Chapter 3 focussed on the unique generosity of our government in offering all qualifying residents over the age of 67 access to a valuable inflation adjusted age pension. Assuming a 5% compounded annual inflation adjusted return above inflation, this approximates to a gift of approximately $400,000 for a single person and $600,000 jointly for a married couple. More realistically, unless the Future Fund is earmarked to help pay future age pension bills, on an unfunded basis with no investment return, the inflation adjusted value of the age pension is a much higher approximate value of $600,000 (single person) and $900,000 (married couple combined).
Without any levies or special taxes to fund outlays, successive governments have for many years limited annual outlays by controlling access to the age pension using both an assets and annual income test. Under these two tests, Centrelink sets the actual pension payment as the lower amount determined under these two tests.
Prior to the commencement of compulsory employer superannuation contributions in the 1990s, voluntary superannuation tax concessions helped many taxpayers to accumulate assets for retirement purposes. However, until 1999 when compulsory employer superannuation contributions were increasing, fund members were able to access their superannuation benefits before retirement age. Even today when compulsory employer contributions have peaked at 12% of salary (subject to a high annual cap), individuals are able to access their benefits before reaching age pension age starting after the age of 60.
As highlighted in Chapter 3, superannuation tax concessions reduce tax collections by around $60 billion annually and are increasing rapidly annually. Yet the government has no formal arrangements to ensure that retirees keep the capital accumulated and use it for retirement purposes and by doing so generate reductions in age pension outlays from age 67 onwards.
Unlike Australia, many overseas countries limit the ability to draw superannuation as a lump sum requiring retirees to draw benefits as a retirement income stream. Australia has no such obstacles to the use of accumulated benefits available after age 60. Even though the age pension tests assess income streams more generously than assets, the assets test provides major loopholes that cushions its impact especially on wealthier retirees. In particular, the total exemption of the family home and ignoring gifts of assets after a 5-year period cushions the adverse impact on many retirees and results in the income test deciding most entitlements.
Apart from increasing pension entitlements, the design of the assets test encourages over-investment in the family home and interferes with the rational use of the housing stock by discouraging movement to more suitable retirement accommodation. The absence of gift taxes also helps the disposal of assets to family members to increase pension entitlements in future years.
Given the crucial role of the income test in deciding pension entitlements, welfare groups and other commentators focus their criticism on the combined impact of the 50% pension income test and a 32% marginal income tax rate for discouraging part pension recipients continuing or limiting their employment after age 67. Addressing this issue would also help address skilled labour shortages and improve retirement living standards.
These defects and continuing budgetary pressure from our ageing population create the need for a fundamental reconsideration of the structure and design of both the assets and income test. The goal of course includes encouraging improvement in living standards as well as ensuring that retirees use their heavily subsidised superannuation benefits for retirement purposes. Simplifying the system and encouraging people to use their assets to boost their income in retirement will help achieve do so.
As discussed in Chapter 10, the Fraser government rejected a SWPS proposal to sell the age pension to eligible retirees at its actuarially assessed value. With the much higher level of indebtedness now, the potential benefits to both the government and retirees now justify a reconsideration of this option. In effect, retirees buying the age pension would be prepaying the cost to the government of doing so thereby reducing the short- and medium-term borrowing requirements.
Obviously, this would not appeal to retirees with few assets eligible for the age pension under both the asset and income test. But for those selling their house or with no close relatives or struggling to manage their investments, this would be an attractive certain source of retirement income.
Compared with the other private sector alternatives of achieving a low or risk-free income that keeps up with inflation, a government guaranteed product would provide a certain income and help compensate for no longer having access to the capital invested. Long term private sector annuity products by their very nature cannot avoid risks and uncertainty especially when adjustment for inflation is involved. The government in providing the annuity has the further advantage of knowing that purchasers of the pension will not be able to claim a pension later in like as the current income and assets tested arrangements permit.
Offering this option would help the introduction needed changes to the assets income test as outlined below. Without detailing precise suggested annual payments, four fundamental changes would improve both the equity and efficiency of the current system. The first would extend the period for ignoring gifts of assets after age 60 (the superannuation access eligibility age) from 5 to 10 years. The second would be to replace the $30 income test free area by an added $15 a week in pension meaning that all income would be subject to the 50% income test.
The third change would be to include the family home in the asset test increasing the asset test limit by $1 million for a couple and $750,000 for a single person with renters keeping their present higher threshold. For valuation purposes, increasing the original assessed value annually for inflation would be consistent with the the same adjustment of the annual pension entitlement. Homeowners should be able to seek a revaluation of their property at three yearly intervals to deal with situations where the inflation adjustment results in over-valuations.
Increasing the annual pension entitlement by an added $15 a week, making the increase $30 in total would partially reduce the impact of the changes on retirees owning low valued homes as well as further assist renters. The fourth change would not levy income tax on pensioners, relying solely on the 50% income test on all income and the assets test to reduce the overall cost of the system. This would ensure that the maximum reduction in pension entitlement from work is 50%.
Further help for retirees ineligible for an age pension under the income and assets test who opt to buy an age pension at its actuarial value could include only taxing other retirement income with no threshold at the standard 32% rate.
Combined these four changes would both reduce the number of pension recipients and help ensure its distribution on a fair basis. The structural change abolishing the free area and increasing the pension size would particularly help lower income recipients of the age pension,
Given that Centrelink does not have data on the value of owner-occupied homes owned by pensioners, I am unable to cost these proposals to find their overall impact on outlays. Nevertheless, despite the proposed increase in pension entitlement of up to $30 a week and the change in income tax arrangements, the savings in reduced payments to homeowners would exceed the added cost of the higher pension.
More importantly, these changes would encourage retirees to reassess the suitability of their owner-occupied home to meet their needs while not affecting retirees owning modestly valued homes. By removing the current social security advantages of owning an expensive home, these changes would help improve the efficiency of the property market.