Thursday, February 19, 2009

The Government Should Help Those Who Help Themselves

The review of age pensions by Dr. Jeff Harmer will deliver its much anticipated final report next week. The report is expected to find that the single age pension is too low, and should be increased to a level where it is two thirds of the couples’ pension, which would result in an increase of around $35 a week. This would be consistent with the findings released in the interim report last year. It’s also nothing new.

We already know that the age pension is too low for anyone who is dependent upon it to exist in any kind of comfort. The single rate is now $545 per fortnight, and is well below the poverty line, no matter which definition of poverty you choose to use. We don’t need an inquiry by a public servant to tell us that. What we do need from the Harmer Report is clear recommendations on how to reform and restructure pensions to provide the level of support that they should.

I have already put forward my own suggestions many times, and they all involve a substantial increase to the rate of pension for both singles and couples. While I don’t expect my suggestions to be taken up, I do expect that the government will be kept to its promise to provide some sort of boost for pensioners in the forthcoming budget. If they don’t it will be a breach of faith so massive that it could easily be the beginning of the end of the Rudd government. But just boosting the pension, as desperately needed as it is, won’t actually fix the problem.

The only long term solution which is sustainable is one which will reduce the number of people relying on the pension, by making the superannuation system work more effectively to provide the benefits it was originally intended to. That means increasing the level of contributions to super above the current 9% paid by employers. The increase should ideally be a further 3% from government, and 3% from employees themselves. The taxpayer investment can be justified by the long term savings created by reducing dependency on the publicly funded pension system.

Equally importantly, the taxation of superannuation contributions needs to be abolished. All money going into super should be quarantined from tax to provide maximum bang for the buck. The payoff for the retiree will be a better nest-egg and therefore a better income in retirement, and the payoff for the government is that people who are more prosperous pay more tax, both directly and indirectly.

Finally, the allocated pensions where most superannuation winds up after retirement also need to be flexible enough to allow people to have some control over their own destiny. Currently, these private pensions are given preferential tax treatment and are structured in such a way as to require the recipient to drawdown a percentage of the capital each year as part of their income. The end result of this is that at some point the money will run out, which becomes rather awkward if you are still alive when it does.

In the wake of the Global Financial Crisis, which has had a devastating impact on the financial wellbeing of self funded retirees, the government has temporarily suspended these compulsory drawdowns of capital so that retirees are not forced to cash in assets at prices well below where they were a year ago. Now that’s a good move, but I have to wonder why it should not always be the case. The idea of the compulsory drawdown is to ensure that people use their own resources before they claim public pension benefits, but if it suits a retired person to take a smaller income now in order to protect his capital, shouldn’t he always be allowed to do that? So long as a person isn’t deliberately manipulating their position to wrongly claim a pension or avoid tax then they should be allowed the flexibility to choose not to spend their money when they believe that is the more prudent course.

The best way to stop people depending on the government to provide for them is to make sure that they can provide for themselves.

No comments: