The Age Pension bunfight

It’s unrealistic to expect the Age Pension to increase over time and unfair to future generations to expect them to fund it. Or so says a new report.

A recent report says the Age Pension is unsustainable and unfair to younger generations.

Authored by Simon Cowan from the Centre for Independent Studies (CIS) The Myths of the Generational Bargain states that increasing life expectancy, a higher proportion of people in retirement and pension increases means the amount workers need to pay to fund the pension is breaking the intergenerational bargain.

The CIS report makes four key recommendations:

  • to increase retirement age
  • to increase superannuation preservation age in line with retirement age
  • to reduce early access to superannuation
  • and to investigate more substantial superannuation reforms.

To bring some context to the report, it is useful to note that CIS is one of a group of independent Australian think tanks that will not reveal their funding sources. It does, however state that it supports ‘individual choice and liberty’ and an economy ‘based on free markets’. So it is fair to describe it as a right wing, libertarian organisation.

Research and commentary on retirement income, including the Age Pension and superannuation, is important to inform the debate on the best way to enable all older Australians to live a productive and dignified life in retirement. This report, however, is a narrowly focused, misleading summary of what might be done to make our retirement-income policy both equitable and sustainable. In fact, equity seems to be missing in action entirely. 

There are three fundamental flaws with the CIS analysis, which include its rewriting of history, its refusal to address the basic inequity of the current system and the assumption that all Australians have an equal opportunity to fund their retirement and to work until they drop.

First up, the rewriting of history. As with many politicians and commentators, Mr Cowan states that the pension was always designed to be a safety net. It wasn’t actually – when it was introduced in the Australian Parliament in 1908, it was commended with the following words:

“… it removes the idea of old-age pensions from any suggestion of a charitable allowance. An old man, who has done his duty as a citizen for 25 years (is) as much entitled to a pension as a commander-in-chief or a chief justice”.

The pension was intended as a reward for service.

As we have covered in our Retirement the risk is all yours article, there has been a steady shift of the risk of retirement income to individuals and away from the state. But this should not encourage commentators such as Mr Cowan to revise the original purpose of the Age Pension – where the welfare of older people was a collective responsibility of society.

And this leads to the point of equity. Australia’s current retirement system is simply unfair. It rewards a narrow band of wealthier citizens at the expense of all others, regardless of generation. So the Age Pension costs the country about $39 billion per year – but the cost of taxation concessions on superannuation is set to overtake this amount within a year. So to take aim at the expense of the pension without a serious consideration of the (soon to be) higher cost of super concessions is, to say the least, unbalanced.

In a report released by the Actuaries Institute (and at least we know who funds them!), it was noted, “There is also a 50-fold difference between wealthy Australians in the top 5 per cent income bracket who are about to retire, and those at the bottom 5 per cent”.

And this leads to the third and final point. Australia’s retirement income system is based upon an individual’s circumstances, particularly their employment. Those who earn a lot, save a lot. Those who save a lot can invest a lot in a tax-favoured structure which, in turn, helps them earn a lot more. Those who miss out are the low paid, the self-employed and women. This entrenched disadvantage must be addressed as, yes, we are living longer and so those with less will continue to need support. Raising the pension age is a crude response to a complex problem.

Tackling inequity is much harder but an even playing field in retirement will be fairer for all concerned – not just the privileged few. To return to the CIS report, and the belief in free markets, it’s worth bearing in mind that it is these same free markets which delivered the Global Financial Crisis in 2008. It was the taxpayer who was forced to bail out the big banks. In the words of Peter, Paul and Mary, “When will they ever learn?”

What do you think? Do you agree with the CIS report that the intergenerational bargain has been broken and the Age Pension age should be increased to cover costs? Or is there a better way of funding retirement?

Written by Kaye Fallick

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