Australia’s pension and superannuation tax concessions are costing the government billions, with costs continuing to rise. The Australia Institute researchers David Ingles and Richard Denniss argue there is another way to best serve the elderly.

As Australia’s population ages, government policies that assist retirement will become even more essential. Superannuation tax concessions and the age pension, the two key government policies that assist the ageing, are becoming increasingly expensive.

Increasing costs have prompted Treasurer Joe Hockey to suggest the pension age be increased to 70, part of an austerity narrative being used by the government to justify broader spending cuts to health, education and welfare support. A new paper from The Australia Institute shows super tax concessions, most of which are being claimed by people able to afford early retirements if they choose, will soon cost more than the age pension.

The age pension currently costs $39 billion, and superannuation tax concessions will cost the budget around $35 billion in 2013-14. These concessions are projected to rise to $50.7 billion in 2016-17, an increase of around 12% per annum. By this time superannuation tax concessions will be the single largest area of government expenditure. The overwhelming majority of this assistance flows to high-income earners.

Low-income earners receive virtually no benefit. The combined cost of these two policies will be $74 billion in 2014 alone. With an ageing population the dual pension/superannuation system will become increasingly expensive. The government’s own projections are that the cost of super tax concessions as a share of GDP will exceed that of the age pension by 2016-17.

There’s an alternative model that could produce a fairer, more adequate and more sustainable retirement system: abolish tax concessions for superannuation and create a universal (non-means-tested) age pension. It’s similar to the approach taken in New Zealand, where labour force participation among older people is higher than in Australia.

A universal age pension would be particularly beneficial to those groups whose superannuation balances are low, such as low-income, seasonal or intermittent workers, the self-employed or those who have long periods of time out of the workforce (e.g. predominately women who care for children/ageing parents). A universal pension would create a level playing field among income groups and reduce the inequality in Australia’s retirement system. Superannuation could then act as a top-up for those who can afford it.

The single pension could be lifted from 30% of male total average weekly earnings to 37.5%, with a consequent lift in the partnered rate. This would raise the pension rate for singles from $21,018 per annum to $26,273 per annum and the pension rate for couples from $31,689 per annum to $39,611 per annum. This system would cost $52 billion a year, almost 30% less than we spend on both the pension and superannuation tax concessions.

This research uses a 15- to 25-year phase-in period for illustrative purposes only; the precise phase-in method can be varied to suit policy objectives. The proposed transition options mean that the immediate cost of the new scheme is a lot less than the immediate revenues flowing from abolition of tax concessions. Revenues are brought forward, whereas costs flow on many years down the track. This produces the interesting result that, while the scheme is revenue neutral in the long term, it produces a large net saving to the government in the short term. This must be of some interest to governments facing budget stringency caused by the slowing of the mining boom.

Such an increase in the pension rate would help to alleviate poverty among the aged. Additionally, government assistance by income class would become more progressive than it currently is. Whereas the present system of tax concessions for superannuation contributions favours high-income earners, the new system would more closely reflect the existing taxation rates applicable at each income level.

Although the cost of a universal age pension will rise over time, the cost of the existing combination of age pension and superannuation tax concessions will cost more. On that basis the policy proposed in this paper is more sustainable.

*This is the summary of Australia Institute report Sustaining Us All In Retirement: The Case For A Universal Age Pension, published today