The solution to the retirement poverty trap
Retirees are hurting with one in four now living in poverty in Australia. Matt Grudnoff, a senior economist at The Australia Institute, has the solution.
Rising electricity prices and housing costs are hurting many retirees. I’ll repeat those words – hurting many retirees. The stark reality is that one in four retirees is living in poverty.
There is considerable government and community focus on how rising costs are affecting young people, but retirees who rent are bearing the brunt of the price increases.
The Retirement Affordability Index™ was established by YourLifeChoices and The Australia Institute to shine a light on exactly these issues. The index for the December quarter shows that the cost of living is rising fastest for retirees who rent, the tribe on the lowest incomes and who can least afford soaring electricity bills.
The problems highlighted by our index are particularly stark when viewed in an international context. The Organisation for Economic Cooperation and Development (OECD) ranks Australia as the third worst for rates of poverty among retired people in the 35 developed nations – behind Korea and Latvia.
Disturbingly, the organisation estimates that a quarter of retired Australians live in poverty, which is twice the OECD average of 12.5 per cent.
Australia’s retirement income system must be made simpler and the amount of money paid via the Age Pension must be increased to permit retired people to live in dignity.
What can we do about this problem? Are there solutions?
At the heart of the problem is an Age Pension system that is both inadequate and hugely complex. But there is a solution – a Universal Age Pension.
There are two parts to government support for incomes in retirement: the Age Pension and superannuation tax concessions. The means-tested Age Pension provides income support directly for those who qualify and superannuation tax concessions increase the value of workers’ super over their lifetime, making more funds available in retirement.
The means testing of the Age Pension results in pension payments being focused mainly on lower income retirees, while the far less means-tested superannuation tax concessions mean that the majority of the tax concessions go to high-income earners.
The Government likes to tell us that the Age Pension is unsustainable. However, over the past three years, spending on the Age Pension has grown by an average of four per cent a year, while superannuation tax concessions have grown by an average of 10 per cent per year. And Treasury predicts the concessions will grow by that same amount for the next three years.
This year, the combined cost of the Age Pension and superannuation tax concessions will be $80 billion. The problem is not that too little is being spent to support incomes in retirement, it is that too much of it is being spent providing a subsidy to those with multimillion-dollar super accounts, while many retired people continue to live in poverty.
A solution is to combine the two parts of the retiree income support into a Universal Age Pension. A Universal Age Pension would be a payment made to anyone over the age of 67, regardless of their income or assets. A similar system operates in New Zealand, which has a poverty rate of one in 10 compared with our one in four.
The main advantage of a Universal Age Pension is that the whole system becomes simpler. It reduces the cost of administration to both the Government and to retirees. No more having to work out if you’re eligible for a pension or part-pension. No more asset or income tests.
The rate of the Universal Age Pension also needs to be increased to tackle the scandalous rates of poverty among Australia’s retirees.
The Universal Age Pension would be increased from the current 30 per cent of total male earnings to 37.5 per cent of total male earnings. The single pension base rate would rise from $814 per fortnight to $1063 per fortnight and the couple rate by a commensurate amount.
This would be funded through the abolition of superannuation tax concessions.
If this occurred, not only would the Universal Age Pension be fully funded but the Government would also have change left over to the tune of about $15 billion per year.
The reason for this is that the cost of superannuation tax concessions has been rising rapidly and in the next few years is likely to be more costly than the Age Pension.
The superannuation guarantee – the compulsory 9.5 per cent of workers’ income that employers pay into employee super accounts – would continue. Without superannuation tax concessions, super balances would be lower, particularly for high-wealth individuals, but super would become a top-up to the Universal Age Pension.
The idea is that the Age Pension would be universally available and sufficient to sustain people in retirement. It would end the situation where the inequality in people’s working life is magnified by superannuation in retirement.
The Universal Age Pension would also improve older people’s participation in the workforce. The choice to work even a few hours has meant possibly having your pension reduced. With a Universal Age Pension, additional work will not change the amount received.
New Zealand, with its Universal Age Pension, has higher work participation rates for older workers than Australia.
The $15 billion per year that this policy change would save could be used to increase public housing stocks for retirees who don’t own their own home. This would further strengthen the safety net for retirees who rent.
The idea that the Age Pension is unsustainable and that we need to accept the high rates of poverty facing retired people is simply wrong. Reform does not need to break the budget. We just need to more efficiently and fairly distribute the money already being used to boost retirement incomes.
A system with integrity and fairness at its core should reflect the underlying purpose of having a pension in the first place: Every Australian should be able to live in retirement with dignity.
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