A SECURE, LIVEABLE INCOME FOR ALL OLDER AUSTRALIANS A COTA AUSTRALIA POSITION STATEMENT APRIL 2015 A SECURE, LIVEABLE INCOME FOR ALL OLDER AUSTRALIANS There is an urgent need for an informed, evidence based national review of income security for older Australians. It must be commissioned by Government but led by independent experts, be comprehensive in scope, and draw on the best policy and economic evidence, expertise and imagination available and actively involve all significant stakeholders. COTA believes that Australians want and expect all older people to have a secure, liveable income. We recognise this vision presents some fiscal challenges as the Australian population ages, but COTA argues that to fall short of achieving it is both unacceptable and unnecessary. Finding a sustainable, efficient and equitable future policy platform for retirement incomes is a strategic imperative for Australia, both economically and socially, and there is an increasing range of voices calling for action to achieve this. The Age Pension has been, as matter of bipartisan policy, the historical bedrock of income support in retirement for the large majority of Australians. Its existence as the anchor pillar of retirement income has been a key part of the social compact between governments and citizens for many decades. Over the last four decades Governments of both persuasions have extended and improved the Age Pension, benchmarking it to the living standards of the working population. The option of adopting a European style national superannuation system was the subject of major reviews but never adopted by government. The pension and voluntary savings, including fragmented and inefficient voluntary super, were Australia’s settings until 1992 when our compulsory superannuation system was introduced and added to the mix. Our compulsory superannuation system is still far from being a mature system. It has suffered in particular from the contribution level being capped at much less than was originally intended, and now delayed for many years, as well as by temporary surcharges and other changes. Nevertheless over the next couple of decades superannuation will achieve much of its intended purpose as a supplement and part replacement of the age pension. As the IGR predicts the very fact that the age pension as a proportion of GDP rises from 2.9% to only 3.6% over 49 years is testament to the impact of super in creating a much higher proportion of part rather than full pensioners. However there are many ways in which super can and must be improved to better achieve a sustainable retirement incomes regime. These must be based around compulsory, preferentially taxed super having the single objective of creating significant improvements in retirement income for most people. 1
Improvements must include changes to the superannuation taxation regime to make it more effective as well as fairer, and stop wasting taxpayer funds; and improvements to the post retirement phase so that it achieves higher levels of retirement income without significant individual risk. COTA also recognises that the retirement income system does not exist in isolation from other parts of the social security system and indeed of the federal budget as a whole. COTA would argue that taken on its own the age pension system is sustainable, as indeed Treasury said it was in the 2009 Federal Budget when the pension was last reviewed and the single pension increased (strongly supported by the Coalition). As noted the IGR predicts that despite a doubling of the over 65 population and continued increases in longevity, the age pension only increases from the current 2.9% of GDP to 3.6% over 40 years on current legislated policies. This compares for example with increases in healthcare costs from 4.2% of GDP now to 7.1% under policies in place before the 2014 Budget – a 70% increase; and aged care costs rising from 0.8% to 2.1% of GDP and even to 1.7% after 2014 Budget reductions – an increase of 212%. Funding for these increases has to be found. Later in this position statement we address the appalling level of the Newstart Allowance on which hundreds of thousands of mature age unemployed people are forced to subsist. We support an increase in Newstart. This has a cost that must be found. So the retirement income system – in particular its age pension and superannuation components ‐ must co‐exist with other claims on public expenditure. However we also need to take note that a major cause of the federal budget deficit is the rapid reduction in the amount of revenue that is being collected. According to the OECD, the IMF, the World Bank and our own Commonwealth Treasury, the level of tax being collected in Australia is not just low by international standards; it is low by historical standards. Calculations by the Australia Institute show that if the Abbott Government was to just restore total taxation to the same proportion of GDP as throughout the Howard government this would result in tax collections increasing by around $35 billion per year. The Federal Government’s Taxation White Paper process is therefore of crucial significance for retirement incomes policy and other social policy. COTA has been calling for a Retirement Incomes Review (RIR) by the Australian Government since April 2014. This proposal is a central recommendation of this statement. This call has been supported by a wide range of other organisations including the Australian Council of Social Service (ACOSS), the Financial Services Council (FSC), and the Business Council of Australia (BCA). 2
ACOSS’s Federal Budget Submission makes a number of specific recommendations on the operation of the superannuation system (in particular taxation treatments and preservation age) and the age pension (in particular tightening the assets test and axing the Seniors’ Supplement). COTA agrees with ACOSS that these are essential matters to resolve and should form part of a Retirement Incomes Review. While the case against the sustainability of the Age Pension remains to be made and should be considered by the Retirement Incomes Review, COTA agrees that debate around pension eligibility in reference to assets, other income and age is more appropriate than reducing the income of full and substantial part‐pensioners who have little or no other assets and income. The recommendations we make in this section of the statement are designed to improve the standard of living for Australia’s most vulnerable older people by developing a retirement incomes system that is fair, efficient and sustainable and delivers optimum retirement incomes for all. They are also fundamental to creating the environment for cooperation and collaboration across the community to tackle the challenge of income security for older Australians. Central to them is an independent, comprehensive Retirement Incomes Review that has the full engagement of all key stakeholders and therefore the potential for a substantially bi‐partisan policy framework for retirement incomes over the next forty years. All the following comments and recommendations are made within this context. Age Pension policy If we project forward the Government’s pension policy proposals in the 2014‐15 Federal Budget, older Australians face an unacceptable, dystopian future where a large proportion of them would be living in escalating degrees of poverty not seen since the Depression era. The government proposed to change pension indexation to CPI only. Currently pensions are indexed by the better of the six monthly increase in CPI, PBLCI (Pensioner and Beneficiary Living Cost Index) and MTAWE (Male Total Average Weekly Earnings); with a guarantee (“benchmarked”) that the couple rate will never be below 41.76% of MTAWE. The single rate of pension is set at 66.33% of the combined couple rate, which is equal to around 27.7% of MTAWE. Since the last Budget some Ministers have suggested that pensioners are better off with CPI increases than the current system, since wages growth is currently slow. This is disingenuous as the current system, explained above, provides a safety net by taking whichever of CPI, PBLCI and MTAWE growth is higher. It is also incorrect to say that under CPI indexation the pension will always go up (nominally) every six months, as there have in the past been periods of zero or even negative CPI, when pensions did not move. 3
Australian National University’s Professor Peter Whiteford tells us what will happen if the Bill currently before Parliament is passed and the indexation regime is changed right through to 2055 and beyond. Professor Whiteford calculates the age pension will reduce from 27.7 per cent of average earnings now to 16.3 percent in 2055. In current dollars – in other words if we were now in 2055 ‐ that would reduce the single pension from $427 per week to $251 per week ‐ $176 per week less! Frankly many aged pensioners would die as a result. Similarly the Commission of Audit predicted a roughly $80 per week reduction over a decade based on using both COI and PBLCI. Looking retrospectively if the CPI had been used since 2009 the pension would already be over $30 per week or around $1600 per year less. COTA is bemused by the government’s focus on reducing pension indexation, which up to 2014 has had bi‐partisan support. In the lead up to the 2104 Budget the Treasurer publicly expressed concern about people with substantial assets and income still being eligible for a part pension. Others have expressed similar concerns, including ACOSS in successive Budget Submissions. However that issue, if it is an issue, must be tackled by reviewing the assets and income tests, not by cutting indexation. Cutting indexation has its major impact on full rate pensioners – those who by definition have the least in other assets and income. It has its least impact on those with higher assets and income who may only receive a few dollars a week in pension (plus the Pension Supplement, which is unaffected by the changes, and is paid at a lower rate to part pensioners however little they receive in pension). There are signs that the government is beginning to realise this. Minister Morrison recently floated the idea of the pension being indexed by CPI but being required to conduct a review of pension adequacy every three years. That’s not a great idea because it introduces uncertainty and regular friction into a system that needs stability and certainty, but at least it recognised that adequacy would be a significant issue under reduced indexation. The other major change in the government’s 2014 Budget proposals was to extend the age of eligibility for the pension to 70 years in six monthly increments to 2035; up from the 67 years it is already legislated to reach by July 2023. There are strong demographic arguments for such a change as people’s life expectancy and capacity to work has increased significantly. However we still face a stratum of entrenched age discrimination in too many businesses; one quarter of people on Newstart are over 55 years and they comprise over a third of the long term unemployed. We have to better address that problem before we lift the pension age further. The government also needs to clarify what is going to happen with the Disability Support Pension post the McClure Review, as the DSP supports people no longer able to work but not yet eligible for the age pension. 4
The other pension measures in the 2014 Budget were to freeze the pension income and assets tests for three years from 2017 and to reduce the deeming thresholds from their current to 1996 levels – from $46,600 to $30,000 for singles and for couples from $77,400 to $50,000. These measures are stop‐gap in nature. If the community believes there is a problem with the asset or income levels for pension eligibility then we need to review them and get them right. Freezing them for three years then restarting indexation is not a sound answer. The same applies to the deeming thresholds. In summary the changes to pension indexation in particular will dramatically reduce the standard of living of pensioners. Full rate pensioners (those most in need) will be hit the hardest by the proposed changes, while the area of real community concern about pensions – people with high assets receiving a part pension – is not being tackled. According to the Department of Social Services, in March 2014 there were nearly 2.4 million people receiving an Age Pension. Many of these older Australians rely principally or entirely on the pension to make ends meet. Many already often struggle to live in dignity and will face poverty as the changes eat into their standard of living. Recommendation 1: The Government withdraw its Bill containing provisions to change Age Pension arrangements currently before the Senate to allow proper consultation and consideration by a Retirement Incomes Review. Recommendation 2: While COTA has argued for “everything to be on the table” in a Retirement Incomes Review, COTA recommends that the Government commit to abandoning any approach to pension policy that disconnects pensioners’ standards of living from that of the working age population, for example through indexation arrangements that will diminish most the income of full pensions. Superannuation policy Along with the age pension, compulsory superannuation, and additional tax assisted superannuation savings, are an integral pillar of retirement income policy. Introduced in 1992 compulsory and tax concessional superannuation has not yet been fully implemented as planned; has had some additional benefits added to it that are neither equitable, nor effective, nor sustainable; and unintended consequences have developed at the upper income and asset end. The Financial System Inquiry has called for changes to the superannuation, starting with a clear statement of its objective, and consequent reshaping of its features to achieve that. 5
As FSI member and leading Company Director Carolyn Hewson was quoted recently in The Australian as saying: The superannuation system had become “a very tax‐effective savings scheme for the rich”. “We have never established an objective for our super system. What it should be is a retirement income system,” she said. “The tax concessions as they sit at the moment are not suited to achieving the objective of providing for retirement income.” While there are arguments about the full cost of tax concessions on super and whether they could all be recovered or would in part move elsewhere, Treasury figures now indicate that the full costs of those concessions ‐ on contributions, on earnings (including capital gains), and on pensions paid out from superannuation – will this year exceed the cost of the age pension and will rise faster than its cost over coming decades. That alone justifies a detailed review. One of the rationales of the concessions is that they encourage people to put in extra super and them become non‐dependent or less dependent on the age pension. However if the concessions are costing more than the pension itself they need to be reviewed as to whether they are fit for purpose. What is worse is that it is estimated that roughly half of these concessions go to the top 20% of income earners in Australia, most of whom would never be eligible for the age pension anyway, so half the concessions are adding to the wealth of richer Australians without saving the government and majority of taxpayers anything. If the same quantum of contribution tax concessions was deployed differently – for example to provide all income earners with the same financial reward for saving beyond the compulsory level ‐ there would be a more effective use of tax forgone that would have a material impact on age pension expenditure, taking more people out of the pension altogether, others from full to part pensions, and many from part pension to lesser part pension. COTA believes the government should do more to assist those on low‐incomes across the generations to build savings that will help them to avoid disadvantage in retirement. COTA is particularly uneasy about the inequitable way in which government support through superannuation tax concessions is apportioned. COTA believes that the superannuation system has suffered from fundamental policy neglect. It has been allowed to shift into becoming a successful wealth management system for the well‐off rather than remaining focused on generating optimal retirement incomes for the vast majority of retirees in ways that are sustainable for the country as a whole. Last year’s Budget measures sought to reduce the living standards of pensioners while leaving intact large superannuation tax concessions to high income earners and well off superannuants. Many tens of thousands of high income earners get tax concessions bigger than the value of the single pension, even though these concessions are not required to 6
induce such well‐off individuals to provide for themselves in retirement rather than rely on the Age Pension. COTA has repeatedly identified this situation as not only inequitable, but economically unsustainable for Australia, and unjustifiable in a climate of fiscal constraint where those with the least are expected to carry the largest burden of public funding cuts. In addition, an obvious, significant potential source of revenue generation is being foregone by the Government. Recommendation 3: The Government examine the superannuation tax concessions regime through a Retirement Incomes Review, for its fairness and effectiveness in strengthening the delivery of optimal levels of retirement income for the vast majority of retirees through the superannuation system. Newstart Allowance A significant fear about impact of the 2014‐15 Budget measure to continue the pension age to 70 years over time will be that many older people, unemployed due to age discrimination and lack of jobs, will stay on Newstart Allowance for years longer. It remains the case that too many older people of pre‐Age Pension age and still in the workforce face significant barriers to retaining their job and to re‐entering employment if they become unemployed. Mature age workers make up just over a quarter of the Newstart population and about one third of the long term unemployed, with many unemployed for over two years. The gap between Newstart Allowance and pensions has widened too far. It is currently about $172 a week for a single person ($149 per week for people over 60 and unemployed 9 months or more), and widening, while differential indexation approaches continue. People who rely on allowances are living in poverty. If the current indexation arrangements are maintained and there are no real increases in the allowance, Newstart will only be worth half the pension in 20 years’ time. It is clear that measures need to be taken to ensure the gap does not get any wider. This could be addressed by aligning indexation arrangements for both the pensions and Newstart allowances to movements in full time wages. COTA supports ACOSS’s call for an increase to allowances in the 2015‐16 Budget. Recommendation 4: The Government increase single rate Newstart allowance payments by $51 per week from March 2016. 7
Recommendation 5: From March 2016 the Government index allowance payments every six months to movements in a standard Australian Bureau of Statistics measure of typical fulltime wage levels. Pensioner Concessions In the 2014/15 Budget the government terminated from 30 June 2014 the partnership agreement with States and Territories covering part funding of pensioner / CSHC‐holder concessions. This was done without notice to the States and Territories. The Australian Government contributed about 10% of the value of state and territory concessions. The short notice of withdrawal of funds to support concessions left the States and Territories little time to rearrange budgets. Most jurisdictions covered the shortfall in the first year (not WA) but not all have committed to continuing to do so. In jurisdictions where the cost of providing these concessions is not picked up by the relevant government, older people face an immediate reduction in their quality of life through higher costs for essential services. COTA’s constituency has been especially alarmed by the likely impact of the Australian Government’s withdrawal from part‐funding the States to deliver pensioner concessions. Concessions often make a real difference to access to essential services and to pensioners’ standard of living. Concessions form a longstanding and important part of the retirement income framework. The Commonwealth should not have withdrawn its contribution without notice without an agreement with States and Territories to secure these concessions over the long term. Recommendation 6: The Government reinstate the National Partnership Agreement on Certain Concessions for Pensioner Concession Card Holders and Seniors Card Holders in the next financial year, and ask the Retirement Incomes Review to consider the role and finding of concessions, including provision for a longer term of notice of any future changes. A Retirement Incomes Review COTA believes that piecemeal changes made to separate parts of the retirement incomes system will achieve neither security nor affordability of retirement incomes over the longer term. Australia needs certainty about retirement incomes policy that can only occur if there is bi‐partisan support for a framework that covers pensions, superannuation, taxation, concessions, support for workforce participation, and other related policy. COTA reiterates our call for an independent, comprehensive, participative Retirement Incomes Review, where: 
consensus is sought on the desired outcomes of retirement incomes policy; 
both Budget expenditure and revenue issues are explored; 8

the efficiency, effectiveness and impact of current and proposed retirement incomes policies are analysed in their own right and in terms of their impacts on each other; and 
related matters (such as the barriers and incentives for workforce participation by older Australians and the interface between employment earnings and retirement incomes) are given full consideration. We also stress that older people are not a homogenous group. A review of retirement income policy should take into account the current evidence that shows how past policies and systemic inequalities compound to create relative disadvantage for some groups in retirement. Mechanisms to avoid a continuation of this dynamic should be built in to any new policy regime. Such tailored policy solutions could assist, for example, older women and Indigenous Australians who enter retirement with lower rates of home ownership and superannuation. The Retirement Incomes Review should take into full account the deliberations, findings and as available recommendations of the Financial System Inquiry, the Intergenerational Report 2015, the Tax Reform White Paper process, the Federation White Paper process and the Review of Australia’s Welfare System (the McClure Report). COTA notes growing support for the COTA proposal for a systematic Retirement Incomes Review by key stakeholders including repeated calls for it made by the Business Council of Australia (e.g. Jennifer Westacott’s Australia Day address); the Financial Services Council; ACOSS and various seniors groups. While some government Ministers have talked positively about the possibility of such a Review, COTA understands that definite decisions have not yet been made on whether to hold the Review and its form. The Review must be announced in the 2015 Budget context. COTA is committed to working with Government and other stakeholders to build a broad consensus around the objectives and operation of Australia's retirement income system. This offers a once‐in‐a‐generation chance to deal with the challenges of ensuring fiscally sustainable, adequate and secure income security for older Australians as the population ages. Recommendation 7: The Government commission a Retirement Incomes Review in the 2015 Budget, with:  with an independent chair and expert members,  incorporating a public engagement process involving key stakeholders,  working in tandem with other recent government policy reviews and those currently underway, to report by early 2016. The Review to cover pensions and allowances, all aspects of superannuation policy, the taxation treatment of assets and income in superannuation accumulation and retirement, issues affecting mature age workforce participation. 9