There is something seriously wrong with the nation's unions when a leading official wants a huge increase in the subsidies for well off retirees while single pensioners struggle to get by on $273.40 a week. Of course, this is not the way the national secretary of the Australian Workers Union Paul Howes put it last week when he called for a sharp lift in government-mandated contributions to superannuation, even though this system provides the biggest budgetary assistance to those who least need it.
Nevertheless, this strange reversal of normal welfare priorities will be perverse outcome of Howes’ proposal that governments should force people to be much better off financially in their retirement than while raising a family, paying off a house, or repaying education debts. Howes’ idea is that everyone should be compelled to have less money available during their working lives so they can retire on 125 percent of their final salary. Too bad about those who have a different view of how they’d like to allocate their money!
As a general principle in a free society, it is usually better for compulsion to be kept to a minimum. Once the requirements of a basic safety net have been met, optimal social and economic outcomes are more likely to be achieved by leaving people free to choose how much they want to save for their old age and how much they’d prefer to spend on other priorities while they are younger.
For the greater part of the last century, there was bipartisan support for relying on the age pension as a retirement safety net. Costs were controlled with means tests. Normally, the budget was not used to subsidise people who could easily look after themselves.
But this is nothing like what now happens with Australia’s twin track subsidies for retirement incomes — the age pension and super. Instead, a good case exists that the basic single rate age pension is too low at only $273.40 a week. The Newstart unemployment benefit of $218.55 and Austudy of $177.70 are even more meagre.
A government discussion paper released on pensions last week showed that the single rate pension of $273.40 a week, as a proportion of the couple’s rate, is lower than in other developed nations. The chief executive of National Seniors Australia, Michael O'Neil, wants the single rate lifted to two-thirds of the couple’s rate of $456.80 a week. His argument is that many fixed costs are the same, regardless of whether one or two people are in a household.
Moving to 66 per cent of the couple’s rate would add about $30 a week to the single rate pension. O’Neil’s estimated budgetary cost of $1 billion doesn’t appear to include the way some of the $30 would go to those on a part pension before phasing out entirely. There may be a case for tightening the means tests a little. At present, a couple doesn't fully lose a part pension until their joint assets exceed $856,500, excluding the value of the family home.
A separate study released last week by a University of NSW social policy researcher Bruce Bradbury found that many age pensioners have valuable homes that make them asset rich and income poor. He suggests these pensioners should be encouraged to boost their income by tapping into this wealth by trading down to a smaller house or by making reverse mortgages a more attractive way to release some of the equity in their existing homes. Another option, suggested by a leading actuary Michael Rice, is to extend the assets test to higher priced homes by excluding the first $750,000 in value.
The simplest way to fund a $30 increase in the base rate pension would be to take a small slice out of the cost of the tax concessions for super. The recent Treasury paper on the tax system noted that the concessions are essentially worth nothing for about 2.5 million people with a taxable income of less than $34,000. For a 50 year old on $300,000 a year, for example, the concessions on a maximum contribution of $100,000 are worth $31,500.
Treasury estimates that the cost of the tax concessions, despite being virtually zero for low income earners, will rise to a total of $33.9 billion in 2011-12 compared to $32.7 billon for the age pension. Basically, the budget only had to subsidise one retirement income stream — the age pension — before the introduction of compulsory super. Now it has to fund two streams at a cost that will soon reach a staggering $66 billion a year.
Howes wants to add many billons to this cost by lifting compulsory contributions from 9 per cent of salaries to 15 per cent, even though this would further skew the cost of this system of topsy-turvy subsidies in favour of higher income earners. Oddly for a union official, Howes does not seem to understand that extra contributions ultimately come from money that could have been paid as a higher take home salary.
Many people would prefer to use more of the funds available for salaries to help make ends meet while they are working. Once, union leaders used to think that way too. Not any more.
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