Opinion & Commentary
OAP rise is doubly taxing for GEN X and Y
This week’s debate about the future of the old age pension provides an insight into the political realities of an ageing Australia. Australia’s expanding and influential elderly population have flexed their political muscle, and virtually ensured that there will be an increase in the base rate of the pension.
The transparent justification is that 80% of retirees are on the pension, and have not had access to the operation of the compulsory superannuation system over the entire course of their working lives.
The Rudd Government – with what it would like us to think is admirable restraint – has delayed a final decision. I suspect the inevitable announcement will come just in time for the early election the Prime Minister is almost certain to call next year.
Thankfully, the delay gives us chance to pause and consider the consequences of increasing the pension, rather than allow populist sentiment and electoral bribery to dictate the outcome.
The rate of the pension is currently set at one-quarter of average weekly earnings and is indexed annually for inflation. Contrary to what has been claimed, the pension has therefore increased every year. However, the base rate has been set at - and should be kept at – the present level for sound policy reasons.
The old age pension system has never been structured to replace the earnings people forgo when they retire. It has always been designed to alleviate poverty. The government taxes people still in the workforce to provide a ‘safety net’ for those who have failed to provide for their own retirement.
The expectation, in other words, has been that people who are now retired or about to retire should have provided for themselves over the 30 to 40 year span of their working lives by purchasing a home, by accumulating assets, and by investing and saving. To reinforce this expectation, and maintain the integrity of existing government policy, it is essential to keep the pension at the current rate to discourage people from trying to shifting the cost of their retirement onto others.
The creation of a compulsory Superannuation system in 1992 partly acknowledged that many people did not provide for their own retirements, and ended up relying on working taxpayers to maintain them in their old age.
What was also acknowledged was the impact of demographic change on the cost of the pension system. Longer life expectancy meant that into this century younger generations faced a much larger bill – on top of the rising cost of health and aged care - to cover the pensions of larger numbers of retirees.
To justify raising the pension, the role of Superannuation in offsetting the impact of the ageing of the baby boomers has also been overestimated. Shifting from a PAYG taxpayer-funded pension system, to a pre-funded, self-financed retirement income model, involves a long term transition period.
In the current debate, the issue of intergenerational equity has been cast aside. For the workers of Gen X and Y, the Superannuation system amounts to an obligation to ‘pay twice’. On the one hand, they are forced to save for their own retirements, and, on the other, they still have to pay through the tax system for the pensions of people who are already retired.
It won’t be until the middle of the century that Superannuation begins to have a substantial impact on the number of people on the pension. By 2050 – after 48 years of the full operation of the 9% Compulsory Superannuation Guarantee – 75 per cent of the elderly population will still receive a full or partial pension. The proportion receiving partial pensions is expected to rise from 28 to approximately 50 per cent.
However, these estimates are based on the rate of the pension remaining at one-quarter of weekly earnings. The danger is that increasing the pension will increase the pressure on the real working families of the 2010s, 2020s, and 2030s, by encouraging the trend recently criticised by Paul Keating.
Rather than preserve their accumulated funds to look after themselves, tampering with the rate of the pension will give retirees an even bigger incentive to dispose of their Super on overseas travel and pour their money into asset-test exempt family homes. It will encourage older generations to double dip at younger taxpayer’s expense, and gear their financial arrangements to qualify for the higher and much more attractive full pension.
The Government and the Opposition will say of course that it’s important to be generous to pensioners. Politicians are always generous with other people’s money, especially to further their own political ends.
Our current arrangements have earned international acclaim for holding down the future (already considerable) cost of the pension system, relative to even bigger taxing and spending European countries. The old age pension already increases automatically with economic growth and the cost of living.
Any decision to increase the base rate of the pension will represent a profound change of policy direction. It will undermine the principles that have underpinned two-decades of Australian retirement incomes policy.
Dr Jeremy Sammut is a researcher in the ‘Health and Ageing Program’ at the Centre for Independent Studies.
