Changes to the pension and benefit system are always fraught because of the very mixed views in the community about who is entitled to public support. WELA would therefore support an independent body to set rates, changes and rises. An arms length process may counter political populist plays and moral panics about the potential problems of paying for the ageing population. It should also cover related expenditures and concessions such as the current allocation of resources for retirement that create the gross inequities of the Superannuation contributions taxation concessions. Low income pensioners are being squeezed at the same time as higher income pensioners gain extra payments and major tax expenditures go to the really affluent. An independent body could oversee a total expenditure (cash and concessions) of over $50 B per annum, which is currently grossly maldistributed.
The received wisdom in the welfare sector has been to go for simple single rates of payment tied to the aged pension, under the assumption that public funding for aged pensioners is more publicly acceptable than for other recipients. However, complex shifts to entitlements, such as Welfare to Work, undermines simplicity in policy and has left those fully dependent Age pensioners far behind the rest of the retired population. We are therefore suggesting differentiating payments to match diverse needs and life cycle status to achieve policies for real equity.
In the short term, WEL’s proposed changes will direct additional payments to those with clearly defined needs and limit disturbing the entitlements for current recipients who do not need supplementation. We recognise that there are many groups with additional needs but will illustrate the new principles by focusing on a new form of payment for one particular group. These are the single aged pensioners, mostly female, who live alone, are private renters and have little or no extra income to provide necessities.
This concept of specific directed payments could be a model for assisting other groups that have little or no additional resources. However, payments to recipients of workforce age, who could earn income, require different approaches than those who are most unable to change their private financial circumstance. Other payments could focus on paying for additional costs of disabilities, or specific children/carer allowances that may not be so steeply income tested would be more appropriate for those with disabilities and carers, who may similarly have little or no other assets or income. While this approach does add complexities, it does ensure that differential needs are more effectively met than a one size fits all model.
This approach also allows appropriate changes for recipients most in need without adding to the base payment that flows to relatively affluent recipients. A discrete set of second income streams can be tightly targeted to particular categories of recipients whose living standards are below those our community would see as adequate.
Ideally, retirement income redesign should be based on an amalgamation of public funds foregone in super concessions and the spending on direct retirement income. This would provide a large pool of resources to redistribute more fairly in ways that recognise both paid and unpaid social contributions and guarantee a decent living standard for all. If the Government is not prepared to reduce inequitable super tax concessions that assist mainly male higher income earners, targeted more generous payments at the bottom end is the next best option. Rises in the basic pension are not acceptable as these will need to be too small as they will also flow to higher income earners who now get a part pension. This is why we are proposing a second payment.
The plight of those at the bottom eg single, living alone pensioners, fully dependent on their pensions, has a particular poignancy because other recipients have been given extra. The claims that age pensioners have not fallen behind in percentage terms ignores the realities that they are increasing in number, living longer and alone, more likely to be female and many are without super or other savings. The current payment gives them little at the margins to cover price increases such as petrol or food or just to cover for the needs of ageing bodies. While not necessarily claiming crises, this subgroup do not have enough income to take part in normal activities or afford small treats that they should be able to enjoy.
Our proposal is for a new type of supplemental payment in the retirement income areas to ensure those recipients, who could not build up subsidised super, or draw on the implicit subsidy of home ownership, could live with dignity. This payment would be an Equity Guarantee, paid quarterly payment to those living alone in private rental accommodation with little or no extra capital/income. We suggest that this supplement be initially $70 pw (indexed) and be withdrawn on $1 for $1 for extra income over $10. This would mean that those singles without extra income would receive more than $350 pw. We estimate this would cover about 15% of single pensioners and cost less than $200 million in the first full year.
Directing up to an extra $70 per week to those particular private rental single pensioners, would make a real difference to the many older, often female, pensioners who have little or no savings. The cost is much less than the proposed $1.5B for $30 to all single pensioners which would allow for similar spending to be directed to other particularly needy groups like the veterans, carers and those on disability pensions with no additional income. We have set the rate higher than those pushing for a general rise as we feel $30 is a lot less than is needed at the bottom end.
We suggest this top up should be paid quarterly because payments of larger sums are very useful to people with no savings and feedback on the bonus payments suggests that the larger sums were more welcome than fortnightly payments.
Background and arguments for the proposed policy change
This policy change moves away from the widely accepted welfare sector strategy of linking payments to the Aged Pension. They can no longer claim that this approach offers the best potential for ensuring there is adequate income support for the less electorally popular groups such as the unemployed and sole parents. The poorest group of retirees are left underpaid and those on Newstart and other allowances are even more grossly underpaid as they get less than the inadequate base pension rate.
There are quite stark differences within the pensioner population. About 20% of all aged pensioners have no other income. The next 40% have less than $50 per week extra income, with maybe some savings. However, many of the top 40% have lots of extra income, including super based on tax concessions. There are more than 3M people on pension linked payments all of whom would benefit from a general pension rise and so it is likely to be spread thinly.
The statistics available do not clearly distinguish which of the 19% of about 600,000 single Aged Pensioner private renters who live alone, may have some savings. Therefore our costings are rough and based on an assumed 15% ie 90,000. As the most vulnerable group in need, these are the proposed target for this initial payments with an estimate of an average payment of $2000 extra per annum would cost as little as $180M. This low expenditure leaves plenty for a similar model to cover married couples, those on disability payments, live alone carers and aged pensioner couples who are all in private rental accommodation without additional savings.
This model both targets more to those most in need and at less cost overall. Current Government figures show the Coalition’s push proposal of $30 a week would add 7500 aged pensioners as it increases the income test by $75 a week to single pensioner with private income of $854 pw, up from the current taper at, at $778 per week. Recipients of even $1in pension receive more than $1300 in flat rate allowances which illustrates the problem of raising the general payments.
The above proposal takes into account the particular financial circumstances of one subgroup within the payments system. The proposal for a dollar for dollar withdrawal rate is workable if the targeted group is most unlikely (because of age and/or disability) to be able to add new income. A slower taper would costs more but assist more people with relatively low incomes. This rate would be a major disincentive to potential earners which is why we suggest other payments be differently designed to take this into account.
Statistics and costs
At present we spend about $26B ($22.6B 2005/6) on aged pensions and a similar amount on tax concessions/expenditures for super. While some of these, eg co-contributions, are targeted to lower income earners, the bulk go to higher income earners through salary sacrifice and other forms of low tax/no tax on super products. The 2007 ATO Tax Expenditure document gives aggregated tax expenditure for funded super at $24.8B in 2006/7 and predicts a rise to $31.1B by 20010/11. Another report shows the gender differences. ‘Are Retirement Savings on Track’ (ASFA 2007) claimed 10% of individuals (mainly male) with super hold 60% of its assets. 70% of men and 90% of women currently have balances of less than $100,000, 24.3% of the group surveyed (mainly females) reported having no super at all – such as low paid/casual workers, social security recipients, and those who have cashed out their super already.
Aged pension expenditure has also risen as changes in the last couple of years have substantially increased the eligibility of higher income retired people to part pensions and related concessions. Many people, who have benefited both from super tax concessions, will also get pensioner benefits eg home owning partners with $856,000 of assets in July 2008 are eligible for part pension and concessions. However, those wholly or massively dependent on pension payments only received the odd bonus payment, which went too all, including those on high incomes. This mal distribution undermines any Treasury arguments that giving substantial rises to those at the bottom level are not affordable. As there are more poor pensioners than rich ones, rises for these cost more but do not justify spending public money on those with little need and leaving those with serious financial limits to go without basics.
Gender statistics on income, pensions, super and savings
There are many more older women than men and they are likely to be alone and on pensions for much longer.
Persons aged 80 years or over, 30 June 2006 (ABS AIHW)
Age (years) Males Females
80-84 166,000 239,328
85 or over 104,337 217,654
Total 65 or over 1,210,499 1,476,615
The current groups of older women tend to come onto pensions with fewer resources, and not necessarily from employment. Current figures from the Government’s own discussion paper show that:
- 2/3rds of women receive the single rate of pension payment.
- 89% of the women coming onto maximum Aged Pension in 2007 came from other Government payments including Carers and DSP.
- 74% of single recipients live alone and are more likely to be female.
- Women are currently double the number of men on Carers’ Payments and triple on the Carer Allowance, and are 85% of sole parents, which will inhibit their future capacities to save and contribute to super.
- Women still earn 84% of male average hourly pay, do more unpaid work and less paid work than men do.
The actual numbers need to be considered. In June 2007 around 58 per cent of all income support recipients were women, with 2,694,200 receiving a payment compared to 1,906,900 men, with women constituting 58.3 per cent of all Age Pensioners, 42.1 per cent of Disability Support Pensioners and 67.3 per cent of Carer Payment recipients. Around two-thirds of women receive income support as a single person, compared with around one-third as a member of a couple. The main reasons for this are that women have a longer life expectancy and are outliving their partners, and that women are more likely to be single parents. More women tend not to be home owners. The discussion paper shows that 74% of singles lived by themselves in 2005-6, and do not share costs. Single recipients of Carer Payment are the least likely to be alone (just 4.6 per cent).
There is no benefit in the superannuation tax regime for those who pay 15% marginal tax or none. For instance, were payments to be made into super for those on unpaid maternity leave, it would result in their unfairly paying 15% on contributions despite being below the tax threshold. Similarly those not in the workforce lose on their super earnings as these are taxed more than say bank interest or share dividends paid directly to someone below the tax paying threshold.
A recent report from the Melbourne Institute (Sept 2007) shows how the tax concessions become gender biased. While 26% of taxpayers are in the 15% marginal tax range, only 13% of partnered males are vis a vis 37% of partnered females, which rises to 42% for those with children under 15. While 26% of partnered men enjoy marginal tax rates over 40% only 7% of women do. The higher benefits of super contributions will benefit the top group most and offer no public subsidy benefit to those on the bottom rate as super is still taxed at 15%. Many women not only earn less, they are overtaxed. Therefore the public support of female retirees is problematic. ASFA estimates that the average retirement payouts in 2006 are likely to have been $130,000 for men, and $45,000 for women.
The Australian Government spends about the same amount ($26B) on super tax concession as they do on aged pensions, and thereby give the biggest public subsidies to higher income males’ retirement income. As few of these would get a pension, this policy is not creating future savings on welfare spending. The main problems come from the flat rate of tax on contributions and earnings that mainly benefit those on higher marginal tax rates and give no benefit to those on the same tax level, and penalise those on untaxable incomes.
Tony Nicholson from the Brotherhood of St Lawrence makes a similar point. “Consider what’s happened to taxes on superannuation. Since July 2007 contributions to superannuation have been taxed at 15% on entry and, after the age of 65, at 15% on annual income earned. At best this represents a flat tax of 15%. But because affluent Australians are able to contribute much, much more to their superannuation than the less affluent, this means they pay lower effective marginal rates of tax. And this means that superannuation tax concessions, which cost the Commonwealth about $20 billion per year, are highly regressive.
Extending the eligibility for part aged pensions has further exacerbated the inequities of retirement income as many higher income earners receive public subsidies and this will increase in the future. A report from NATSEM ‘Old, Single and Poor: Sept 08, states:
“In 2003-04, total government outlays on age and service pensions were $23.3 billion, representing 2.9 per cent of GDP. By 2044-45, despite increasing numbers of older people receiving private superannuation, these outlays are expected to increase substantially, rising to an estimated 4.6 per cent of GDP (Productivity Commission 2005). Changes after this have probably exacerbates the gap in public support to higher and lower income earners.
Discussion on the role of government in tax and income support
What should be the role of government in distributing and redistributing financial resources among the people? What is an appropriate balance between the resourcing of individuals to purchase their own services and meet their own needs, versus public use of resources to collectively provide those services that are not necessarily best provided by the market? The last few policy decades have tended to move the responsibility back to individuals and families for self provision but there is evidence that this has undermined perceptions of fairness and increased some inequalities.
The size of the public sphere and its allocations for payments and services to the community can provide or deny levels of equity that affect social well-being and quality of life. The big question which should underpin decisions for the whole tax review is what are the optimum levels of equity to create the society we want to live in? Economic decisions, usually seen as the major drivers for financial measures, need to be assessed for their social impacts, short term and long term.
This feminist viewpoint is not about making proposals that are aimed at specific benefits for women, but offering evidence that women are still disadvantaged by structural discrimination such as the under-valuing of their contributions to unpaid and paid care work and relationship building. It is time, in a 2008 tax review, to look at future policies that value and encourage appropriate balances between the types of social relationships that contribute to quality of life and productive societies, as well as to productive economies. The capacity to balance paid and unpaid contributions to the community and public good need to be recognised in terms of the impact these may have on retirement income as well as daily living.
The capacities and well being of any society rests not just on economic productivity but also on the availability of people with time and skills to make relationships, offer nurture, care and other interactions. Good societies need to develop inclusion, capabilities, good will, altruism and the necessary frameworks for creative change through appropriate levels of social and personal supports. Gender based assumptions and practises about what is valued and valuable, particularly within disciplines of conventional economics and public policy, often relegate such factors to the private, family or voluntary spheres and fail to recognise the essential links to public spending and policy.
The relationship between time spent earning income and time spent in other types of socially necessary occupations, affects life time earnings in other ways as well. There is still gross pay difference for paid care activities and the related qualifications, and those skills considered to be public (masculine) spheres of labour. Those very necessary jobs that are most easily associated with tasks that have recently moved out of home based services eg child and aged care, are grossly underpaid and often casualised. While these inequities need to be addressed in other spheres, they do provide a rationale for assisting those whose retirement income is most affected by these factors.
The clear gender differences in both public support and financial resources in retirement as these differences raise wider issues of how Australia, as a nation, recognises the value of making different time allocations to paid and unpaid work. Though these currently are still gender based choices, there are slow changes and similar issues will affect those men who may seek similar life patterns. If we value the carers and nurturers, we need to recognise the difference this makes to older people’s income.
The periods in which care time and paid work time are most likely to be in conflict generally relate to child bearing and rearing, and possibly the care of older relatives or other society members. As suggested above, some such periods of withdrawal may benefit other household/couple members by allowing them to increase their workplace engagement and rewards. Where essentially intra family transfers result later in family members sharing resources such as high accumulated super, the problems are lessened.
However where the lack of paid work time results in the person becoming a sole pensioner with little or no extra income, there is a need for some form of publicly funded additional resources to be offered. As we have no general entitlement to paid maternity leave, we hope that adequate parental leave payments may partially counter such losses. However, where the long term outcomes for many turn out to be limited savings and solo rental accommodation at retirement time, the consequences of what is usually a gendered division of care need to be publicly recognised. Where people are paid carers, they again are limited in their capacity to accumulate super because they often have low paid jobs. Like those caring unpaid, they also contribute substantially to the social good as well as the individual well being of their charges.
The statistics above show the over-representation of women in most pension and carer payments and the particular problems faced by those living on their own whose patterns of earnings and care had limited their capacity to contribute to superannuation or provide other forms of savings to supplement the basic pension. These are already a substantial proportion of recipients of income support pension payments and are likely to increase over the next decade as more women transfer to aged pensions from extensive time spent on carer payments or parenting payments. While compulsory superannuation is likely to improve ‘nest eggs’ for many more women in the future, there will continue to be some whose contributions in unpaid work seriously undermined their contribution capacities. As women also live longer, and some costs increase for older age group, some effective forms of supplementation will be needed.
This exercise and the Henry inquiry offer the possibility of a serious consideration of the social systems we want to achieve, not just welfare costs and savings.
Conclusion
We have historically tended to have a single basic pension level, which flows from the Aged Pension to other payments such as Carers Payment and DSP, and, particularly recently, a range of other payments labelled allowances which are offered at a lower level. Various other cash payments have accrued to cover presumed other costs and the eligibility for even a part payment acts as a passport to many other concessions at state and local level, and bonus payments have gone to some pension groups and not others.
A particular problem comes from the difference between pension and allowance rates, both the lower rate of base payment and more savage taper levels. People on DSP or grandfathered Parenting Payment recipients will try to avoid losing eligibility for the more generous payments and their attendant concessions. This may be to their long term detriment but fear and the exigencies of current living costs tend to take precedence.
So the system has become over time, far too complex and hard to understand and negotiate. Added to the mix are the series of family payments and other forms of income supplementation so the complexity means that few recipients. or often those that seek to serve them, can understand entitlements or the rationale for payments. Therefore the current Review should be able to make some major changes. Change is never easy as people have a passionate interest in getting what they feel they are entitled to particularly Aged and Veteran pension recipients and those who feel their super or other contributions are being undermined. Therefore any root and branch changes may not pass the political test so some intermediary changes may be required.
Therefore the Rudd Government should commit itself to a new basic income strategy that will ensure adequate income for those who are entirely dependent long term on income support. Other income support/replacement payments need to offer sufficient resources at the base level and diminish as private income increases. This is vertical equity and based on levels of financial need, not the categorisation of the payments and recognise the need to encourage, rather than discourage extra earnings where feasible.
Where the recipient, because of age, abilities or other circumstances, is most unlikely to be able to increase their private income in the long term foreseeable future, and has no extra property, income or assets to draw on, there needs to be some additional payment to ensure decency in living.[1] A basic income supplement can be introduced on a rolling basis and restricted to those who need the extra. A supplementary payment can be tightly targeted, which minimises the overall costs if it is not a significant disincentive to seek extra income. Payments such as rental allowance and other specific payments should be continued as these create equity between recipients in terms of access to basic living costs and needs. Those who depend almost entirely on public support need to live with dignity. The first step could be a special payment to those singles with no extra income to give time for a major restructure of the system as part of the broader Henry review with so tax, superannuation and other payments can be seriously considered.
Eva Cox 25th September 2008
Note: NATSEM data referred to in this submission can be found in Robert Tanton, Yogi Vidyattama, Justine McNamara, Quoc Ngu Vu and Ann Harding, Old, Single and Poor: Using Microsimulation and Microdata to Analyse Poverty and the Impact of Policy Change Among Older Australians, Paper for Presentation at UNU-WIDER Conference on Frontiers of Poverty Analysis, Helsinki, 26 – 27 September 2008, National Centre for Social and Economic Modelling,2008.
[1] While this is not the scope of the present inquiry, we want to note our concern about those income recipients not included in the FAHCSIA brief. Where there are possibilities of individual increases in contributions to self support, different policies should be introduced that specifically meet their needs and potential. The current punitive approach which penalises extra effort by big reductions in existing payments does not pass any test of logic or justice. Incentives to pursue other income need to be structured in ways that do not reduce the minimum payments below decent subsistence levels. There is no justification, therefore, for paying those on allowances at less than the base level of pensions, if in similar circumstances. More attention to modes for encouraging additional earnings should include positive rewards, not just penalties.
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