Australian conservatives seem to have lost some of their traditional commitment to institutions and the liberalism they protect.
The Foreign Relations (State and Territory Arrangements) Bill 2020 currently before the Parliament would require State and Territory entities to seek the approval of the Minister for Foreign Affairs for any proposed ‘arrangement’ with a ‘core foreign entity’; existing ‘arrangements’ would also be subject to approval. The bill may be presented as ‘country agnostic’ but there is little doubt that its intent is to constrain ‘arrangements’ State and Territory entities have with China in particular. Included in the definition of ‘entities’ are universities. (more…)
In calling for a review of Australia Post in light of its decision to reward some executives with Cartier watches, the PM stated that ‘there wouldn’t be a board member of a government agency or a CEO of a government agency that didn’t get my message’.
In Parts 1 and 2, I used three desirable attributes (equity, efficiency and simplicity) of a coherent tax and transfer system to assess the 2020-21 personal income tax changes and the lack of a rate increase for JobSeeker recipients. In Part 3, I examine family assistance and child care.
In Part 1, I used three desirable attributes (equity, efficiency and simplicity) of a coherent tax and transfer system to assess the 2020-21 personal income tax changes. In Part 2, I examine JobSeeker payments.
More sensible than the Government’s Stage 3 tax cuts would be the approach put forward by the Henry Tax Review of an explicit and high tax threshold and no means-tested ‘tax offsets’. (more…)
Public debate on superannuation is currently focused primarily on the level of the guarantee. This is a legitimate debate, but the guarantee is not the most important issue for ensuring Australians have adequate and secure retirement incomes.
As some politicians and commentators call for containment of China, it is time to put forward the case for engagement instead. It can only assist with our understanding of China’s huge challenges, and maybe help encourages continuing reform.
A Royal Commission into Robodebt could shed light on future policy and administration issues, some going beyond social security writes Whiteford, Podger and Stanton from ANU’s Crawford School of Public Policy.
Australia has so far been successful in its response to the COVID 19 pandemic, a major reason being the constructive role of the ‘National Cabinet’. But there is good reason to be highly sceptical about the ongoing role for the ‘National Cabinet’ announced by the Prime Minister.
In Hidden Hand, China scholars Clive Hamilton and Marieke Ohlberg examine the Chinese Communist Party’s influence in Europe and North America in a similar way to how Hamilton dissected the CCP’s influence in Australia in his 2018 book, Silent Invasion.
A desirable new normal in economic and social policy will require a new normal in Australian politics. For a decade or more we have suffered from hyper-partisanship and the constant campaign. Good policy is no longer recognised as good politics. Arguably, Scott Morrison is the supreme example, being until now the most ‘transactional’ of political leaders. (more…)
As governments transition out of the current restrictions to slow the spread of COVID-19 and help the economy towards recovery, it is worth exploring what the future might or should look like. (more…)
The convid-19 epidemic has shown how much Australia relies on an effective public service, free from politics. This, however, is in spite of the over-politicisation and under-resourcing of the service over recent years. (more…)
The government’s defence of Bridget McKenzie and the prime minister’s call for advice from the head of his department reveal a remarkable misunderstanding (or, less surprisingly, a remarkable misrepresentation) of the respective roles of ministers and administrators. (more…)
The final report of the Independent Review of the APS is much more substantial than its Interim Report. That is hardly a high hurdle, but its 18 page bibliography suggests considerable reflection beyond the (mostly disappointing) submissions and commissioned papers. (more…)
In their first ‘Saving Private Insurance’ report in August, Stephen Duckett and Kristina Nemet from the Grattan Institute presented a most helpful framework for assessing the future role of private health insurance in Australia in the context of our universal public insurance scheme, Medicare. (more…)
The relationship between politics and administration has been likened to the Chinese Yin and Yang: a dichotomy of almost opposites but simultaneously a complementary partnership in which neither can survive without the other. That is the challenge the new Morrison Government needs to understand as it sets out what it expects from the Australian Public Service. (more…)
At the time of last year’s budget, I wrote a [1] revealing how neither the Government’s nor the Labor Party’s then proposed tax changes would simplify the personal income tax system or offer genuine long-term reform. This was largely because of continuing misrepresentation of the tax scale and failure to take into account how the means-tested Low Income Tax Offset (LITO) and the new Low and Medium Income Tax Offset (LMITO) actually work. The same criticism can be made about the Government’s of its legislated and proposed tax changes over the next five years. (more…)
While it is important to consider our tax and transfer arrangements as a single integrated system, there are various (overlapping) parts to it: retirement incomes (including superannuation tax arrangements and the age pension), the core welfare system (pensions and benefits for people not able or not expected to work, including the aged, disabled and sole parents with young children, as well as the aged) and family assistance (family payments, childcare subsidies and related personal income tax arrangements). This article examines family assistance and the personal income tax system; an earlier article addressed retirement incomes and a separate article focuses on inequality and Australia’s welfare system.
Family assistance serves two core objectives:
These objectives are supplemented by other important principles including:
And of course the tax system must raise the revenue the government needs.
The unique nature of the Australian approach to family assistance, like the rest of the ‘welfare system’, is its emphasis on vertical equity through means tests. We have one of the most targeted systems in the world – around two-thirds of family assistance is received by the poorest 40% of the overall population (ABS, 2013). . This has its strengths: in particular, support for most lower income families has increased substantially over the last 30 years, with the real value of Family Tax Benefit Part A per child more than doubling from around $40 per week in 1975 to around $90 per week in 2010 (in 2010 dollars) (Whiteford, Redmond and Adamson, 2011) . But it also leaves horizontal equity problems, efficiency costs due to high effective marginal tax rates and administrative costs and complexities. Yet most political commentators keep calling for even more targeting to reduce ‘middle class welfare’.
Looking at family assistance on its own inevitably draws attention to its vertical distribution. Looking at it, as we should, as part of a wider tax and transfer system and in particular as part of the way we treat families in the personal income tax system, leads to consideration also of horizontal equity and broader notions of capacity to pay tax, as well as of the principles of efficiency and simplicity. Debate will continue about the balance between these issues but at least this way they all get put onto the table.
Indeed, if we want an approach that preserves vertical equity but gives more emphasis to efficiency and giving mothers in particular more choice including to return to the workforce and to pursue their careers, we need to reduce the emphasis on means tests and increase the emphasis on horizontal equity. There is also a case for reconsidering the current emphasis on child care to give more weight to assistance that allows more choice about the form of care families want for young children.
The personal income tax scale also delivers vertical equity (though not as much as transfers). This is primarily through the impact of the tax threshold rather than the higher marginal tax rates applying further up the scale. Some commentators have been questioning the need for such a high threshold but it is an essential component of a coherent tax and transfers system; if anything, it should be increased further. Not only is it the primary means of achieving progressivity in the tax system but, if it is set above the level of pensions and benefits, it ensures that few people fully reliant on welfare, nor anyone else on the same low income, would need to pay personal income tax, . For too long tax relief for low income people has been achieved artificially by complex ‘pensioner tax offsets’ and ‘low income tax offsets’ rather than having a simple and transparent tax threshold. Wayne Swan took some action towards fixing this but there is still further to go as the Henry Report recommended. The costs can be met by applying a standard tax rate of around 35% above the threshold rather than the lower rates now applying initially (again as recommended by the Henry Report and, indeed, as actually applied back under Malcolm Fraser’s 1978 reforms).
With progressivity in the personal income tax scale achieved more clearly and simply in this way, the next issue is how best to recognize different capacities to pay tax given family circumstances ie horizontal equity. Around the world, tax systems grapple with this issue. Some, like the Australian system, are based primarily on individuals and then make adjustments for family circumstances; others tax family units and then make adjustments for the impact on those without families or living alone. Such adjustments are not normally considered separately or as ‘welfare’ but as part of the very structure of the tax system, optimising revenue collection by ensuring tax reflects accurately capacity to pay.
Looked at this way, the tension many see between horizontal and vertical equity in family assistance arrangements is greatly exaggerated – horizontal equity should be achieved as part of the very design of the personal income tax system. Yet there is still some tension because the system as a whole is expected to give particular support to low income families and hence must balance that against all the other elements. But addressing the tension simply by means testing all family payments as the Henry Report suggests is unlikely to optimize the system: a better approach is likely to involve some modest universal assistance for tax equity, adjusting the tax scale (eg by applying the top rate from a lower level) and more tightly means-tested supplementary payments to achieve vertical equity (and to limit the numbers affected by high effective marginal tax rates).
Family responsibilities affect capacity to pay (and need) in two ways – via the direct costs of children and via the costs of their care. The first increases with the number and age of the children, the second is inversely related to the age of the youngest child.
The Henry Report rightly suggested varying Family Tax Benefit A, which addresses the first aspect, according to the age as well as the number of dependent children. That could be achieved with a universal payment complemented by a tightly means-tested supplement.
Currently, the second aspect – the costs of caring for young children – is addressed in a most complex mix of payments and subsidies which fail to address almost any of the principles of a well-designed system. These include Paid Parental Leave (set at the minimum wage, available to birth mothers for 18 weeks), Family Tax Benefit B (means-tested and, aside from sole parents, essentially limited to mothers not in paid work with a child under 18, and with a higher payment if there is a child under 5), parenting payments (means tested, with two levels of payment, the higher one designed for sole parents with children under 8 and the lower one for the carer in two parent families with a child under 6) and childcare subsidies (some universal, most means-tested, subject to various rules on the nature, amount and price of care and the extent of workforce participation by the parent).
The complexity reflects in part that the care of very young children involves additional objectives including the development of children from an early age (evidence suggests investing in development programs for pre-school children aged 3 and 4 yields significant benefits later) and the return to paid work of mothers as children begin to grow in order to sustain and build on their human capital and capacity to contribute; the latter is particularly important for disadvantaged parents in order to provide a path towards sustained independence and self-reliance.
These considerations do not however justify the current complex and contradictory measures. There is a strong case for a more uniform approach to payments based on the age of the youngest child, with highest payments in respect of the care of babies and reasonably generous payments also where the youngest is under school age; some payment where the youngest is at primary school could also be justified given the after-school care costs involved. (It might also help coherence of the system if we returned to a separate scheme for sole parents – not lumbered into family payments – that recognized their limited capacity to work when they have young children and provided a safety net consistent with that for other core welfare groups and with suitable work tests.)
There is a strong case for reducing the emphasis on means tests given the high effective marginal tax rates they impose on so many parents. A trade-off is involved between very high marginal tax rates for a small minority of families or rates around the maximum in the personal income tax scale applying to a much higher proportion of families. My preference is the former approach with modest universal payments to ensure horizontal equity.
Despite the current push to focus more on childcare, there is also a case for giving more emphasis to cash payments that offer more choice, and to supplement these with more targeted approaches to childcare subsidies and a general education/development program for pre-schoolers managed through schools and childcare centres. Much more effort is also needed to ensure employers offer flexible work options suited to help mothers transition back into paid work, and to offer continuing education and training options also.
Very young children require the full-time care by an adult, and there is no particular economic advantage in that adult being paid rather than unpaid. Most mothers choose to drop out of the paid workforce when their youngest is under two, and 90% report they do so not because of lack of childcare but because they want to look after the child themselves. Facilitating these choices while recognizing the costs of caring for young children (whether through direct child care costs or the opportunity costs of stay-at-home mothers) would be better and more simply achieved by generous universal payments where the youngest is under two (for example by extending the PPL to 26 weeks and having a further slightly lower universal payment while the youngest is under two) and a moderate universal payment where the youngest is over two but under five or six. This could replace much of our massive system of child care subsidies. The payments could be complemented by means tested supplements. (Consideration could still be given to targeted child care for mothers needing help to become welfare-independent.
Current arrangements are not just overly complicated: they are inconsistent and incoherent, overly means tested and having insufficient regard for efficiency or the way families and mothers in particular today want to exercise choice in how they care for their children and pursue their careers. The Government’s latest budget proposals would only increase the system’s complexity and its inconsistencies. Its proposals from the last budget, still on the table, would tighten means tests also making the system less coherent. At least its earnings-related PPL is no longer on the agenda, but the series of confusing proposals over the last year or so demonstrate a lack of careful policy analysis. But Labor too could give family assistance closer attention and develop a coherent approach that is fair and better promotes choice and efficiency.
Andrew Podger is Professor of Public Policy at ANU and former Head of several Commonwealth departments.
Inequality is a complex issue. It is affected by many factors, so that it can increase as a result of beneficial changes as well as socially undesirable ones, and can decrease because of changes that reduce overall social wellbeing as well as a result of socially desirable changes. A particular level of inequality may not therefore be suitable as a policy target per se as distinct from such specific objectives as alleviating poverty, increasing employment, achieving a fair taxation system or improving levels of participation and engagement in society.
In our submission to last year’s Senate Inquiry into Inequality we summarised trends in Australia over the last 30 years but suggested the Committee focus its attention on promoting employment and addressing specific weaknesses in the tax and transfer system. These might deliver some of the savings the Government has been seeking but would also involve some new expenditure priorities.
Trends in income levels and disparities
Average real incomes of Australians have increased substantially over the last 30 years, but with some periods of slow growth and others of very rapid growth. Employment patterns have also changed with periods of increasing unemployment and periods of reduced unemployment; overall, employment has grown strongly in the second half of this period, but accompanied by growth in part-time employment and casual work.
The periods of high unemployment were associated with increases in inequality. Some family changes reinforced these negative trends, and Australia developed an extremely high concentration of joblessness in households with no adults in paid employment.
The increases in real disposable incomes for Australian households since the recovery from the 1990s recession were greater than in any period since the 1960s. After Ireland – and from a much higher base – Australia enjoyed the largest real increases in mean and median real incomes of any OECD country, and since 2008 Australia has continued to move ahead at a faster rate than many countries in Europe or the United States.
The richest 10 per cent of Australian households, however, enjoyed the largest real increase in household disposable incomes of any OECD country and, since the incomes of the richest increased faster than the incomes of lower income groups, income inequality increased. The overall trend on virtually all measures of resources is towards greater inequality in the period up to 2008.
The causes of these trends are complex. The most important source of income inequality in Australia is related to access to earnings, since earnings are the largest single component of household incomes. As mentioned, high unemployment has a major impact on the level of overall inequality and disadvantage.
A related factor is inequality of earnings for full-time workers which have tended to increase almost continuously since the 1970s, as a result of modest real wage increases at the bottom of the earnings distribution, a hollowing out of middle level jobs and growth in the number and wages at the top of the distribution. This is broadly consistent with international experience.
These disparities were partly offset in Australia by rising real wages for women (although gender wage gaps have increased since around 2004, so that overall little progress has been made to reduce these gaps since the mid-1990s). In earlier periods rising employment for women tended to increase family income inequality as the growth was concentrated amongst families with a relatively high male income earner, but over the last decade rising female employment has tended to reduce overall inequality (Austen and Redmond, 2012) .
Changes in family composition and the demographic structure of the population appear to have reinforced trends towards rising inequality, but the effect is much less important than access to employment.
One of the more striking features of recent Australian experience is that after 2000 inequality in market incomes actually decreased (Herault and Azpitarte, 2014) . This positive trend appears to reflect the equalising effect of growth in employment for lower income groups in this period. But this also means that increased inequality in disposable incomes over the period up to the Global Financial Crisis was a consequence of government policies becoming less effective in reducing inequality.
The tax and transfer systems are important mechanisms by which Australian governments have acted to moderate inequality in market incomes particularly to alleviate poverty, and also to offset rising inequality. The effectiveness of taxation and social security systems (and social spending more broadly) in reducing inequality reflects two factors – the distribution of taxes and benefits (i.e. how progressive are the tax and welfare systems) and how large they are as a share of household income. In this context, it should be noted that while levels of social spending in Australia are towards the lower end of OECD countries, the social security system is the most progressive in the OECD.
The effectiveness of the tax and transfer systems in reducing inequality reached its peak in the mid-1990s and subsequently declined. The decline in the effectiveness of the tax and transfer systems in reducing inequality is partly explained by some transfers such as Newstart not keeping pace with rising community incomes (this being particularly important for alleviating poverty), but it also reflects the fact that the Australian social security system is very targeted to lower income groups so, as the earnings of lower income households increased due to higher employment levels, the social security benefits they received reduced.
Because Australia has the most progressively distributed social security benefits in the OECD, per dollar spent Australia reduces income inequality more than any other country (but we spend fewer dollars). Correspondingly, across the board cuts in social security in Australia would increase inequality by more than any other OECD country (OECD, 2012). This makes achieving further expenditure restraint in Australia a particularly difficult challenge – although it contributes to the outcome that overall we have relatively low social security spending.
Design principles for Australia’s social security system
There are strengths in the Australian social security system design and its emphasis on poverty alleviation. That remains the central objective. But this objective needs to be balanced against other objectives, particularly the objective of encouraging work and savings and self-help more generally, noting the longer-term advantages of employment including the avoidance of persistent poverty and disadvantage.
Getting the right balance is a matter for judgment, but we suggest the following general principles should be applied in the design of our social security (and related tax) system:
Some specific priorities
From these principles we suggest the following practical measures to achieve expenditure restraint while simultaneously addressing concerns with inequality:
We also suggest a comprehensive review of retirement incomes policy to allow careful consideration of the effectiveness and efficiency of current arrangements, including inter alia tax expenditures and the age pension means test. This might avoid the inevitable adverse effects of the piecemeal approaches now being put forward by the Government and Opposition.
The specific measures above would deliver some of the savings proposed by the Government, but would also involve higher expenditures in some areas. If some of these measures are considered too hard in the current budgetary climate, we suggest a new review of the adequacy of the full range of social security payments using the same methodology as the Harmer Pensions Review (which, because it was restricted to consideration of pensions and related allowances, contributed unintentionally to some of the current inequities within the social security system).
Andrew Podger is Professor of Public Policy at the ANU and former Head of several Commonwealth departments. Peter Whiteford is a Professor in the Crawford School of Public Policy at the ANU.
In his introduction to this series, Ken Henry said he could not recall a poorer quality debate, on almost any issue, than what we have had in Australia in recent times. Ian Marsh, in his contribution, advocated pursuing bi(multi)partisanship opportunities as far as possible.
Sadly, Henry’s comment seems most apt when it comes to retirement incomes policy, and Marsh’s call seems a long way off after the Prime Minister and Treasurer ruled out a comprehensive review of the policy after the recent Budget. This is despite the Treasurer recently saying in relation to taxation that all options were on the table, and the Opposition indicating a willingness to work with the Government. In addition, there has been some excellent work in academia over recent years, and a quality report from David Murray’s Financial Services Inquiry which highlights the importance of drawing all the threads of the retirement income system together. We can only hope some others in the Government can find a way to allow proper discussion and wide engagement on this critical issue for everyone.
Careful analysis of Australia’s retirement income system would reveal it has considerable strengths, but also some serious weaknesses and challenges, most of which have not been addressed by the Government’s Budget proposals – either this year or last year.
Such an analysis requires, first, some agreement on the objectives of the system. David Murray’s Financial Services Inquiry made an important contribution in its simple admonition to articulate in legislation the objectives of the superannuation system, the primary one being, ‘to provide income in retirement to substitute or supplement the age pension’. Such a focus would avoid debate being hijacked by those promoting housing investment, or infrastructure financing, or broader wealth accumulation and so on.
The wider retirement incomes system in fact has two objectives:
These core objectives are complemented by general principles such as value for money and sustainable cost, simplicity and understandability, and stability and certainty.
Australia’s ‘multi-pillared’ system (to use the language of the World Bank) has considerable strengths. Its ‘foundation pillar’, the age pension financed by general revenue, addresses poverty alleviation reasonably effectively and efficiently. The level of the pension is slightly below the OECD benchmark for poverty (50% of median income) so the headline poverty rate amongst our elderly is quite high (35% compared to an OECD average of 12.5%0, but the severity of poverty is lower (the average gap being 12.4% compared to the OECD average of 18.4%). With significant increases in the pension over the last decade and more, and with increasing numbers having superannuation as well as the pension, our main underachievement against the first objective concerns those fully reliant on the pension who are in private rental accommodation whose after housing costs are much higher than those who own their own home or are in public housing. The case for increasing rental assistance is strong.
Perhaps our system’s greatest strength comes from our emphasis on ‘pillar two’ mandated contributions and ‘pillar three’ tax-encouraged voluntary savings. These pillars are mostly fully funded instead of a ‘pillar one’ national superannuation scheme with unfunded promised benefits as is common in Europe and North America. In theory at least, our approach imposes less risk on governments and future taxpayers, and hence offers greater intergenerational equity.
At the current mandated contribution rate of 9.5%, most people will accumulate superannuation savings which, with some age pension, will be able to deliver at least 70% net income replacement in retirement after 35 years of contribution. The rates are higher at low income levels because pension eligibility is higher. This suggests we have the mandated contribution rate about right already if one accepts the international standard of adequate income maintenance of between 70 and 80%. Raising it further would only force people on low incomes to save more when their needs are greater in order to improve retirement incomes that are already sufficient. Most people on or above median earnings are already contributing more than the mandated amount taking advantage of the incentives available and, on average, it seems they also are likely to have sufficient accumulated savings to achieve 75% replacement rates.
The problem is that these income replacement rates are only potentially available. That our system does not in fact deliver them and ensure they last everyone’s full life is perhaps its greatest weakness. It certainly contrasts with every national superannuation scheme in other countries, and indeed with our own age pension.
We allow people too much freedom to take benefits in the form of lump sums. This can leave people with insufficient funds for their later retirement years and make them overly reliant on the age pension. Evidence gathered by the FSI suggests that this is not as yet a major concern but it could become one.
Of more concern according to the FSI is that too many people are trying to manage longevity risk on their own. To do this, they are holding back consumption from their accumulated savings so as not to run out of savings before they die. The result is lower consumption (and a lower standard of living than their accumulated savings suggest they should be able to have in retirement), and much larger bequests to the next generation than they would have planned (and much more than the system was intended to provide). Also, some still live to a very old age and run the risk of running out of savings.
There is also capacity to exploit the tax concessions to accumulate wealth including for planned transfer to the next generation rather than genuine retirement purposes.
Our system needs products that deliver retirement streams and provide insurance against the risk of longevity, and for policies which promote the take up of these. The FSI proposed requiring superannuation funds to offer their members a ‘comprehensive retirement income product’ which would include a longevity insurance element. It hoped these products would become the default retirement benefit products which most will take up, and thereby also addressing in part some of the ‘market failures’ such as adverse selection. This may not be sufficient and, eventually, consideration may need to be given to a mandated approach and to complementary measures to address market failure such as the options identified in the Henry Report including the issue of longevity bonds and the sale of annuities by government to supplement the age pension. These might be more likely to make lifetime annuity products available and limit capacity for people to use superannuation tax concessions for purposes other than retirement income.
The structure of our system makes us much better prepared for demographic and economic changes, but we still have serious cost challenges. The 2015 Intergenerational Report projects the cost of age pensions will grow from 2.9% GDP to 3.6% over 40 years unless the legislation changes. Health and aged care costs are projected to grow further. These increases will need to be managed and, if possible, curbed while ensuring the programs still deliver what the community needs and prefers.
What the IGR did not report was the cost of superannuation tax concessions which are growing faster than the age pension and are concentrated on those on high incomes. We should not however exaggerate the scale of these.
Treasury estimates of close to $30 billion are based on a ‘comprehensive income tax’ benchmark or TTE approach (taxing contributions and fund earnings as income and exempting the benefits). This may apply to your bank account but it is clearly excessive as it eats into the real level of savings. Last year Treasury presented estimates of the tax expenditures if a ‘comprehensive consumption tax’ or TEE benchmark was used. This suggested the costs of superannuation concessions are around $12 billion. But even that is arguably more than the revenue forgone that might be reaped if we agree the purpose of superannuation is to spread lifetime incomes to maintain living standards in retirement. That would suggest an EET approach, the orthodox approach used elsewhere but way too hard for us now given policies of the last 25 years. I have not seen any estimate of our tax expenditures on this basis, but they would be much lower as few retired people would have large amounts of other income so the tax rate would be much lower than their marginal rate when making contributions.
Given it is not feasible now to replace the current regime with an EET one, the question is what tax arrangement might most closely replicate an EET one, containing the costs and ensuring tax equity. I suspect the Henry Report approach would get pretty near to it by allowing a 20 percentage deduction from contributor’s marginal tax rate when setting the contributions tax. In practical terms, this would mean applying a 30% contributions tax for all those with incomes at the top marginal tax rate and no change for the vast majority of contributors; Henry also proposed a flat 7.5% tax on fund earnings at both the accumulation and drawdown phases.
The Government is right to draw attention to the costs of the age pension even if our challenges are small compared to those facing many others. But we also need to be realistic and to consider carefully how the pension will fit with superannuation as our population ages and the transition to retirement shifts and varies.
Australia has already been remarkably successful in reducing eligibility for pensions amongst women under 65, and has legislated to increase the age pension age to 67. When considering possible further increases consideration needs to be given to the implications for those with limited capacity to continue work, and the savings actually generated by such a change. The savings may be modest given the falling numbers of full-rate pensioners and the increasing proportion of these already on welfare before transferring to the pension. The Government’s proposal to increase the age to 70 in the 2030s was designed to maintain the ratio of working years to retirement years: that has some attractions but we need to look more carefully at the effects of the increase to 67 first and review whether the overall impact of a further increase would be acceptable.
The Government proposed last year to change the pension index to the CPI rather than AWOTE. That was always far too tough, reducing relativities with community incomes very substantially if continued for a lengthy period. But as Minister Morrison suggested in February, there is a case for modifying the current AWOTE approach which will over time increase the pension relative to community incomes. Using the CPI for automatic increases then having independent reviews to make adjustments for community income changes every two or three years would in fact be very sensible, and could form the basis for a uniform approach to indexation of all welfare payments. The welfare lobby might like to reconsider its opposition to any change in pension indexation arrangements.
Tightening the means test offers another way of achieving savings but it is important to recall that the original intention of the superannuation reforms was to allow most retired workers to supplement age pensions not to fully replace them. We have already seen a drop in the proportion of the aged on full-rate pensions from around 60% to 50% and this is projected to drop to 30%. The proportion on part-rate pensions however is increasing, so the forecast involves only a modest reduction in the total pensioner population.
To achieve a much greater reduction would require radical changes which could have adverse implications. The income and assets levels at which pension eligibility ceases are of course a function of the level of the pension and the means test withdrawal rates. The income test withdrawal rate has already been increased to 50%: a higher rate could affect incentives to continue part-time work. The Government has proposed an increase in the assets test withdrawal rate but few (including in the welfare sector) seem to realise this involves an effective wealth tax of 7.8% removing incentives to improve assessable assets above the threshold, contrasting sharply with superannuation tax arrangements intended to encourage saving.
More sensible suggestions include Henry’s proposal for a single merged income test which converts assets into appropriately deemed income: this would not radically change the numbers eligible for some pension, but would provide a more coherent effect on incentives to work and save. Another is to include the home in the assets test beyond some threshold, allowing people to continue to receive the pension but requiring repayment from their estate through a reverse mortgage arrangement. But in all likelihood over half our retired population will continue to receive some age pension, and that should not be regarded as bad so long as the system as a whole is delivering adequate incomes efficiently and at an affordable cost.
All this goes to demonstrate how a bi-partisan review of our retirement income system could build on its strengths, make it more effective and sustainable, and give people full confidence as they plan for their retirement years.
The demographic changes now underway should not be presented as a crisis; they represent a triumph of increased life expectancy and years of health living at older ages. They provide new opportunities for people to contribute to society and their families and communities as they transition from full-time employment. Our retirement income system can provide the security people need against poverty and reduced living standards while offering the flexibility for people to manage this new transition to retirement in the way they want.
Andrew Podger, Professor of Public Policy, Australian National University. He was previously the Public Service Commissioner and Secretary of the Departments of Health and Ageing, Housing and Regional Development, and Administrative Services.
Just as the Abbott government sorely needs a coherent health policy, welfare policy and family assistance policy, it should also put time and effort in 2015 into investing in a coherent approach to retirement incomes instead of focusing narrowly on the age pension.
The budget measures are being stymied by the Senate, not because of poor communications, but because they simply do not stack up as fair and reasonable.
David Murray’s FSI offers a more considered approach though it too only covers part of the retirement incomes system. Perhaps its most important contribution is Murray’s simple admonition to articulate in legislation the objectives of the superannuation system, the primary one being, ‘to provide income in retirement to substitute or supplement the age pension’.
The wider retirement incomes system in fact has two objectives:
Australia’s ‘multi-pillared’ system (to use the language of the World Bank) has considerable strengths. Its ‘foundation pillar’, the age pension financed by general revenue, addresses poverty alleviation effectively and efficiently. Instead of a ‘pillar one’ national superannuation scheme with unfunded promised benefits, we have ‘pillar two’ mandated contributions and ‘pillar three’ tax-encouraged voluntary savings which are mostly fully funded. In theory at least, our approach imposes less risk on governments and future taxpayers.
But there are significant weaknesses. The tax concessions for pillars 2 and 3 are very substantial and skewed to those on high incomes; the accumulated savings are not directed efficiently or effectively into retirement incomes; the transaction costs are high; and the system is very complex and places an undue burden on individuals, particularly on older people whose cognitive ability may be impaired (indeed, few financial advisers have an adequate understanding of superannuation products, tax arrangements and the means test). These weaknesses greatly overshadow those the Government has so far tried to address through its proposed age pension measures.
Murray suggests changes to tax arrangements that would address the scale and distribution of the concessions for consideration through the White Paper process. The scale of the tax expenditures may be of the order of $10 billion (using a comprehensive consumption tax benchmark) rather than the $30 billion (using the comprehensive income tax benchmark) more commonly and inappropriately used, but this is still large, and it is even more skewed to the rich.
Murray’s suggestions follow the Henry Report approach: taxing contributions at individuals’ marginal tax rates less 20 per cent, and applying a standard (low) tax on fund earnings whether individuals are in the accumulation or de-accumulation phase.
As Murray highlights, our system’s greatest weakness is in the de-accumulation phase. Too much of the accumulated savings are taken in the form of lump sums and allocated pensions, and too little in the form of annuities or other forms of longevity insurance, with the result that many retirement incomes are lower than they could be, too much is left in unplanned bequests and too many rely on the age pension for their longevity insurance.
Murray does not go as far as I would in regulating the de-accumulation phase, but he is certainly heading in the right direction. He recommends that funds be required to pre-select a comprehensive income product (which includes insurance against longevity risk) as a default option that individuals would not be required to accept. He believes that most people would accept such a product or buy some other form of insurance against longevity and not rely so much on the age pension, and that as a result they would in fact consume more in retirement knowing they are adequately insured. My own preference would be to mandate some form of deferred lifetime annuity, not only to reduce reliance on the age pension and enhance living standards in retirement, but also to limit opportunities for tax avoidance.
Murray complements these proposals by recommending the removal of regulatory obstacles to longevity insurance products and greater competition to reduce fees.
Two other aspects of the system were not within his terms of reference: pension indexation and the age pension age, the only aspects so far addressed by the Government.
The Government rightly wants to move away from indexation based on average earnings (AWOTE). This index will move faster than community incomes as the population ages. But while CPI would protect the real incomes of pensioners, it is not appropriate as the sole adjustment factor in the longer-term. This will be most obvious to all if the Government sticks to it in February’s Inter-Generational Report: forty years of CPI-only indexation will reveal a dramatic reduction (up to a third) in the pension relative to community incomes.
There is a case for some reduction in the relative level of the pension. Rudd’s costly increase in 2009 following the Harmer Report (which was in response to Abbott’s reckless promise of a $30 a week increase) contributed much of the sharp increase in social security outlays in recent years and crowded out much higher priority increases in assistance for the unemployed, sole parents and those in private rental accommodation.
Once appropriate relativities are in place, all social security payments need to be regularly adjusted by more than CPI to maintain them. Biennial independent reviews should be set in legislation so that appropriate adjustments are made beyond automatic CPI indexation.
The Government’s proposal to increase the age pension age to 70 is over-the-top – the currently legislated increase to 67 comes on top of the very cost effective measures since the 1990s to phase out wives’ pensions, widow class B pensions and pensions for women under 65. We do not need to press everyone to work until age 70.
As Murray demonstrates, there are much better ways to improve the retirement incomes system, and to make budgetary savings.
Andrew Podger is Professor of Public Policy at ANU. He was formerly Secretary of the Department of Health and Ageing.
This article was first published in the AFR on 6 January 2015.
The recent suggestion of a modest user charge on patients of bulk-billing doctors, and the immediate reaction in the media, suggests the need for a more careful study of the appropriate role of co-payments in our health insurance system, and of other measures to contain costs while delivering an effective insurance product.
Ensuring everyone has affordable access to effective health services, while keeping total costs manageable, is the central challenge for any health insurance system. The very existence of an insurer raises the risk of moral hazard whereby consumers and service providers take advantage of the third party payer. This is exacerbated in the health system by the reliance patients have on the expertise of doctors and the extent to which doctors, understandably, wish to draw on the latest technologies to help their patients.
A fee-for-service system, as we have in Australia, adds to these problems, as doctors (and other health service providers) are rewarded financially by the number of services they provide, a variable they can influence particularly if the insurer meets all of the costs.
There are several ways of addressing this issue, all of which involve insurers acting more as purchasers of services on behalf of their members, rather than simply reimbursing costs. A number are already used in the Australian health system.
What is obvious is that our current approach is messy and not focussed on a system-wide strategy relevant to today’s challenges affected so much by chronic illnesses and the needs of the frail aged. There is the likelihood of continued over-servicing by bulk-billing GPs in particular, but also under-protection (and hence obstacles to access) for those unable to find a bulk-billing GP and for those referred frequently to specialists. The limited role of blended payments also means insufficient reward for preventive health services and high quality continuing care. There are also distortions such as people turning to (free) emergency departments for primary care services. Some international studies also suggest Australia relies too heavily on co-payments on pharmaceuticals (though Australians also pay large amounts voluntarily for ‘complementary medicines’ of dubious effectiveness).
The suggestion of a modest charge on non-concessional patients of bulk-billing GPs would not go very far to address these problems. A better approach with the potential to achieve greater long-term savings to taxpayers would be:
Private health insurers similarly should be encouraged to set total annual co-payment caps for their members’ hospital-related services.
An early dialogue with the AMA and other doctor associations (including the Colleges which focus on professional standards rather than just doctors’ financial interests) could develop a manageable reform agenda. Regional variations would need to be negotiated, with the new Regional Primary Healthcare Organisations perhaps playing a role so long as conflicts of interest can be managed.
This approach could be complemented by a more transparent system-wide budgetary control arrangement which helps to promote the optimal allocation of resources across programs to address health risks in the community. In the short to medium term, some notional health budget for the population in each region, with a soft cap, would assist allowing regions to negotiate agreements/contracts with doctors and other service providers within their notional budget cap to supplement or vary national fee-for-service prices, focusing in particular on the most appropriate support for the chronically ill and those at risk of chronic illness. (In time, private health insurers might play a greater role for their members including for Medicare services, by being offered their members’ Medicare ‘premiums’ otherwise managed through the regions’ budgets along the lines of the Bennett Report’s Medicare Select option).
The Abbott Government will not want to ignite public doubts about its commitment to Medicare and so is likely to move cautiously. A balanced strategy that clearly improves Medicare’s overall insurance product while introducing a more coherent system-wide approach to co-payments might be attractive politically as well as economically.
Andrew Podger was former Director General of the Department of Health and Ageing. He is currently Professor of Public Policy, College of Arts and Social Sciences, Australian National University.