Income Policy

Pension

According to the latest published statistics (Department of Family and Community Services and Indigenous Affairs, Statistical Paper No. 8, Income support customers: a statistical overview 2009), there are well over 3 million people who depend, to a lesser or greater extent, on the pension, including 2.2 million Age Pensioners (budget expenditure $30 billion a year), 760,000 Disability Support Pensioners (budget expenditure $11 billion a year), 180,000 Service Pensioners (budget expenditure $3 billion a year) and carers (147,000; budget expenditure $3.7 billion a year).

Total expenditure for 2008 – 2009 on pensions stood at approximately $48 billion in a total budget of approximately $320 billion.

Well over 2 million pensioners are on a full rate payment, which stands at $729.30 a fortnight for singles and $1,099.40 per fortnight for couples combined (rates as of March 2011). Being on a full rate payment means having very little or no private income.

There is no doubt that the Australian Government’s 2009 Secure and Sustainable Pensions reform has improved the circumstances of particularly single pensioners. For many years, the full rate single pension had been consistently tracking in a typical range of 5 to 10 per cent above the poverty line applicable for single pensioner households.

Since the reforms were implemented, the single pension has tracked at about 20 per cent above the relevant Melbourne Institute’s poverty lines, which has put the single pension on a similar footing as the couple combined pension.

However, the margin by which the single and couple combined pensions exceed the relevant poverty lines is slim, which means that pensioners are still poor. As at 20 March 2011, the full rate single pension stands at 63 per cent of the minimum wage and the full rate couple combined pension at 47 per cent of the minimum wage doubled.

The circumstances are particularly grim for pensioners renting accommodation privately. The impact of private rents in Sydney, for example, on the Sydney CPI has increased twenty-fold in the five years between March 2006 and March 2011, while Rent Assistance, which is indexed according to the CPI, has gone up by a mere 16 per cent. The inadequacy of Rent Assistance is further illustrated by the fact that, in the same period, even public housing rents for full rate pensioners have risen by 265 per cent more than Rent Assistance (Consumer Price Index, ABS Catalogue no. 6401, table 4).

As part of pension reform, the pension taper (or withdrawal) rate was increased from 40 per cent to 50 per cent to reduce pension entitlements of part pensioners. This measure applied to modest private income as well as substantial private income. As a measure addressing the issue of targeting, it is, itself, poorly targeted.

As at 20 March 2011, the pension cuts out at an annual rate of private income of $41,719.60 for singles, where the Westpac/ASFA retirement income standard (September 2010 quarter) sets a comfortable income at $39,302.

The couple combined pension cuts out at an annual rate of private income of $63,824.80, where the Westpac/ASFA standard sets a comfortable income at $53,729.

While the Westpac/ASFA standards are merely indicative of how much income it takes to fund a certain lifestyle in retirement, the part rate pension is such that people with income in excess of the ‘comfortable’ Westpac/ASFA standard continue to collect income support through the pension system.

Retirement savings of part rate pensioners tend to run out or at least become severely depleted over time, rendering part rate pensioners into full rate pensioners with a real need for an adequate pension.

It is in the interest of part rate pensioners as well as full rate pensioners that the full rate pension is genuinely able to fund a modest retirement lifestyle.

It is CPSA’s position the Australian Government should develop a number of Budget Standards for all types of pensions to cover variations in need and household composition.

Superannuation

Superannuation is a policy area where confusion reigns.

It is not clear when the superannuation system will be “mature.” Given the length of a working life, will the superannuation system be mature by 2026, forty years after compulsory contributions were introduced, or by 2040, forty years after the current rate of 9 per cent of the compulsory contribution, or at some other date?

And what does maturity in this context mean? Does it mean that most people have superannuation savings to supplement the Age Pension? Or does it mean that most people have superannuation savings to replace the Age Pension?

The AMP Retirement Adequacy Index (January – June 2010) indicates that people just starting out in employment now will still have an Age Pension entitlement that is 95 per cent of the age pension entitlement of people recently retired ($14,556 for people aged 20 – 24 - $15,227 for people aged 65 – 69).

The same AMP Retirement Adequacy Index (January – June 2010) which indicates that 20 – 24-year-olds will have 95 per cent of the Age Pension entitlement in real terms of today’s 65-year-olds also indicates that their income from super will be three times that of today’s 65-year-olds, while overall their private retirement income will be twice that of today’s 65 – 69-year-olds.

This illustrates that superannuation policy objectives are ill-defined.

What is certain, though, is that the superannuation system continues to benefit middle- and high-income earners disproportionately. As the Treasury noted in its Australia’s future tax system: Retirement income consultation paper, December 2008, the top five per cent of individuals account for 37 per cent of concessional contributions. For 2008 – 2009, the Treasury estimated the value of these concessions at $31.6 billion. This compares with the cost of the pension (across all types of pension payments – see above) of $37 billion in 2008 – 2009, or with the cost of the Age Pension for 2008 – 2009, which was $28 billion.

It should be noted that tax expenditure on superannuation concessions will keep growing in real terms until the system is mature. This means that the value of concession will continue to rise dramatically and that these increases will mainly benefit middle and high income earners.

Given that the Age Pension is an income support mechanism, there is a case for superannuation concessions funded through tax expenditure to be limited to the accumulation of retirement savings, as they have the same effect as the Age Pension. Why have two income support mechanisms, one of which is means-tested and one of which offers, both proportionally and absolutely, increased support as wealth increases?

From both a social equity perspective and the perspective of affordability, there is an urgent need to reform superannuation.