About the only news the Rudd government didn't leak before the budget was the decision to increase the qualifying age for the age pension to 67 by 2023. Perhaps it should have leaked this decision too, so it wasn’t the only newsworthy "nasty" left to attract attention on budget day. Not that it was all that nasty.
Contrary to some concerns, no one will be "forced" to work until 67 as part of the change being phased in from 2017. People can retire earlier, if they feel have enough assets. There will also be provisions to cover those who can no longer do hard physical work. No decision has yet been made on whether to align the qualifying age for withdrawing money from super with the new one for the age pension. But this change is recommended in a report from the Henry review of Australia's tax and welfare system that was tabled with the budget.
Meanwhile, the case for containing the cost to the budget of the super system and the age pension is overwhelming. Expenditure on the age pension and the super tax concessions is expected to rise to $36 billion and $31 billion respectively by 2012-13. Unless controls are imposed, younger members of the workforce will face an ever-increasing tax burden. The demographic projections are compelling. Today, the ratio of the working age people to those who are 65 and over is 5:1. The ratio will be more than halved by 2050.
Life expectancy for males was only 55 when the pension was introduced in 1909, but eligibility for the pension was set 65. Since 1909, male life expectancy has increased by almost 25 years. Life expectancy for women was 60 in 1909. Now it is almost 85. Moreover, the value of the age pension in 1909 was only about 12 percent of average earning compared to the budget’s new benchmark of 27.7 percent.
The US and Norway have already increased their pension age to 67. Denmark, Germany and the UK are in the process of doing so, or going higher. On one level, the case for a similar lift in Australia is obvious. But the Rudd government deserves credit for taking a decision that the Howard government should have made. After all, the then Treasurer Peter Costello boasted about how he had highlighted the problems of intergenerational equity raised by an ageing population.
Although the Rudd cabinet worried about the political risks, the opinion polls show that majority of voters support the gradual move to 67. Cabinet also deserves credit for restoring the 50 percent rate at which the pension is withdrawn as incomes rise. Unfortunately, Costello increased the burden on the budget by cutting the rate to 40 percent. Given the brutal demographic reality, tighter means tests seem unavoidable if the future budgets are not to be swamped by increased welfare spending. Those who can fend for themselves will have to do so.
The Henry report shows that someone who earns an average of $150,000 a year (in today's dollars) during a working life of 35 years could still receive over half the full age pension, despite being in the top three percent of income earners. The report recommended that the means test include a cap on the exemption of the family home. No details were given in the report, but a leading actuary Michael Rice has suggested that the value of a home in excess of $750,000, or $1 million, should be included in the assets test. If people don't want to "downsize", they would not have to sell the home. Instead, they could access an improved form of reverse mortgage that Rice says the government should offer.
The key to containing budget costs is to align the eligibility age for accessing both the age pension and super and better integrate the two systems. The Henry report recommends that this alignment should occur, but is unclear about the date. There is no good reason why the two should not be aligned by 2023 when the pension eligibility age reaches 67. The key proviso is that there should be enough flexibility to allow earlier access to super for those who are unable to keep working, or have enough assets to ensure they won’t need to rely on the age pension. Allowing access to super before age 67 for those no longer able to do hard physical work, or switch to another job, should ease the concerns of some unions about the change.
At present, super can be withdrawn from age 55. If people keep working for an extra 12 years, their super assets should more than double in value, thus reducing reliance on the age pension. One proposal for integrating the two systems is to require super and other assets to be converted into a generous income stream. If this runs out, the age pension would take over at a time when most people are old enough not to need a relatively high income.
Apart from generating crucial savings for the budget, lifting the access age for super and the age pension would have major workforce and social benefits. For example, studies show that people are healthier if they keep working. They are also able to afford a higher standard of living when they do retire. Far from being a budget "nasty", further measures to discourage early retirement could gain acceptance with surprising ease.