are collecting a part pension of over A$200 a week,” Dr Daley said.
“The problem with the super assets test is that it encourages people to live in houses that are more expensive than they necessarily want, because if they put all of their assets into their house then they collect a pension.
"The minute they sell the house they’re not going to collect their pension, so they stay there as long as they can. What this would do is unglue all of that.”
But Dr Hodgson said she did not agree with all of the reasoning in the report on this issue.
“For a lot of policy analysts owning your home is regarded as the fourth pillar of the retirement income system.”
She said removing the different treatment between home owners and non home owners would be problematic as renters generally needed more cash to live on.
The report recommended that people who fail the asset test due to the value of their houses be allowed to collect the pension. But this would be accumulated against the value of their homes, and be reclaimed when transferred or sold.
Judy Yates, a researcher in housing economics at the University of Sydney, said this would have a greater impact on income poor households than on income rich ones.
“I would prefer to see other solutions considered at least at the same time. One example could be removing the significant tax concessions on superannuation income for retirees,” she said.
“In the absence of an adequate supply of suitable, affordable down-size housing, it’s not obvious that older households will be able to down-size even if they choose to.”
“It’s important to consider the supply side as well if demand based solutions are to work. Down-sizers won’t move if there is nothing that meets their size, location and cost preferences,” Professor Yates said.