Wednesday, February 25, 2009

$35 Is A Band Aid, Not A Cure

Although the Harmer Report on Aged Pensions won’t be released until later in the week, and there will be even longer to wait before finding out just what the Government response will be, there seems to be a widely held expectation that there will be an increase in the single rate of pension of about $35. For some reason this figure has come to be seen as some sort of benchmark as the least that can be reasonably offered while being the most the taxpayer can afford. It has become so prevalent it has almost become a foregone conclusion, one which if not fulfilled would be a massive disappointment. But at the same time, the expectation has also set up a scenario where an increase of $35 will be seen as a successful outcome, regardless of the real needs of pensioners. It is a real risk that this modest increase will be made at a cost of four or five billion dollars, and we will still have pensioners subsisting below the poverty line. That’s not a solution. That’s a band aid.

So where has this expectation come from, and is it actually a distraction from the real need for pension reform? At the very beginning of the review process it was recognized that the ratio of the single pension to the couples pension was out of step with world standards. Rather than two thirds of the couples rate, it was a little below 60%. The difference for a single pensioner worked out to be about $35 per week, and ever since that has been the figure thrown about in discussion. What it completely ignores of course is the question of whether or not the couples rate itself is adequate.

There’s any number of benchmarks which can be applied to measure an appropriate level of pension, but all of them clearly show that the current levels are insufficient to provide any kind of basic security and dignity in retirement, let alone any kind of comfort. Whether we look at measurements of the poverty line, of average incomes, or of regulated minimum wages, the pension doesn’t measure up on any score. The Council On The Ageing has proposed an increase of the single rate of pension from 25 to 35% of the Male Average Total Weekly Earnings, which would boost the payment by about $100 a week, with a commensurate increase to also apply to the couples pension. That’s more like the ball park that is needed to provide genuine support to those who need it most.

The cost to the taxpayer for such an increase could easily exceed $15 billion, quite a slug, especially since the Global Financial Crisis has already wiped out the surplus we once had. But there are savings to be made elsewhere in the budget which would go some distance in helping to find the dollars. It turns out that the tax concessions on superannuation contributions are not actually providing the greatest benefits to the ordinary workers who need them most. Instead, it is the top 5% of income earners who deposit 37% of the concessional contributions. Dr. David Ingles, author of a report for the Australia Institute, has demonstrated that the concessionary tax arrangements on superannuation provide that vast bulk of benefits to high income earners who would save for their retirement anyway, even if there was no super scheme.

While I have suggested many times that ensuring the compulsory superannuation system provides adequate retirement incomes is the only genuine long term solution to reducing the number of people relying on taxpayer funded pensions, it would appear that the present tax arrangements are not the most efficient way to achieve this. At present, all super contributions are taxed at 15%, regardless of what marginal tax rate you might be on. The result is that those on higher incomes get the greater benefit, while those on low incomes can actually get no benefit at all. For that reason, a better way to tax super contributions would be to have a tax free threshold for contributions up to an amount equal to 9% of the average wage, meaning those on average wages or less would pay no tax on their super contributions at all. As incomes increase, marginal rates of tax could be levied so that high income earners no longer have the incentive to dodge income tax by salary sacrificing money into extra super payments.

There are many complicated issues around the whole question of retirement incomes, but the bottom line is that the pension system is broken and it has to be fixed, and it has to be fixed now. To do that properly, it is also necessary to fix the superannuation system so that it delivers on the original promise to provide an equitable income in retirement for all Australians.

No comments: