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The myth of the ageing ‘crisis’

Financial measures to address ageing promote inequality and weaken the budget. Patrick Doheny/Flickr

So far there have been three Intergenerational Reports by Treasury examining the challenges of an ageing population which have consistently been used to justify new policies to address a potential ageing ‘crisis’.

Yet, the evidence of a problem is minimal, and often the measures proposed increase inequality and weaken the budget.

In last year’s budget, the Labor Government announced changes to the aged pension to gradually increase the age at which people will be eligible from 65 to 67. Similar moves in Europe caused riots. In Australia, it was barely noticed. The government has also proposed increasing compulsory superannuation contribution rates from 9% to 12%.

Together these measures seek to shift the balance of retirement policy from public pensions to private savings.

For policy theorists this presents a number of contradictions.

There is little evidence that population ageing will hurt the budget, while measures to support private savings tend to exaggerate inequality and penalise those that provide care for free – particularly women.

The ageing ‘problem’

Much of social policy is aimed at the old. Aged pensions are a large component of social security receipts, and the aged are high users of some public services, like health and aged care.

Overseas, this is generating some fiscal pressures as public spending increases with the age of the population.

But in Australia, the evidence is far less clear. High migration and relatively high fertility rates mean population ageing is much less advanced, and will occur much more gradually, than in Europe or Japan. Public pensions are also less generous than overseas.

Part of the difficulty is modelling the potential impacts. Treasury generally only provides estimates up to four years in advance. Even these are frequently corrected by significant degrees. In contrast, the Intergenerational Reports look 40 years into the future.

It is true that the reports predict a deficit in the future. However, much of this is unrelated to ageing. The biggest growth in spending is in health, and most of this is related to technology, not demographics.

The estimates themselves have also changed considerably since the first report in 2002. Back then the deficit was predicted to reach close to 5% of GDP by 2040. The most recent report in 2010 revised this down to less than 2%.

The first age-related deficit is still as far away today (16 years) as it was when the first report was released.

It appears the Treasury has a systematic conservative bias. That may not be a bad thing in the short term, but over long time horizons it can suggest crises that do not really exist.

Given the imprecision of the estimates, the current figures do not suggest any evidence that there will ever be any deficit due to population ageing.

Even if we are less concerned with fiscal impacts, we may be concerned with ensuring adequate retirement incomes for our population.

Low incomes earners and super

This is another reason given for changes to superannuation. Advocates argue that low income earners and women simply do not have enough savings.

The problem with this argument is that super is a uniquely poor policy vehicle to address these problems.

Compulsory super generates savings that are proportionate to income – currently 9%, proposed to be 12%. So the largest benefits go to those on the highest incomes.

This is reinforced by the way we tax super. Super is taxed at a concessional rate – meaning those on high and low incomes pay the same tax rate. This is a significant benefit for those on high incomes. Those on the top marginal tax rate gain, on average, $11,000 each year in tax concessions on their compulsory super contributions alone.

But for anyone earning less than $35,000 a year, which includes full time workers on the minimum wage and many part-time workers, there is no benefit. They pay the same tax as they would if they received the income now. The Government is proposing to give them a little more, but still much less than what those earning more now receive.

That is particularly troubling because saving tends to have a higher cost for those with little income. Super could be used to pay down expensive credit card debt, save for a house deposit or pay for school uniforms.

Instead, low income workers are forced to save in funds whose historic performance is little better than the inflation rate, for a time in the future when, for many low income people, their standard of living will increase even without super savings.

Elliott Brown/Flickr

Women, saving and inequality

Likewise, super does little to help women. Currently men reaching retirement have on average twice the super of women of the same age. Even taking all workers together, women have only two-thirds the savings of men.

This reflects relative earnings. Even when women do the same type of work as men they receive only 90% of the pay. But women are also more likely to be part-time, to be in lower wage industries, in lower waged positions and to take longer breaks from the workforce. The combined effect is substantial.

The difference in super savings reflects these differences in lifetime earnings.

Any increase in the super rate will simply reproduce the same inequality, because it is based on the same lifetime income.

‘Bizarre’ policy

It seems bizarre to suggest a policy that gives men more than women as a way of correcting the low savings of women.

These issues reflect a broader problem. Schemes that encourage private savings tend to reinforce inequality.

Policymakers often point out that savings are a product of age – saving tends to increase during our working lives and then decrease in retirement. That is true.

But savings are even more strongly related to our income. That is because the more we earn the more we can afford to save. Those on low incomes can barely afford the rent, let alone long-term savings.

Savings schemes also ignore the contribution people make outside the paid labour market. There is no consideration of all the unpaid care that goes into raising children, looking after a sick or disabled relative or after a frail parent or partner.

The payments people do receive are paltry compared to labour market incomes, and there is no component that increases retirement savings. This is why super penalises women – and will continue to do so.

Previously, some of this inequality was mitigated by the nuclear family. Men were paid higher wages explicitly to support a wife and children, while women were largely excluded from the workforce to provide care.

This always made women dependent on men – but in an era where relationships are less stable, and such internal family redistribution is less predictable, the implications are much more troubling.

Conversely, the aged pension acts to significantly reduce inequality, and is an important factor in explaining why income inequality amongst the aged is much lower than amongst those of working age.

Super, with its relationship to waged income, will reverse this, reproducing the inequality of working life in retirement. This is exaggerated by tax arrangements, and voluntary contributions from those on high incomes, that mean super is less equal than market wages.

Weakening the budget

That inequality has one last worrying implication.

Because tax concessions do most for those with high incomes who can already afford to save, and who are least likely to rely on the public pension, super actually weakens the budget.

But the effect is often overlooked because of poor understanding and accounting of tax measures.

The proposed increase will cost the budget money, as income that would have been taxed at higher rates is now taxed at a lower rate. For every $1 lost in tax revenue, we only claw back 10c in future pension costs.

These concessions are already substantial – they easily exceed total public spending on aged care, and rival spending on the pension.

This might explain why the Henry Tax Review recommended against increasing super, and why a host of economic bodies have called for the tax treatment of super to be overhauled.

If we want to improve living standards in retirement, supporting the provision of basic services, like health and aged care, is a cheaper, more direct and more efficient mechanism.

Governments can also help middle and high-income earners save.

But large subsidies for saving, or schemes that force money into pensions before people have paid off their credit card, can make things worse.

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