Opinion & Commentary
Stop the churning to extend direct benefits
WHAT kind of welfare state should Australia have in 30 years? If the trends of the past 30 years were to continue, we could end up with more than a quarter of working-age adults living on benefits, a huge retired population relying on hopelessly overstretched age pensions and Medicare, and younger workers struggling under a massive tax burden as government soaks up almost half the nation's gross domestic product to pay for it all.
This would be a deeply undesirable outcome, for widespread reliance on government would undermine our spirit of independence and destroy work incentives by driving up the tax burden. It would also politicise everyday life by giving even more power to politicians and enticing even more pressure groups to queue up with their begging bowls.
Fortunately, all this is avoidable, for we are getting richer as a nation. During the next 30 years our real spending power should almost double, just as it has in the previous 30. If that happens, many of us will be able to afford what we need without relying on politicians to provide for us. But for self-reliance to flourish, changes to our welfare state are needed now. In particular, we have to reduce tax-welfare churning.
Most people think the welfare state is like Robin Hood, taking money from the rich and giving it to the poor. But no more than half the money spent on welfare state benefits and services is redistributed in this way. The other half is churned. In other words, the same people who pay the tax receive the benefits.
Some churning takes place immediately. Many middle-class families, for example, pay large sums in tax each fortnight but then immediately get much of it back in family payments from Centrelink. But some churning takes place over a longer period. Tax paid one year might be received back many years later in the form of an age pension, for example. Over a lifetime, even people who experience poverty at one point can end up paying for most or all of the government benefits and services they receive, for as their fortunes fluctuate, so too does their tax-welfare balance sheet.
Cutting down churning would not mean depriving the needy of help, for they would still get the benefits and services they receive now. Rather, it would mean spending less on those who pay high taxes only to have their money recycled back to them. If churning were reduced by cutting their taxes, for example, more parents could raise their children without government family payments or childcare subsidies, and more workers could save for their retirement without needing a government age pension. Rather than claiming income support when they are out of work, more people could use their own savings, and instead of relying on Medicare and public hospitals, more patients could afford to pay for routine medical bills while insuring against high-cost treatments.
Paul Keating showed how we can reduce churning and increase self-reliance when he introduced the superannuation guarantee 15 years ago. Thanks to his foresight, millions of workers have their own retirement savings, which will increase their independence in old age while reducing their demands on government spending. But the start Keating made needs to be built upon. Not only do we need to save more for retirement, but we need to find ways of extending self-reliance to other areas such as health care and unemployment and sickness cover.
Part of the answer could be to establish special savings funds, linked to super, for everyone in the country. The federal Government is hoarding tax revenues and Telstra receipts in what it calls its Future Fund, but this is our money. If it were given back to us, every adult and child would be entitled to about $3000 to start their own personal future fund, which could be supplemented over time with contributions from earnings. One use of these funds would be to reduce reliance on government unemployment and sickness benefits by giving everyone something to fall back on when their earnings are temporarily interrupted.
Personal future funds could also be used to bolster self-reliance in health. Voluntary Medicare opt-outs should be offered to anyone who wants to organise their own health care. People who prefer to remain in the state system could do so, but those who choose to opt out would get tax reductions, and the money they save would be paid into their personal future fund. They would then use this money to pay for routine doctor and pharmacy bills and to buy health insurance. Any surplus funds could be cashed on retirement, along with their super savings.
Opt-outs could also be extended to the age pension. If you agreed to give up any claim on the pension, your super fund could be exempted from tax on the contributions made by you and your employer. This would allow you to build up your retirement savings more quickly and would probably be a very attractive option for younger workers.
There are different ways of organising opt-outs. The system I have in mind would allow you to opt out only up to the level of tax you pay into the system, but a more socialist approach might allow people to trade in their full entitlements, not just their contributions, so those who pay little tax would receive tax credits to buy the services they need. There are arguments for and against both systems, but at the moment none of our political leaders is discussing them.
We urgently need a serious political debate based on the recognition that an increasingly affluent society such as ours should not need a large welfare state. Many of us could be looking after ourselves in the future, but it won't happen until we find another Keating who has the vision to introduce reforms now from which later generations will benefit.
Professor Peter Saunders is social research director at the Centre for Independent Studies. His proposals are outlined in A Welfare State for Those Who Want One, Opt-outs for Those Who Don't, which can be downloaded free at www.cis.org.au.
