Pension Review : Addressing the adequacy of income support for Age Pensioners, Disability Support Pensioners and Carers

CPSA calls for a Fair Go supplement to ensure that all pensioners and carers receive a modest income, and are not financially disadvantaged by circumstance.

A Fair Go Supplement

There are about 1.5 million pensioners and carers living on very low incomes. It will cost about $3.2 billion a year to give them a modest income.

In comparison, estimates of the annual cost of the new tax concessions related to superannuation are expressed in multiple billions of dollars.

The Fair Go Supplement will not be a one-size-fits-all. It will be paid as the difference between a cost of modest living standard and the greater of actual and deemed income of pensioners.

It will cost $3.2 billion to give low income pensioners a fair go.

In addition to the Fair Go supplement, concessions, rebates and allowances need to be provided to pensioners and carers to cover specific costs associated with circumstance. They also need to be appropriately indexed and maintained to ensure that their value is not eroded over time.

The Problem

CPSA is firmly of the view that the income support system must provide adequate financial support for all recipients. It must ensure that pensioners and carers, who have very little or no additional income, are still able to afford basic goods and services. CPSA supports the view that all social security income recipients (including sole parents) should have enough income to prevent poverty. Currently, pensioners and carers relying on the pension and little else as their sole means of income cannot afford basic goods and services.

Treasury estimates show that expenditure on concessional taxation of superannuation for the last financial year was almost $24 billion . Expenditure on the Age Pension in the same financial year was $22.6 billion .

Whilst superannuation will gradually boost retirement incomes, it will not benefit everyone sufficiently, or equally. Women, low income earners, those with broken workforce participation, and people retiring between now and 2040, will typically have lower superannuation balances than other groups.

The nine per cent Superannuation Guarantee and superannuation tax offsets favour high income earners. High income earners not only have greater compulsory contributions, but also have more disposable income to boost their superannuation. This generates higher returns and greater tax savings when high income earners salary sacrifice to their super funds. Overall, high income earners are the winners when it comes to superannuation.

Low income earners do not have the financial capacity to ensure an adequate superannuation upon retirement. The systems in place to encourage low to middle income earners to make voluntary contributions to their super are ineffective as low income earners do not have the disposable income to make voluntary contributions. Furthermore, low income earners’ compulsory contributions will generally not suffice in retirement, even after 40 years in the workforce.

Despite the billions of dollars spent each year on superannuation, most people over 65 in the future (as now) will be reliant on the Age Pension in some way.

Pensioners are in receipt of a variety of pensions including Disability Support Pension, Age Pension and Carer Payment. About 1.5 million pensioners and carers are on very low incomes and live below a modest standard of living.

In the absence of an official or objective measure, CPSA defines a low income as $19,399 p.a. and lower, for singles, and $27,151 p.a. and lower, for couples.

These income levels are based on the amount needed to achieve a modest standard living in retirement as developed by Westpac and the Association of Superannuation Funds of Australia .

Whilst their guide should be used with caution as it is formulated by financial planners and superannuation marketers, it offers a clear break-down of necessary weekly expenditure – something that the underpinning of the pension lacks. It is also important to note that the guide assumes home ownership.

Currently, the full rate pension is about $14,614 for singles and $24,414 for couples combined. Recipients of the full rate pension are allowed some additional income before their pension is affected. With the maximum additional income allowed, couples on full rate pensions can have an income of just over $30,000 p.a., which exceeds the Westpac/ASFA modest income standard of $27,151.

With the maximum additional income allowed, singles on a full rate pension can have an income of about $18,200 p.a., well short of the modest living standard of $19,399. Even then, most pensioners and carers who have additional income do not earn the maximum. About 1.5 million people live on a full rate pension with either less than $20 per week in additional income, or no additional income at all.

About 320,000 single full rate pensioners and carers do not have any additional income. About 911,850 single full rate pensioners and carers have some additional income; yet fall short of the $19,400 standard.

So, even though most full rate single pensioners have some additional income, not one of the approximately 1.2 million single full rate pensioners achieves the modest retirement income threshold of $19,400 p.a.

In the absence of detailed published information on additional income levels, it is difficult to be accurate about how many full rate pensioner couples do not achieve a modest retirement income.

A widow or widower pensioner can lose up to $15,500 in income following the transition from a couple to a single rate pension. Newly single pensioners find that their incomes are slashed by 40 per cent or more. This happens, by definition, at a traumatic time, where marriages of long standing are broken up, often suddenly, by death or debilitating infirmity.

Generally, once age pensioners reach 75, the age pension tends to be their only income, as their retirement savings are exhausted and they are less able to generate additional income. The majority of pensioners are in this situation, as the average age of an age pensioner is 74.

All in all, about 1.2 million single full rate pensioners and about 300,000 partnered full rate pensioners do not have a modest income. On average, they fall short by an estimated $2,200 per single pensioner and pensioner couple.

Cause 1

The root of the problem is that the pension was set at a level that requires additional income from work, investments or superannuation to achieve even a modest income. In other words, the pension is enough for people to subsist on only. The pension is not enough.

Since June 1998, the index on the basis of which the pension is increased at six-monthly intervals has been the Male Total Average Weekly Earnings Index. Where this index shows a lower increase than the Consumer Price Index increase, the Consumer Price Index increase is used as the basis for adjusting the pension.

The Australian Bureau of Statistics has developed the Pensioner Price Index, assessing the cost-of-living for age pensioners. It has maintained the Pensioner Price Index since 1998. In the 2001/2002 financial year, the age pensioner cost-of-living index started tracking above the CPI, meaning that the cost of living for pensioners was increasing by more than the rate of inflation.

While this undoubtedly has an effect on the ability of age pensioners to pay their bills and buy groceries, the basis for indexation of the age pension has been Male Total Average Weekly Earnings, which has tracked above the CPI. Thus, it is fair to say that the real value of the pension has been maintained and in some years even been increased.

The financial stress experienced by pensioners is therefore not caused by inadequate indexation of the pension, but by something else.

While the development of the Pensioner Price Index should be applauded, it has one defect. It is based on the results of the ABS’s Household Expenditure Survey. The Household Expenditure Survey records actual expenditure. In the case of pensioners, it asks people who do not have enough money what they spend their money on.

Therefore, the Pensioner Price Index does not reveal or consider what areas of essential expenditure pensioners are unable to cover.

The indexation currently used means that any increase in the pension is immediately absorbed by living costs. Pensioners’ incomes are worn down towards the end of each indexation period as pensioners wait for indexation to counter higher living costs. However, as the pension was set at a level that cannot meet living costs in the first place, CPI indexation fails to increase a pensioner’s living standard.

Cause 2.

There is another reason why the pension falls short of pensioner’s expenses. Even with bi-annual adjustments, the pension’s real value continues to be eroded by changes to, or a lack of indexation of, pensioner benefits, concessions and rebates at federal, state and local government levels.

Benefits and concessions form a vital part of pensioners’ income package. Yet, they are attacked continuously. The most flagrant example of this is the gap between Medicare refunds and medical fees.

The reduction of bulkbilling for Medicare services means that pensioners on incomes of $14,600 a year have to find money to cover the gap between the Medicare fee and the actual fee. In many cases, this has led to pensioners putting off consultations with medical specialists and deferring expensive medical scans.

At a federal level, the Pharmaceutical Allowance is adjusted in accordance with the CPI, but only if this leads to an increase of 10 cents or more. As a result, the Pharmaceutical Allowance has remained the same for years and its real value has dropped by over 25 per cent as a consequence. CPI did apply though to the safety net threshold for Pharmaceutical Benefits Scheme safety net. Pensioners now have to fill 58 scripts instead of 52 to meet the threshold, which has reduced the value of the Pharmaceutical Allowance even more.

Single pensioners are further disadvantaged by the Pharmaceutical Allowance and Pharmaceutical Benefits Scheme safety net. Singles are required to fulfil the same amount of prescriptions to qualify for the PBS safety net threshold as couples. Couples can reach this threshold theoretically faster than a single person and benefit from free PBS medication. This anomaly could be rectified by halving the PBS threshold for single pensioners.

Rent assistance administered by Centrelink is an ineffective way of boosting a pensioner’s income. Approximately 500,000 pensioners rent privately. Seniors housing and landlords in the private sector set rents in a way specifically intended to collect rent assistance on top of rent that would otherwise be charged.

Public dentistry has all but disappeared across Australia. Thus, a free service to which pensioners are entitled is largely unavailable. Pensioners are faced with a choice between dental neglect and somehow finding the money for a private dentist, often requiring going without other essential goods.

At the state level, pensioner concessions have steadily been reduced. NSW recently imposed a 15 per cent booking fee on previously free country rail travel. Patronage dropped 25 percent in the first twelve months, which shows how tight pensioners’ budgets are.

Inadequate public podiatry programs force pensioners to use full-fee private podiatrists.

There is an absence of rebates and concessions for certain health and disability needs, such as mobility aids, medical aids, etc. This causes low income pensioners to either go without such equipment, or sacrifice essential goods (such as food) to cover their cost.

Patient transport is grossly underfunded in NSW and cannot keep up with demand. The Cancer Council NSW, Council of Social Services NSW and the Community Transport Organisation state that an estimated 90,000 patients are refused health related community transport each year in NSW . CPSA has spoken to pensioners who pay hundreds of dollars in taxies just to get to and from health services.

Community transport is inadequate in most rural and regional areas. As a result, pensioners and carers continually pay for private transport as the free service to which they are entitled is not available.

At the local government level in NSW, there is no mechanism for indexing the pensioner rebate on rates. Consequently, the pensioner rate rebate has not been increased for almost 20 years , even though rates have increased each year.

These are the two main reasons why people living on just the pension, and even those with a little bit of additional income, are alarmed about the cost of living. The pension is not enough.

The solution

The solution requires expenditure of an estimated $3.2 billion to guarantee a modest income to pensioners and carers.

The solution requires provision of concessions and rebates that ensure all pensioners and carers are not financially disadvantaged due to circumstance. Concessions, rebates and allowances must be adequately indexed and maintained to preserve their value.

Measure 1.

A supplement to the pension will ensure that pensioners and carers, who do not have a modest income, get one. A supplement would be paid only to those who need it, to the extent that they need it.

This measure requires:

 the development and maintenance by government of a cost of modest living standard for Age Pensioners, Disability Support Pensioners and Carers. This Cost of Living guarantee would provide a floor for all pensioners to ensure that all pensioners meet a modest standard of living.

 the payment of an income supplement to those pensioners and carers who do not achieve a modest retirement income. The supplement should be provided as either a lump sum, or series of lump sums. This will ensure that no one is disadvantaged as a result of renting privately or publicly or living in a nursing home. Ideally, individuals should be able to choose if they receive the supplement fortnightly, or in a series of lump sums.

This supplement will differ between individuals, as the difference between the cost of modest living standard and the greater of actual and deemed income of pensioners.

The cost of a modest living standard must not be isolated to one payment, benefit or concession, but apply across government, to all rebates, concessions and benefits. This will be of particular importance for compensation to pensioners and low income groups in the Carbon Pollution Reduction Scheme.

Measure 2.

All pensioner concessions and benefits made available by the states and territories need to be centrally administered to ensure their value is not eroded without adequate compensation.

The current pensioner concession and benefit regime lacks transparency and is riddled with inequities.

For example, a Sydney pensioner can take advantage of large savings on public transport through the use of the Pensioner Excursion Ticket. A country pensioner, who has no access to public transport, misses out on this entitlement. Although they, like all pensioners, receive an exemption on car registration charges, private transport costs are generally much greater than a city pensioner’s who has access to public transport. Moreover, a country pensioner without a car may be forced to use taxis, with no discount, concession or benefit.

Certain goods and services need to be included under Medicare (such as podiatry and dental care). Home and Community Care services must be expanded to cover areas where there a large waiting lists and inadequate service provision. Research into service shortages nationally is required, so that the Commonwealth can target funding to services and areas where it is most needed.

A fairer solution may be to place a monetary value on concessions and benefits, which is paid to pensioners as an allowance. No-interest loans for costly medical and mobility aids would ensure that pensioners and carers are not financially disadvantaged due to individual circumstances.

Whatever the policy response, it must recognise the value of concessions and benefits to pensioners. Reducing or cancelling concessions or benefits, or failing to index them, is tantamount to reducing the pension paid through Centrelink.

The insufficiency of the pension for those with little or no additional income must be addressed. The value of concessions, rebates and benefits must reflect the real costs they are designed to alleviate. It is time for government to act and give pensioners and carers A Fair Go.

Contact details

Combined Pensioners and Superannuants Association (CPSA)
Level 9 28 Foveaux Street, Surry Hills, NSW, 2010
Phone 9281 3588
Fax 9281 9716