IN THE BEGINNING
The recent changes to the age pension accepted by the Senate are the result of careful preparation. When the LNP planned the 2013 election they knew what most people wanted to hear: No cuts to health, education, pensions or SBS and the ABC. But they also knew they were going to cut funding to all of these things. What answer would they give to the "broken promises" criticism? They developed a wonderful scare campaign: Australia faced an imminent financial disaster hidden by Labor! Government debt was too high, and this would destroy Australia's future!
MASSIVE DEBT - THE BIG PROBLEM OF 2014
As soon as the Abbott government took office they said again and again that Australia's debt was too high and disaster was just around the corner. They set up an "audit" of government finances. In the business world an audit reveals the financial health of a firm. However this audit was special because it only looked at the expenditure of the Federal Government. The question asked was: Where can we spend less money and avert disaster? Nobody would run a business in this way. In a real audit one would look at expenditure and income to assess a firm's financial health. Any business that was unconcerned with income would soon be bankrupt. But for government, income derives from taxes, and the LNP did not want to increase taxes.
AUSTERITY IS A SCAM
Still, the fear of massive debt did not work well for the LNP. Many of the proposed cuts in the 2014 budget did not pass the Senate and the world did not come to an end. In fact, there never was a serious problem of the Australian Government accumulating a massive debt. Australia’s level of government debt is one of the lowest in the West. In fact the LNP government themselves increased the level of Australia's debt, but somehow the “fear of debt” message dropped out of the media. The LNP have given no account of how the big problem of 2014 was fixed. They just don't talk about it any more.
REBOOT 2015: NO AGE PENSIONS FOR MILLIONAIRES
While the LNP have scrapped the scare campaign, they are still insist that austerity, cuts to government expenditure, is the only way to go. Perhaps they don't need to repeat the scare message as it is now firmly fixed in people’s minds. The story they have spun this time is that pension levels need to be cut because millionaires should not get the age pension. The LNP seized on the growing negative feeling toward "the rich". In effect they say: "Yes, the rich are the real problem. There are millionaires getting the pension which should only be paid to the poor."(1)
On cue the Australian Council of Social Services (ACOSS) came up with an alternative to the draconian cuts to the age pension in the 2014 budget. They propose a "compromise" which takes the pension from those rich people who don't deserve it, and gives more money to poorer people who do. Further, this new plan will save the government 2.4 billion dollars. Suddenly the new leaders of the Greens say this new plan for cuts to the age pension is a fair proposal, much better than the cuts in the 2014 budget. Almost overnight the ACOSS plan became law. These changes allow 170,000 people to have more pension but reduce the pension or remove it completely from 362,523 pensioners.(2) The majority of pensioners stay the same. Most media outlets consider these changes fair. But are they really fair, or are they just a fig leaf to cover a grossly unfair approach to funding retirement for older Australians?
EXCELLENT PUBLIC RELATIONS, BUT SHOCKING RESULT
One group that was not impressed was National Seniors Australia. They are a consumer lobby for older Australians founded in 1976 with 200,000 members and 140 branches around Australia. Their assessment is that the LNP and the Greens "turned their backs on middle Australia". Their blog not only explains how asset test changes would penalise savers who do not have access to tax-advantaged superannuation, they recognize "these cuts have been sold to the public on the pretext of ending welfare to millionaire retirees in Sydney harbour homes.”(3) Perhaps these comments have not been covered in the media because they are not supportive of the LNP push for austerity at any cost.
"The Coalition’s victory will ring hollow for the several hundred thousand older Australians who have saved and gone without for decades only to see the rules change at retirement. (...)
“It’s the single older woman, living in a little house with modest savings, who will be hit hardest. All the experts confirm this. On current deeming rates her yearly income will be well under $20,000 or several thousand dollars less than that of a full age pensioner.”(4)
Since these changes have not been "grandfathered", that is not applied to people now getting the age pension, it means the rules of the system people have used to plan their retirement have been suddenly changed without notice. This will set a precedent for implementing other changes to the system without warning in the future. Here are some serious consequences for people now on pensions and for those who will reach retirement age in the future.
DO THE CHANGES TARGET MILLIONAIRES?
The LNP and the Greens insist the changes will give $30 per week more to some age pensioners. However it will also take the pension from many others, and the changes will force these people to either live below the poverty line, since they no longer get the pension, or make them live off the capital, not the income of their savings. However the Greens do not accept this as a problem.
In their "Fact Sheet" on the changes, the Greens claim it is a "myth" that some pensioners will lose $8000. This is not actually a myth at all, and they admit it with their reply to this claim. "These are people who both own their own home and have at least than $550,000 (half a million!) in assets as well."(5) The sentiment is clear: These people will loose $8,000 but they are "rich" and can easily afford it. They are so wealthy they don't really need the age pension.
To many people, and the person who wrote this "fact sheet", assets of $550,000 seem like a huge amount of money. The reality for pensioners is rather different, and this is why National Seniors and the Australian Institute of Superannuation Trustees are both critical of the new proposals. They understand the needs of the large number of ordinary Australians who rely on superannuation and the age pension in their retirement. First, this $550,000 asset is for two people, a couple. Second, for retired people, such an asset is used to generate income, and not all of the asset can be used to generate income. In his calculations Vince O'Grady assumes that 75% of an asset will generate income.(6) As a benchmark to assess these changes for a pensioner couple we can use the poverty line of $600 per week, or $31,200 per year. This is 50% of the median income in Australia.
CHANGES PUSH PENSIONERS BELOW THE POVERTY LINE
Borrowing from modelling done by Vince O'Grady, we can look at a couple with $600,000 in assets. Under the changes they will get $17,373 in Age Pension using the rebalanced asset test measure, and $13,463 Income from 75% of assets at the new $3.00 taper rate. This makes a total income of $30,836 for the year. Under the current system they would get $23,165 as an Age Pension and $13,495 income from 75% of assets at $1.50 taper rate for an income of $36,660. So these changes cost this couple $5824 per year and will put them below the poverty line. Pensioners with under $300,000 assets get a yearly income of $34,923 under the new system, which is about $4,000 more than pensioners with $600,000 assets.(7)
Vince O'Grady has produced a spreadsheet which gives an approximation of the effect of these changes on people receiving the age pension. He begins with the figure of 3,518,176 people on pensions. He estimates that 362,523 people or 10.3% of the total will have their pensions reduced. Before the changes he calculates that 38,096 pensioners received benefits which put them below the poverty line. After the changes, this number grows to 428,041. The two largest groups are home owner couples and non-home owner couples.(8) The following graph shows how the changes provide a modest increase for people with assets between $250,000 and $550,000, but a very dramatic decline for those with assets between $550,000 and $823,000.(9)
Taper rate or cliff?(8)
Notice that there are no changes for the very wealthy or those with few assets. This is why National Seniors stated that the LNP and the Greens "turned their backs on middle Australia".
BUT THESE PENSIONERS HAVE SUCH HUGE ASSETS!
One could say: "Well, they can just take more money from their assets/investments to make up the difference." But this totally changes the present retirement system. People save for retirement to use their investments/savings as an income stream from interest earned. Some cash might be taken out to pay for medical expenses which rise dramatically for people as they get older. Some might also be used for nursing home accommodation. In addition to these contingencies, these investments have unpredictable rates of return. Now they are very low, and they can disappear into thin air with dramatic movements in world markets. Super funds were hit dramatically by the Global Financial Crisis in 2007 and more could be on the way. Money in such investments is not like cash under the bed, and it is certainly not "safe as houses".
In effect the changes are an attack on the living standards for ordinary people who have been able to own their home and manage to save for their retirement. Their assets are intended as a buffer to protect themselves from the things we know life throws at us. The government (and the Greens) want these people to use this money for ordinary living expenses, which are rising, and the smaller their assets become, the more vulnerable they are.
SUPERANNUATION INDUSTRY INSISTS THE SITUATION WILL BE WORSE IN THE FUTURE
Another point which has received scant media attention is that more and more people will be hit by these cuts. “One of the most troubling outcomes of this proposal is that around 80% of single women retiring in 2055 will be disadvantaged,” said Mr Whiteley, chief executive of Industry Super Australia (ISA). “As it is, around 63% of single women will not be able to retire comfortably through to 2055, even with super, pension payments and other savings combined. This measure will deepen that inequity.”(10)
Industry Super Australia and Rice Warner have produced a model for retirement and superannuantion which we will examine below. It shows that the number of new retirees affected by the proposed changes will more than double from one in three retirees today, to around seven in 10 by 2055. "The impacts of these changes are very significant for most of the working population. Executed in isolation they will reduce retirement incomes of middle income earners, not the well-heeled," said ISA chief executive, David Whiteley.
Further, modelling by the Australian Institute of Superannuation Trustees (AIST) shows that in the future, the cuts will substantially affect those in the bottom 30% to 50% income range.(11) According to data produced by actuaries Rice Warner and ISA, the proposed changes will impact most heavily on middle to low income workers earning average wages of $75,000 or below, and women most severely.(12)
DID THE GOVERNMENT CLOSE THE $500M FAT CAT PENSION LOOPHOLE?
An article by Simon Benson in the Daily Telegraph had the gleeful headline: "Public sector gravy train derailed by pension crackdown." In the body of the article he explains that "thousands of retired public service fat cats will be cut off from a $500 million double-dipping rort under which they can claim an aged pension while also drawing income from their taxpayer-funded superannuation".(13)
However if you look at the comments by chief executive of Industry Super Australia, David Whiteley, it is hard to believe they are talking about the same thing: "The impacts of these changes are very significant for most of the working population."(14) How can they be so different? Because the comments by Simon Benson (and the Greens) are LNP inspired spin, while the comments by David Whiteley are from a person who actually knows how our pension/superannuation system works and wants to explain it to us. Notice that on the graph entitled "Taper rate? Or cliff?" there are no changes for people with assets over $850,000. So they are not "fat cats"?
THE ELEPHANT IN THE ROOM: THE TAX LOOPHOLE FOR THE VERY WEALTHY
The government and most media outlets mindlessly repeated the claim that the age pension changes in the 2015 budget were aimed at wealthy "fat cats" who rorted a loophole in the age pension. Simon Bension particularly attacked those with state and federally funded defined benefit pensions while also drawing income from their taxpayer-funded superannuation. But does it really matter who paid for the superannuation? Consider the "millionaires" with assets of $550,000 discussed by the Greens. Without the top-up from the age pension, their income will fall below the poverty line and they will face a decline in living standards.
We have seen that the people who work for Industry Super Australia and the Australian Institute of Superannuation Trustees have pointed out that these cuts do not hit wealthy fat cats but middle income earners, middle to low income workers earning average wages of $75,000 or below, that is most of the working population. The "talk" about attacking "fat cats" is just like the pre-election promise not to cut pensions, a diversion to distract attention from the real goals of the LNP, reducing wages and living standards for most of the population. However, since they started talking about "loopholes" and "rorts", let us look at the way superannuation works for the top 20% of the Australian population.
A QUICK LOOK AT THE ELEPHANT
The elephant in the age pension room are the SUPERANNUATION TAX CONCESSIONS. The benefits of these concessions flow to the upper income groups who will not feel the cuts to their superannuation benefits from the 2015 budget that almost everyone else has. There are several different ways to understand how the “welfare for the rich” works. In an interview John Hewson compared the cost of the pension for older Australians seen in the budget with the cost to taxpayers of the taxes that are not collected on investments in superannuation. Remember most older Australians do not have nearly as much money invested in superannuation as the wealthiest 20%.
"ELIZABETH JACKSON: So how costly then are superannuation tax concessions in comparison to aged pension costs?
"JOHN HEWSON: They're roughly the same. The figures we're using is sort of $44.8 billion for the aged pension and $44.9 billion for the superannuation concessions but the superannuation concessions are rising faster.
"So when Joe says that bill is going to be $70-odd billion in 10 year’s time, well the tax concessions are going to be even bigger and you've got to look at that in the context of total tax concessions, which today are like $120 billion and they'll rise to about $150 billion by 2016/17."(15)
Thus one way to see the elephant in the age pension room is to realize that taxes not collected on superannuation investments are about the same as to total cost of the age pension and soon will be higher. If you say you want to "balance the budget", why not look at the tax = income side of the budget as well as the payments?
ANOTHER QUICK LOOK
In 2012 Australian Council of Social Service (ACOSS), using 2007 data, estimated that the top 5% of taxpayers obtain 17% of superannuation tax concessions, while the top 12% get 48% of them. According to Australian Tax Office, the top 5% of taxpayers consists of around 640,000 individuals earning more than $150,000 a year. Using ACOSS’ estimate, this 5% group by 2017-18 will be costing taxpayers $8.4 billion in lost revenue on superannuation. At the same time the top 12% of taxpayers, earning $100,000 a year and above, will cost over $23.6 billion in lost revenue on superannuation.(16)
John Hewson also presented another way to look at the imbalance in the pension/superannuation system.
"Well, if you take a person who earns for example $250,000, they only give up $62.50 after tax to boost their superannuation by $100, whereas somebody who earns say $20,000, it costs them about $118 after tax to boost their savings by $100."(17)
In other words, it costs about twice as much for people on lower incomes to accumulate $100 in a pension account as it does for people on high incomes. Since tax concessions for wealthy Australians are so generous, low income earners are actually penalised in terms of preparing for their superannuation. And Joe Hockey complains that the amount spend on age pensions is so high? If ordinary people had more superannuation, they could live well with less tax spend on their pensions.
A MORE DETAILED PICTURE OF THE ELEPHANT
There is another way to look at the age pension and superannuation system together. The AIST Mercer Super Tracker system is a model of these two systems developed by the Australian superannuation industry to get a full picture of the system as a whole. The following graph comes from the AIST Mercer Super Tracker.(18)
TOTAL LIFETIME GOVERNMENT COST FOR EACH OF THE 10 INCOMES LEVELS
This is not the way the government wants you to see the retirement and superannuation system because the this model does not just focus on the payments presented in the budget. The AIST Mercer model looks at three separate elements of government policy at the same time. These three are the value of the government concessions related to the compulsory superannuation contributions made by people earning income. The second is the value of the investment earnings concession which are made in the way these are taxed. The third is the value of the age pension paid by the government and recorded in the budget. It shows the level of government support and what form it takes.
Across the bottom of the graph are the income percentiles for Australians. For statistical purposes, this model divides people in Australia into ten groups called deciles which have roughly the same earned income. The number '10' stands for the people who belong to the one tenth of the population with the lowest level of earned income, which falls in the range from $37,856-$43,264. The number '20' stands for the people who belong to the one tenth of the population with an income just above the lowest one-tenth, which falls in the range of $43,264-$49,754. The table below shows the income ranges for each group.
10 Lowest 10%...............$37,856-$43,264
20 Next highest 10%......$43,264-$49,754
30 Next highest 10%......$49,754-$54,080
40 Next highest 10%......$54,080-$62,354
50 Middle 10%...............$62,354-$71,494
60 Next highest 10%......$71,494-$82,148
70 Next highest 10%......$82,148$97,452
80 Next highest 10%......$97,452-$125,898
90 Highest 10%..............$125,898 and above
99 This group is made up of the people who have incomes greater than 99% of Australians.(19)
Notice that these figures are the annual incomes for full-time workers, as these are the only people who can accumulate superannuation to be used for retirement. People who are on pensions but not working full time are not considered for the purposes of the superannuation industry. For comparison here are the current age pension rates:
$22,365 Max age pension for singles with supplements
$33,716 Max age pension for couples with supplements
WHAT DOES THE GRAPH SHOW??
As one might expect, the highest level of direct payments in the form of the age pension goes to the people with the lowest income levels, and it declines as the income levels rise. But the most interesting fact this graph reveals is that the people with the highest income levels of $125,898 and above get more support from government policies than the lowest 10%. Those at the lowest income levels get $404,000 support over their lifetime, while those at the highest levels get $489,000 or $641,000 if they are in the top 1%.
The AIST "Response to Tax Discussion Paper" also shows that the changes to the asset test introduced in 2015 budget have reduced the level of support for all but the highest income levels. Notice that this is not a table of assets for each group. It is a table which shows the difference in the level of government support for each group between the current system and the new system which starts in 2016.
Amount of government support over the lifetime of people in each group:
......in 2014........................in 2016
10 $404,000........................$371,000 (lower)
30 $352,000........................$239,000 (lower)
50 $306,000........................$214,000 (lower)
70 $288,000........................$257,000 (lower)
90 $489,000 and over............(no change)
99 $641,000 and over............(no change)(20)
The authors of the "Response" are clear about the effect of the new changes to asset rules: "The Super Tracker highlights the sharp impact of reducing government support for median income earners (via the proposed asset test changes) while leaving higher income earners untouched (by ignoring super)."(21)
The age pension and rules for superannuation and relevant forms of taxation are quite complex. However it is totally misleading to say that the recent changes to the age pension were necessary to stop millionaires from getting a level of support from the age pension that they did not deserve. The people who had their pensions cut are older Australians who had modest levels in income during their lives and managed to save what they could have reasonably thought was an adequate level of superannuation. It seems clear that the changes reduce the level government support for median income earners, not those who make up the most wealthy people in Australia. Some of these conclusions are based on models provided by Vince O’Grady and the AIST Mercer Super Tracker. They may be imperfect, but will the LNP come clean and give a better account from Treasury information?
1. “We had been buttered up by a proposal of the Centre for Independent Studies (CIS) which suggested that pensioners with a million dollars of assets actually got the same as someone with ‘almost nothing’.” https://vinceogrady.wordpress.com/2015/06/19/political-honesty-does-it-exist-in-australia-here-is-a-detailed-example-of-why-it-doesnt/
6. "A million dollars sounds like a lot of money. But the reality is that it is not. And not all of the assets counted can be used to generate income." https://vinceogrady.wordpress.com/2015/06/19/political-honesty-does-it-exist-in-australia-here-is-a-detailed-example-of-why-it-doesnt/
18. The AIST Super Tracker is based on the Melbourne Mercer Global Pension Index which compares retirement income systems in 25 countries using international data and responses from Mercer consultants based in each country. http://www.mercer.com.au/content/dam/mercer/attachments/asia-pacific/australia/insights/AIST-Mercer-Super-Tracker.pdf/Aist-Mercer-Super-tracker.pdf, page 7.
19. Ibid. page 23.
20. https://www.aist.asn.au/media/14792/20150602_submission_tax_taxwhitepaper%20v1.1%20FINAL.pdf, page; page 19.
21. Ibid. page 20