We’re old enough (but wise enough?) to make tough decisions on pension
So, Treasurer Joe Hockey has finally put the aged pension on the block for reform, placing it alongside Newstart and the disability pension. Hockey’s comments late last week that the retirement age of 65 (scheduled to increase to 67 by 2023) is unsustainable in light of increasing life expectancy, and that failure to reform would be akin to “intergenerational theft”, is appropriate on a number of levels.
Like many other advanced nations, Australia is facing a demographic tsunami that threatens to cripple government finances. The large-scale retirement of the baby boomer generation means that the ratio of working-age Australians supporting dependents (mostly the aged) will shrink over coming decades, slashing the tax base at the same time as age-related outlays expand …
According to the Grattan Institute, without corrective action, the federal budget deficit could hit $60 billion per year by 2023, or up to 4% of GDP, due mostly to rising health and welfare costs. Grattan also argues that the only part of the tax and welfare system that is not well targeted is that for old people — a view supported by researchers from Curtin University, who recently found that welfare policies across the period 1984 to 2010 overwhelmingly favoured the elderly at the expense of the young.
Judging by the Treasurer’s comments, the government will likely follow the Productivity Commission’s recommendation and seek to raise the eligibility age of the age pension to 70 — a move that is estimated to save around $150 billion over the period 2025-26 to 2059-60 and increase participation rates among older workers by around 3% to 10%.
While such a reform is welcome, on its own it is not enough, and deeper reforms of the retirement system are needed in order to improve intergenerational equity and the long-term sustainability of the budget.
Superannuation is a particularly large problem. While the system was originally designed so that a younger generation could pay for its own retirement, it has instead become a mechanism whereby older people pay less tax given their income than everybody else, with the lion’s share of benefits also overwhelmingly going to richer people.
Under the current system, all employees that contribute compulsorily into super pay a flat 15% contributions tax, which effectively means that the amount of concessions received increases as one moves up the income scale …
For example, someone who earns in excess of $180,000 per year receives a 30% tax concession for each dollar she contributes into super (i.e. 45% marginal tax rate less the 15% flat tax). At the other end of the scale, someone who earns less than $18,200 per year in effect gets penalised 15% for each dollar he contributes into super.
According to Treasury figures, concessions on superannuation contributions were estimated at $16.5 billion in 2012-13, with concessions on superannuation earnings valued at $15.5 billion. Moreover, Treasury estimates that the top 5% of contributors would receive 20.3% of contribution concessions, with higher income earners also receiving the lion’s share of the earnings tax concessions.
Given that the main rationale behind superannuation is to both adequately provide for retirement and take pressure off the aged pension, the 15% flat tax system is inherently flawed and designed to fail. By providing massive taxation concessions to those on the highest incomes, the budget loses billions of dollars of forgone revenue. At the same time, the super system is unlikely to relieve pressure on the aged pension, since those that are most likely to need it — lower- and middle-income earners — receive minimal (if any) concessions, which both hinders their ability to build up a retirement nest egg and discourages them from making additional contributions.
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