The Australia Institute senior economist Matt Grudnoff tells why the Age Pension and other government payments are not giving recipients the standard of living other Australians enjoy.
The government has claimed as a virtue the biggest rise in the Age Pension in many years. But this increase is because prices have been rising at their fastest rate in many years.
While people tend to focus on the dollar value of incomes, economists like to look at what we call the real value. The real value is the dollar value with inflation removed.
For example, if you asked people would they prefer to live in a world where they earned $1000 or $800, most people would probably choose $1000. But an economist would want to know the prices of the things you usually bought in these worlds. If the things you bought in the world where you earned $1000 cost $1000 but these same things cost $700 in the world where you earned $800, you’d be better off living in the world where you earned $800.
The large increase in the Age Pension is just compensating people for the higher prices of the things they buy. While it might be a big increase in the dollar value of the pension, it is not a big increase in its real value. It is not necessarily making pensioners better off.
The inflation rate
Another important consideration is that while we all talk about the inflation rate, this is just the increase in prices for an average household and in the real world everyone has a different rate of inflation.
Let’s compare two hypothetical retired couples on the Age Pension. Our first couple is having lots of health problems and is restricted from travelling around except to medical appointments. They spend a significant amount of their income on healthcare. Our second retired couple is much more fortunate. They are healthy and tripping around Australia in a caravan. They spend a significant proportion of their income on transport.
While both couples are retired and on the Age Pension, they spend their money on very different things. If transport costs are rising much faster than health costs, then the couple tripping around would face a higher inflation rate. If healthcare costs are rising much faster than transport costs, then the couple who are unwell would face a higher inflation rate.
Since everyone has a different inflation rate, it is tricky to find one right inflation rate by which to increase the Age Pension.
Calculating the Age Pension
The current method is to increase it twice a year to either the Consumer Price Index (CPI) or the Pensioner and Beneficiary Living Cost Index (PBLCI). The CPI is the inflation rate faced by the average of all households, while the PBLCI is the inflation rate faced by the average household that gets the Age Pension and other similar payments.
Another important issue is why the Age Pension and other government payments are linked to inflation and not to the growth in wages. Wages usually grow faster than inflation.
By linking the Age Pension to inflation, you are fixing the standard of living of pensioners according to the amount of stuff they can buy with their pension. But standards of living usually go up over time. Think about the average standard of living for a household in the 1960s or `70s. It was lower than today because today we’ve had the benefit of 50 or 60 years of economic growth.
Some might argue that if it was good enough for households in the past, then it should be good enough for households today. But this ignores rising expectations. It also is effectively saying that we should lock age pensioners out of the benefits of economic growth.
It seems strange that we would choose to pick this particular segment of society to be excluded from rising living standards.
We can get bogged down in discussions about which inflation rate the Age Pension and other government payments should be linked to. But we need to ask the wider question of why we think these people should not share in Australia’s growing economy.
The Age Pension and other government payments should keep people out of poverty and they should be linked to wages and not inflation so that these people can share in rising living standards over time.
Do you believe living standards for pensioners are falling despite big increases in the pension? Why not share your thoughts in the comments section below?