Opinion & Commentary
Welfare saps will to save
The welfare lobby supports the push to increase the single pension by $35 a week, despite the billions this will add to the budget. It also has been complaining about rich people who live in million-dollar houses receiving the pension.
The Brotherhood of St Laurence has proposed including family homes worth more than $1 million in the pension means test because the pension should only ‘support the most disadvantaged.’ This appeal to class envy is pretty rich considering the welfare lobby is responsible for the entitlement mentality that took hold of the national consciousness in the 1970s, supplanting traditional self-reliance.
Nevertheless the brotherhood has identified a real problem: the spiralling cost of welfare. The arbitrary remedy it proposes is ludicrous. It is impossible to justify a person with a home worth $999,999 receiving government support while those with homes worth $1 more are excluded.
The welfare lobby wants it both ways. It is disingenuous to complain about ‘welfare for millionaires’ and mount an attack on the symptoms rather than the root causes of the ballooning welfare state. It doesn’t twig that raising the pension dilutes incentives to work and save, and encourages retirees to expect to rely on increasingly attractive government assistance in old age.
It also fails to understand that the more the Government hands out in welfare, the more it has to collect in taxes. One in five working-age people are now dependent on government payments and 80 percent of recipients of the full aged pension were on another taxpayer-funded benefit. As the welfare bill has increased in the past 40 years, so has the tax burden.
Higher taxes have made it harder for people to save to support themselves and more have been forced to depend on government. Higher tax also has created disincentives to save because tax is paid not just when income is earned but when it is saved and invested. The combination of higher tax and more attractive pensions (which have increased 200 percent since 1970) has contributed significantly to the collapse in the national saving rate from 12 percent of gross domestic product 40 years ago to about 5 percent today.
Not surprisingly, people have opted to save in the most tax-efficient way: by spending more on the family home. This has pushed up house prices above the $1 million mark in many suburbs. The problem with saving by investing in the family home is that people need to live in it and they don’t produce income to live on in old age.
The escalating welfare and tax bill also has encouraged claims for government assistance to slide up the income scale: the middle classes have demanded welfare as compensation for higher taxes such as the very generous means test for the pension. This is fast turning a modest safety net payment for the poor into a de facto universal scheme as retirees arrange their financial affairs down to the last dollar to qualify for a part-pension and associated taxpayer-funded goodies.
This vicious cycle has led to the percentage of Australians aged over 65 receiving a pension rising to 77 percent from 50 percent in the 1960s.
The only way to break the welfare-tax spiral is to reduce the size of government, starting with welfare. In this, Kevin Rudd should avoid the mistakes of his predecessor rather than repeat them. John Howard’s instinct was to give money back to taxpayers in the form of handouts to targeted groups of voters, including new allowances and concessions for the elderly. What he did not do was reduce the size of government. As a result, not enough was done to cut taxes and encourage work and saving, and promote self-funded retirement.
When compulsory superannuation was introduced by Paul Keating in the 1990s, the aim was to create a long-term cycle breaker to hold down the future cost of the pension.
The original plan was to gradually increase the level of mandatory employee contributions above 9 percent of income, which is not enough to provide most workers with an adequate self-funded retirement income, to the 15 percent necessary to significantly reduce dependence on the pension. Otherwise, about half of retirees will rely on the full pension and a further quarter will be in receipt of the part pension in the 2040s.
The last 17 years of economic growth and rising real incomes created the perfect opportunity to kill two birds with the one stone. Overflowing budget coffers should have enabled taxes to be cut to offset increases in compulsory contributions. Instead, the proceeds of the now vanished boom have been squandered on expensive, politically motivated handouts. Fear of a grey vote backlash has intimidated the Rudd Government, which is now committed to raising the pension despite the worst global economic outlook in decades.
The aim of tax policies should be to enable more people to provide for their old age. Only by getting serious about promoting saving, super and self-reliance will we start heading in the right direction. The first step is to restrain welfare and cut taxes, a lesson both sides of politics have yet to learn.
Dr Jeremy Sammut is a Research Fellow in the social foundations program at The Centre for Independent Studies.
