Retirees need not live in poverty

With the economy slowing and incomes in many cases not even keeping up with inflation, people are doing it tough. And when things are tough, it’s always those at the bottom who are hardest hit.

Despite Australia recently being declared the country with the highest median wealth, we have a patchy record when it comes to rates of poverty. According to the OECD (Organisation for Economic Co-operation and Development), among developed countries, Australia ranks 23rd out of 36 for the proportion of people living in poverty – placing us squarely in the bottom half.

Proportion of people living in poverty in developed countries

Source: OECD

And while that record for a country such as Australia isn’t great, it gets worse when we drill down to poverty in retirement. If we look at the same developed countries, but now just look at that part of the population over the age of 65 who are living in poverty, we slip from 23rd to 33rd out of the 36 countries. That puts us fourth from the bottom.

Proportion of people aged 65 and older living in poverty in developed countries

Source: OECD

So why is Australia failing to provide an adequate income for those in retirement? Is it because the Government isn’t spending enough?

The two main ways the Government helps fund retirement incomes is through the Age Pension and superannuation tax concessions. There are other ways, such as excess franking credits, but the Age Pension and super tax concessions are the biggest contributors.

Combined, they are worth almost $90 billion a year. But what is interesting is the way in which each is growing. Super tax concessions are growing more rapidly than spending on the Age Pension. The graph below shows spending on the Age Pension and super tax concessions as well as projections out to 2021-22. While spending on the Age Pension is larger than super tax concessions, the gap is closing. It won’t be much longer before super tax concessions are bigger than spending on the Age Pension.

Spending and projections for the Age Pension and superannuation tax concessions

The $90 billion per annum expenditure on the Age Pension and super tax concessions is enormous, yet it doesn’t include excess franking credits, the seniors and pensioners tax offset (SAPTO) and other perks.

So why do we have such high rates of poverty in retirement?

The answer is how we’re spending the money. While the Age Pension is reasonably targeted, many other parts of the retirement income system are not. Super tax concessions, one of the fastest growing areas of retirement incomes, overwhelmingly go to those who are unlikely to need help in retirement.

Because of the way super tax concessions are structured, the more you earn the bigger your proportion of concessions. This leads to a situation where 60 per cent of super tax concessions go to the top 20 per cent of income earners with only 11 per cent going to the bottom half.

Excess franking credits are much worse. Looking at households according to wealth, a staggering 90 per cent of excess franking credits go to the wealthiest 10 per cent of households and almost nothing goes to the bottom 70 per cent.

The reason that poverty can exist at the same time as substantial retirement income support is that so much of it is going to those who are never likely to be in poverty.

The solution is to shake up how we hand out government support for retirement incomes with a focus on reducing poverty in retirement and simplifying the whole system. We can do that with a Universal Age Pension.

Super tax concessions are large. They’re expected to be more than $50 billion a year by 2022. If we get rid of all super tax concessions, money is freed up to increase the rate of the Age Pension and make it universal. A universal pension means it is paid to anyone of retirement age, regardless of income or assets.

This will make the whole system much simpler. No more income and asset tests. No more worrying about the impact that working a few hours a week will have on your pension payments. In turn, this reduces administration costs for both retirees and the Government.

Research by The Australia Institute shows the pension amount can also be increased – from 30 per cent to 37.5 per cent of male total average weekly earnings. The base rate for the single pension would be increased from $850 to $1107 per fortnight. The partnered rate would see an equivalent increase.

The Superannuation Guarantee, which is the 9.5 per cent compulsory super contributions, would continue. But super would be an extra on top of the Universal Age Pension. If you didn’t accumulate enough super through your lifetime, you would still be supported by an Age Pension that allowed you to live with dignity.

All of this would be funded through the removal of superannuation tax concessions. But due to the size of these concessions, there would still be around $15 billion to $20 billion per year left over.

This money could be put into a fund to help with another looming crisis – the increasing number of retirees renting with little to no savings. Retirees who rent are at great risk of poverty. With falling rates of housing affordability, the number of people renting in retirement is expected to increase – to 50 per cent of retirees by 2050.

The $15 billion to $20 billion per year could fund a substantial increase in public housing for retirees. This would make a big difference to rates of poverty in retirement.

Australia spends enough today to dramatically decrease the number of retired people living in poverty. But at the moment we spend it in entirely the wrong way. A Universal Age Pension at a higher rate could allow many more Australians to live in retirement with dignity.

Do you support the concept of a Universal Age Pension? Would it make your life easier and more comfortable?

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Related articles:
Age Pension ‘generous’: Minister
Age Pension ‘too complicated’
Retirement pillar is crumbling

Written by Matt Grudnoff

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