Economy

Feb 24, 2014

We’re old enough (but wise enough?) to make tough decisions on pension

The aged pension is increasingly unsustainable. And raising the age is only one reform Joe Hockey should be looking at if he's serious about "intergenerational theft", says economist Leith van Onselen.

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 ...

Free Trial

You've hit members-only content.

Sign up for a FREE 21-day trial to keep reading and get the best of Crikey straight to your inbox

By starting a free trial, you agree to accept Crikey’s terms and conditions

28 comments

Leave a comment

28 thoughts on “We’re old enough (but wise enough?) to make tough decisions on pension

  1. Jimmyhaz

    ‘The age pension is becomingly increasingly unsustainable’.

    And the award for the quickest objectively incorrect statement in an article goes to, this one!

    Moving on from that, I do agree entirely that the current set-up for super is grossly unfair, and I would like to see it changed to one that is fare less favourable to the already super-wealthy. I don’t really see it happening with this government in charge, however.

    Wasn’t one of the first things this government did reverse the concessions for low-income earners to superannuation, and reinstate them for the upper-bracket? It seems the ‘age of entitlement’ is only over for those who cannot afford to buy a voice.

  2. AR

    When workers (of any age) become excess to requirements, dole/pension/welfare is still far cheaper than oppression.
    The rich don’t want to be eaten or burned out, they’ll pay, whinging all the while.

  3. michael r james

    The “family home” is actually an “empty nest” by the time people retire at 65 or 67 years. If people still don’t own their home mortgage-free by the time they retire then 1. they have mismanaged their finances for decades without a thought for their future 2. they have extended their finances to own multiple homes counting on under-taxed capital gain; 3. they have possibly upscaled irresponsibly late in life planning to use super money to pay it off and then live off the age pension (rather than their own super savings).
    The use of super funds to pay off a house is an abuse of the scheme; such funds have been heavily subsidized via the tax system and should never be used in yet another ploy/scam by Australians in their property obsessions. People need to get the message that they must only buy/mortgage what they can really afford during their working life.

    For the same reasons the primary residence must be included in an asset test for any age pension. Although we have the obscene situation where millionaires with an extravagant house are effectively subsidized by the state in their retirement–for absolutely no good or justifiable reason. But actually lots of Australians of even modest means and income over their lives have ended up owning property worth a million so we shouldn’t even think this just applies to the very rich.
    Their obligation to their children is long since discharged: to have provided them with a safe upbringing, good education and healthcare. NOT inheritance of a house, which, given how long parents live, can only be the equivalent of a free gift by the time of their death. (And, do the maths: av. lifespan is ≈85ys so children will be 50-65 and should have their own housing almost paid off unless they too have been irresponsibly relying upon a totally un-earned and undeserved inheritance.)

    It also follows from the previous point that the sentimental reasons for staying in the “family home” don’t apply any more. The children will hardly ever move back into this home when they come to inherit it, and will usually just sell it off. For the retirees themselves, they need to be encouraged to downsize into a more manageable situation–which usually means an apartment or perhaps modern townhouse. (More and more boomers are realizing what a hassle it is to keep a big house, or even a small one, compared to a conveniently located apartment.) As the boomers age there will be an increase in the phenomenon you can find in suburbia: big old houses that are worse for wear and getting worse every year as the maintenance (and escalating cost of skilled labour) of both the house and grounds gets beyond them. I would even agree to favourable tax arrangements for people freeing up useful houses to downsize (ie. so the surplus $ generated can go towards future maintenance of their new downsized home).

  4. michael r james

    Groan. Moderated a at 8:10 pm . I’ll break it up into three posts.

    Part 1.

    The “family home” is actually an “empty nest” by the time people retire at 65 or 67 years. If people still don’t own their home mortgage-free by the time they retire then 1. they have mismanaged their finances for decades without a thought for their future 2. they have extended their finances to own multiple homes counting on under-taxed capital gain; 3. they have possibly upscaled irresponsibly late in life planning to use super money to pay it off and then live off the age pension (rather than their own super savings).
    The use of super funds to pay off a house is an abuse of the scheme; such funds have been heavily subsidized via the tax system and should never be used in yet another ploy/scam by Australians in their property obsessions. People need to get the message that they must only buy/mortgage what they can really afford during their working life.

  5. michael r james

    Part 2.

    For the same reasons the primary residence must be included in an asset test for any age pension. Although we have the obscene situation where millionaires with an extravagant house are effectively subsidized by the state in their retirement — for absolutely no good or justifiable reason. But actually lots of Australians of even modest means and income over their lives have ended up owning property worth a million so we shouldn’t even think this just applies to the very rich.
    Their obligation to their children is long since discharged: to have provided them with a safe upbringing, good education and healthcare. NOT inheritance of a house, which, given how long parents live, can only be the equivalent of a free gift by the time of their death. (And, do the maths: av. lifespan is ≈85ys so children will be 50-65 and should have their own housing almost paid off unless they too have been irresponsibly relying upon a totally un-earned and undeserved inheritance.)

  6. michael r james

    Part 2b. (attempt #6)

    (House must be included in asset test.)
    Their obligation to their children is long since discharged: to have provided them with a safe upbringing, good education and healthcare. NOT inheritance of a house, which, given how long parents live, can only be the equivalent of a free gift by the time of their death. (And, do the maths: av. lifespan is ≈85ys so children will be 50-65 and should have their own housing almost paid off unless they too have been irresponsibly relying upon a totally un-earned and undeserved inheritance.)

  7. michael r james

    Can’t get the rest past the moderator no matter what I do.

    This is one of the reasons I hardly ever come back to Crikey!
    All Crikey users must surely have tried The Guardian which has a superb commenting system. Crikey itself today has a piece on The Guardian Australia’s steady march to success. Just this one issue (along with other important ones) should tell the Oz media how to run online sites–this includes The Oz and Fairfax, but also Crikey!

  8. I.Klajn

    And this is Professor Ian Lowe in Brisbane, author of Bigger or Better – Australia’s Population Debate.

    Ian Lowe: The decisions being taken now about our population are literally determining what Australia will look like in 2050. So we should be making informed choices about our future.

    I was provoked to write a book about the population debate when Kevin Rudd calmly told Kerry O’Brien that he believed in ‘a big Australia’. Rudd was Prime Minister at the time, and his off-hand comment created a storm. One insider said ‘the focus groups went ballistic’. The fundamental reason is that most of us live in or around our major cities. We accurately perceive that our quality of life has steadily declined as urban populations have grown. Successive state of the environment reports show that all the important environmental indicators are getting worse as a direct result of the increasing demands of our growing population. In fact population growth is a serious environmental threat on the fringes of our cities as well as driving increasing greenhouse gas production.

    The water has been muddied by widespread misconceptions. I often hear such statements as ‘we aren’t replacing ourselves’, ‘our population would decline if we didn’t bring in migrants’, ‘our ageing society is a problem’, ‘we need migrants to fund the pensions of older Australians’, or ‘population growth is good for the economy’. So I set out to identify some facts that could inform the debate.

    First of all we don’t have a problem replacing ourselves. Each year about 100,000 Australians die and about 250,000 babies are born, so the population would grow by about 150,000 a year or about 400 a day if there were no migration. Yet there is still a widespread perception that we aren’t replacing ourselves. The confusion arises from the decline in the birth rate since reliable contraception became available. Where Australian women often had four of five children 50 years ago, the average number of children per adult woman is now about 1.9 but the number of adult women is still increasing rapidly as a result of the past birth rate and migration, so there is still a large so-called natural increase, births minus deaths.

    You might recall that the Howard government spread the misconception that we aren’t having enough babies to justify offering women a financial incentive to have children and backed it with a facile encouragement to have one for dad, one for mum and one for Peter Costello. The birth rate has increased since the baby bonus was introduced, but there is a dispute about whether the financial incentives are the main cause. It was still a wasteful solution to a non-problem. The so called natural increase – births minus deaths – has never been less than 100,000 a year in the last 50 years.

    Of course we do also bring in migrants. Each year some people leave Australia and others arrive. The significant figure is the net migration, the difference between numbers arriving and leaving. This has varied from year to year with political decisions between about 20,000 and 200,000. It’s averaged about 100,000, a similar figure to the natural increase. Then the Howard government dramatically increased inward migration to well over 300,000. A significant cause was the scam of education schemes that were really back-door visa programs, with dodgy private providers and some respectable institutions recruiting students with the implied promise of a short-cut to residency or even citizenship.

    The current government has clamped down on those arrangements but the annual net migration is still about 250,000 a year. The balance of our immigration has also changed, historically by far the largest group of migrants were from the UK and Ireland but last year for the first time more migrants were of Chinese background than British. Overall more migrants now come from the Asian region and Africa than from Europe and North America, so migrants are more visible on the streets, on public transport and in our institutions.

    Adding together the birth rate and migration, the Australian population is now growing by about 400,000 a year or another million every two and a half years. While Kevin Rudd approved the calculation that our population could grow to 36 million by 2040, on current trends it could be over 40 million. So we are right to be asking whether that sort of growth is manageable. Where would we get twice as much food or twice as much water?

    In fact the infrastructure in all our major cities is failing to keep pace with the growing population and this is causing a decline in material living standards. A perceptive US economist actually predicted and quantified this problem 25 years ago, while a local academic has refined the calculation for the current situation in south east Queensland. Lester Thurow argued that the average life of built infrastructure like roads, water supply, sewers and transport systems is about 50 years, so the annual bill for replacement would normally be about 2% of the total capital invested. If the population is growing by 2% the infrastructure bill is the normal 2% replacement plus an extra 2% for the new people, or 4% of the total capital. So as Dr Jane O’Sullivan has pointed out, quite a modest rate of growth, about the average in recent years in south east Queensland actually doubles the infrastructure bill. But the revenue base will only have grown by 2%.

    Faced with this problem Thurow predicted, governments would find themselves forced to sell public assets and put together improbable public/private partnerships to try to meet the impossible task of funding the infrastructure needs of the growing population. Of course that’s exactly what we have seen in Australia in recent years.

    One reason for the unpopularity of the Bligh government leading to it being swept from office was its fire sale of public assets to fund infrastructure. A second issue was that even those desperate measures did not solve the problem, so roads got more congested, public transport got more crowded and so on. Ironically, the backlash against the Bligh government brought to power a Coalition administration headed by Campbell Newman. He was formerly Lord Mayor of Brisbane. In that capacity he ran up a huge public debt in an orgy of building roads, tunnels and bridges to try to dilute the public disquiet about growth. It remains true that a major factor leading to the State governments in NSW, Victoria and Queensland all being thrown out was a rising tide of discontent with the state of public transport and roads, a direct result of rapidly growing populations in each State’s capital city.

    Let me turn to the issue of ageing. The claim that we have a financial problem of an ageing population is completely false. The number of us over 65 is increasing, but that doesn’t inevitably mean we are an increasing burden on the medical system; the reason we are living longer is that we are healthier. When I was young it was unusual to see anyone over the age of 30 still playing cricket; today there are enough over 60s cricketers for there to be a national competition and a national over 60s team has been chosen to play against English cricketers of similar age. There is now serious talk of an over 70s team. While I am a bit unusual to be still bowling outswingers at my age, I am not unusual in being alive and still productive at an age when my father and both my grandfathers were already dead; we are all living longer on average. But Australia is not unusual. In fact UN statistics show we are comparatively young for an affluent country. We rank 43rd in the world in a listing by average age; not just younger than European countries but also younger than Canada, Cuba, Hong Kong and Singapore.

    About 19% of Australians are over 60, the average for Europe is 22%, for western Europe it’s 24%, Sweden 25%, Germany and Italy 26%, Japan nearly 30% compared with our 19%. At the other end of the age scale 19% of Australians are under 15, the same percentage as those over 60, that compares with an average of 16.6% for the developed world as a whole and 15% for Europe. In other words, in Western Europe there are many more people over 60 than under 15, in Japan there are more than twice as many, but in Australia there are as many under 15 as over 60. For at least a decade the numbers entering the workforce will be similar to the numbers turning 65. In any case most of the jobs in modern Australia don’t require youth and physical strength but wisdom, so a more mature workforce might actually be an advantage. And even if we did have an ageing society, migrants are typically about the same age on average as those already here and of course they age at exactly the same rate.

    The economic question is more complicated. There is no doubt that population growth makes the total size of the economy greater. If there are 1% more people we eat 1% more food, wear 1% more clothes, live in 1% more houses and so on. That means some economic sectors like retail and housing clearly benefit. And the total size of the economy grows, so politicians can claim to be presiding over increasing wealth and progress. But there is vigorous debate among economists about whether it increases wealth per person, which is the factor determining whether you and I are better off. Comparative studies show that countries with growing populations need to spend on assets that are not economically productive like houses, so they don’t perform as well economically as those with stable populations.

    The general view is that there may be a small net benefit, but it’s quite small and it needs to be offset against the negatives of more crowded roads and public transport, less access to open space and recreation areas and so on. A calculation by the Queensland Treasury for the government’s Growth Management Summit is typical. It found the Queensland economy to have grown by about 3% a year for the last 20 years; on average, the growing population accounted for 0.2% increasing rates of participation in the paid workforce provided 0.6%, three times as much as population growth and the lion’s share, 2.2%, ten times as much as population growth, came from increase in productivity. So the total economic output grew by 3% per year on average, but it would have grown by 2.8% without an increasing population. By my sums the average Queenslander is 50% wealthier today than in 1990, but they would have been 47% wealthier if the population hadn’t grown at all.

    Looking ahead, the average household income is projected by Queensland Treasury to grow from about $50,000 a year now to about $65,000 in 2030 if growth is tightly controlled, or to about $69,000 if the present pro-growth policies remain. At the present growth rate of about 2% a year the population will increase about 50% by 2030.

    So the question we should be asking is would you rather be 30% wealthier retaining the liveability of your area or 38% wealthier with 50% more cars on the road, 50% more people crowding on to public transport and trying to find space in the parks and children’s playgrounds? I suspect many people would opt to maintain their lifestyle rather than have the extra money.

    The debate gets messier when we factor in the changing balance of migration and it isn’t helped by opportunistic politicians demonising the relatively small groups of boat people. More refugees arrive by plane than by boat, while the total number of refugees is tiny compared with the numbers of other immigrants. In fact the total refugee intake is about 5% of migrants.

    But the demographic calculations are clear. If we had zero net migration the population would stabilise in the 2030s. With relatively low levels of net inward migration the population stabilises later at a higher number. At current levels of migration the population keeps increasing until we produce disease outbreaks or fighting among ourselves for limited food supplies. I would like to see a better future than that.

    The choices we are making now determine what Australia will look like in 2050. If we continue to encourage large scale migration and a high birth rate the population will be over 40 million and still growing rapidly. Holding migration down to around 100,000 a year or lower and phasing out incentives for larger families would enable us to stabilise the population below 30 million. There is no more important issue for an informed public debate.

    Robyn Williams: Professor Ian Lowe from Griffith University in Brisbane. He is President of the Australian Conservation Foundation as well as being a swing bowler and useful chorister. His book Bigger or Better on population is published by the University of Queensland Press.

    Next week Geoff Hudson in Melbourne lists a few of his favourite inventions from the future.

    Guests
    Emeritus Professor Ian Lowe
    Griffith University
    Brisbane
    President of the Australian Conservation Foundation
    Publications
    TitleBigger or Better – Australia’s Population DebateAuthorIan LowePublisherUniversity of Queensland Press

  9. Dogs breakfast

    The article deals with complex problems pretty simply, and despite the rule, actually gets it right.

    The flat tax 15% deduction for superannuation may be difficult, but not impossible, and is so clearly the answer that it is hard to comprehend why this government won’t contemplate, other than bigoted ideology.

    I retch every time when I hear hockey talk about the end to the age of entitlement. It is only the end for the less well off, the rich are being encouraged to continue their entitlements into forever.

    Otherwise, as usual, some very erudite comments by the proles in the comments section.

    Just a fact check, I think you will find that people can access their super prior to 60. There is a sliding scale in place which will bring it up to 60, but not for another decade or so. I retire, at my earliest, in 5 years, at the superannuation age of 57.

    I am investigating other aspects of this, but I thought that lump sums were largely difficult to access these days, particularly pre 60.

    By the way, kudos to the contributor who pointed out that the current taxing of super post retirement was the time bomb that Costello the Stupid left for everyone else to deal with. We will be cleaning up Costello’s messes for decades to come.

  10. sabina lokic

    If only they taxed multinationals properly instead.

Share this article with a friend

Just fill out the fields below and we'll send your friend a link to this article along with a message from you.

Your details

Your friend's details

Sending...