The following article was written by Air Commodore Robert M.C. Brown AM who is a chartered accountant and Chairman of the ADF Financial Services Consumer Centre. It is an edited version of a story originally published in the professional journal of the Institute of Chartered Accountants in England and Wales in August 2015.
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 genuinely needy. According to the memory of my centenarian aunt, born during the early stages of World War One and still going strong, 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 remains at 65 (although this is being gradually extended to 67) and its increases are indexed to average weekly earnings. Thankfully, the stigma attached to 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.
Attempts by governments to reduce the cost of the pension are generally met with howls of protest from ‘grey power’ lobby groups. Even in recent months the Australian government has been heavily criticised because of its proposal to lock in the indexation of age pensions to the rate of inflation, rather than to wage increases, an action which in the long run would lower its cost to taxpayers. The latest argument has been around tightening of the legislated ‘means test’ before a person qualifies for a pension. This proposal is supported by the country’s most influential social security lobby group. On implementation, it will cause a large number of middle-class part-pensioners to lose their some of their valuable entitlements.
Running alongside these arguments are related and similarly politically-sensitive discussions about the appropriate level of taxation concessions and prudential conditions that should be attached to the private pension system (known in Australia as ‘superannuation’). The issue has become even more significant since the cessation of the mining boom. 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 was used to justify all manner of politically attractive decisions such as across the board income tax reductions, generous middle class welfare entitlements and expanded superannuation tax concessions, including tax free retirement entitlements. This prompted the then shadow Treasurer of Australia, Joe Hockey (since appointed Treasurer), while speaking in 2012 at the Institute of Economic Affairs in London, to support the importance of bringing “the age of entitlement” to an end. During his speech he observed that doing so would not be easy. How right he was.
Much of the current political debate in Australia is about the importance of reining in spending and lowering government debt. 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 generous superannuation tax concessions. A key element in the debate is how to ensure that private superannuation accounts (99% of which are simple accumulation arrangements, not based on purchased 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 has recently topped $2 trillion in funds under management. However, at an individual member level the pot is relatively small. In 2013, the mean superannuation balance for males (aged 60 to 64 years) was approximately $200,000; and for females it was approximately $100,000. While as a general rule these balances are growing, they are clearly nowhere near the levels required to replace the publicly funded age pension. Indeed, at the current rates of increase, it will be decades before compulsory superannuation makes a significant dent in the public cost of retirement in this country. The reality is that these amounts are so small as to guarantee that the majority of Australian retirees will extinguish their superannuation savings within a few short 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 tax free lump sums (typically by paying down debt and holidaying overseas); and then claiming the government-guaranteed age pension, the quantum of which is moderated by a relatively liberal ‘means test’ to which I referred earlier. Most importantly, this test specifically excludes the family home (irrespective of its value) and will continue to do so, such is the extreme political sensitivity of any proposal to remove it.
Therefore, given the alleged propensity for retirees to spend their lump sums and then claim the government-guaranteed 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, unavoidable and regrettable 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 both in the UK and 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 certainty and 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 and falling revenues. In Australia, the combative political climate is not conducive to bi-partisan agreements; but behind the scenes, there is substantial agreement (in principle) that the ‘age of entitlement’ is over. Therefore, short of the unlikely event of another mining boom, the key political and fiscal problem for any Australian government is how to share its ever-decreasing pool of financial resources. Ultimately, it’s hard to imagine how the solution won’t involve the reduction of superannuation tax concessions.