Way back in 1909 when the first taxpayer-funded national age pension was introduced in Australia, life expectancy for males was 55. The amount of the pension was $1 per week and its qualification age was 65. Consequently, the cost to the public purse was insignificant. The pension was seen as a safety net for the elderly and seriously needy. According to the memory of my centenarian aunt, born during the early stages of World War One, people of her parents’ generation took the view that any form of government financial support should be avoided as a matter of personal pride and certainly not regarded as a right.
Subsequently, during the many financially difficult times of the 20th century, the amount and scope of taxpayer-funded age pensions were increased. The pension is now available to women (initially only to widows), its qualification age is being gradually extended to 67 and its increases are indexed to average weekly earnings. Thankfully, the stigma attached to receiving the pension has gone.
However, the life expectancy of Australians has increased to over 80 years of age. As a result, the pension (in whole or in part) is paid to many more Australians and for a longer time. Its cost has become one of the most significant and politically sensitive lines in the federal budget and any attempts by government to reduce the pension or access to it are understandably met with howls of protest from ‘grey power’ lobby groups.
Running alongside these arguments are related and similarly politically sensitive discussions about the appropriate level of taxation concessions that should be attached to the private superannuation system. The issue has become even more significant since the cessation of the economic boom years which Australia experienced in the first decade of the 21st century. This extraordinary period of economic good fortune endowed Australian governments with ‘rivers of gold’ (even throughout the global financial crisis) in the form of revenue which financially supported across the board income tax reductions, middle class welfare entitlements and expanded superannuation tax concessions, including tax free retirement entitlements. This prompted the then shadow Treasurer of Australia, Joe Hockey, when speaking in 2012 at the Institute of Economic Affairs in London, to support bringing “the age of entitlement” to an end. During his speech he observed that doing so would not be easy. How right he was.
Ultimately, this is a political debate about priorities and the sharing of increasingly scarce resources. There will be winners and losers. Centre stage is the taxpayer-funded aged pension system and its complex interaction with the private superannuation system. The survival of the latter, at least in its current form, depends on the continuity of compulsion and generous tax concessions. A key element in the debate is how to ensure that private superannuation accounts, most of which are simple accumulation arrangements and are not based on government-guaranteed pensions or annuities, are large enough to last the distance, given the ever-increasing age of the Australian population.
At the aggregate level, the Australian compulsory national superannuation system is a large and lucrative industry, at least for the private sector funds managers who “clip the ticket” on a pool that contains trillions in funds under management. However, at an individual member level the pot is relatively small. While as a general rule, individual balances are growing, they are nowhere near the levels required to replace the publicly funded age pension.
The reality is that the amounts are so small that the majority of older Australians will extinguish most or all of their retirement savings within a few years, requiring them to fall back on a government pension for the balance of their increasingly long lives. Indeed, it’s only natural that Australians with low superannuation balances might be inclined to spend their lump sums, typically by paying down debt and holidaying overseas; and then claiming the means-tested government-guaranteed age pension. Most importantly, this test specifically excludes the family home (irrespective of its value) and is likely to continue to do so, such is the political sensitivity of any proposal to remove it.
Therefore, given the propensity for retirees to spend their lump sums and then claim the age pension, should we force Australians to buy annuities? As a matter of public policy, this may sound like a fine idea. Variations of it have been strongly promoted by commentators as the logical and unavoidable solution to the dissipation of retirement savings in an ageing population. However, it is a most unlikely outcome, given the political unpopularity of compulsion and the predisposition of governments in Australia, towards consumer choice, flexibility and personal responsibility.
So what should we do? Should we increase tax concessions so that retirees, particularly at the lower end, are offered greater incentives to save and to purchase an income stream in the form of an annuity? Should we remove tax concessions at the higher end on the basis that such people are unlikely to ever draw on the taxpayer-funded age pension? Should we tighten taxpayer-funded age pension entitlements so that only the demonstrably needy can rely on the welfare system? Or should we leave the current system alone, imperfect as it is, so that people can plan for their futures with the confidence that governments will not interfere?
These questions may sound familiar. They are being asked throughout the world by governments charged with managing flat economies, falling revenues and an ageing workforce. In Australia, the combative political climate is not conducive to bi-partisan agreements; but behind the scenes, there is substantial agreement, at least in principle, that the ‘age of entitlement’ is over. Therefore, the key issue for any government is working out how to share its limited pool of financial resources. It’s hard to imagine, for better or for worse, how that process won’t involve serious discussion about placing more limitations on superannuation tax concessions and further tightening of access to government-funded age pensions. In the end, this is about what kind of society we want. That matter will be determined by political priorities and choices in our democracy and our willingness as citizens to get involved in the debate.
This opinion piece was written by Air Commodore Robert Brown AM, Chair of the ADF Financial Services Consumer Centre. Its original version (now edited) was originally published in the journal of The Institute of Chartered Accountants of England and Wales.