Why Joe Hockey’s Federal budget will hurt us, as the superannuation system is failing and the age pension is our biggest drain
TREASURER Joe Hockey’s budget dilemma comes from a failed superannuation system, as the age pension is already our biggest drain.
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AUSTRALIA’S superannuation system is failing us.
Despite Aussies pouring trillions of dollars into super since compulsory contributions were introduced in 1992, the Treasurer Joe Hockey revealed a startling fact last week.
For all our efforts to boost private retirement savings, the same proportion of retirees will be reliant on government support in 2050 as today.
If super was supposed to set more Australians up for a self-sufficient retirement, the policy appears to have failed.
It may surprise you to learn that only one in five retirees alive today are entirely self funded — receiving no aged pension support from the government. In fact, if you include the benefits provided under the seniors health care concession card, only 14 per cent of retirees are paying their own way.
Alarmingly, this is not expected to change. By 2050, still only one in five retirees are expected to be able to fund themselves in retirement without government help.
Support for the aged is already the biggest drain on the federal budget.
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At an annual cost of around $40 billion a year, the age pension now soaks up 10 per cent of government spending. That’s more than we spend on defence or hospitals or schools.
And demand for it is only expected to continue to grow.
Why? Because by 2050, the number of Australians aged 65 to 84 is expected to double. The number aged 85 plus is also expected to quadruple.
As a percentage of economic output, the cost of the age pension is expected to double from 2 per cent today to 4 per cent by 2050.
Australia’s demographic squeeze is diabolic indeed when you remember that, even as the cost of supporting the elderly spirals, the pool of working aged Australians available to earn the income to pay the taxes to support the aged is expected to halve.
Now you see Hockey’s budget dilemma.
It’s not quite as bad as it seems. While four in five retirees will continue to get the age pension by 2050, the proportion receiving only the part-rate pension is expected to rise.
Half of people of age-pension age alive today receive the full rate pension and 30 per cent get only a part pension (remember 20 per cent get none).
By 2050, this will have flipped. Half of retirees will get the part-rate pension, 30 per cent the full rate and 20 per cent none.
Higher levels of wealth accumulated through super will mean fewer retirees meet the means test for the full pension. That creates a budget saving, for sure.
But it comes at a hidden cost to the budget.
In its efforts to encourage people to contribute to super, the government taxes contributions to super at the low, flat rate of 15 cents in the dollar. Incomes, by contrast, can be taxed as high as 45 cents in the dollar.
The benefit of this concession to taxpayers has been estimated at a whopping annual value of $39 billion — about the same cost to the budget as the age pension.
And super tax concessions are highly regressive — the biggest value going to the highest earners.
High income earners paying 45 cents in the dollar get a bigger tax saving from the concessional super tax rate (30 cents in the dollar) than middle income people paying 30 cents in the dollar tax (they get a 15 cents in the dollar saving).
The result is that government has bled hundreds of billions of dollars in tax revenue to feather the retirement nests of retirees who were probably going to be self-sufficient anyway.
As Hockey’s revelation makes clear, we haven’t actually helped any more people to become entirely self-sufficient.
Our super system — if not a compete failure — has proved an expensive way to achieve the relatively small cost saving of moving some people from a full to part-rate pension.
And now we’re all going to pay for it.
If he’s serious about fixing the budget, Hockey should tighten up eligibility for both the age pension and super tax concessions. Greater means testing of the aged pension — including the wealth accumulated in the family home — and a crackdown on super tax concessions won’t be popular.
But it’s not clear we have any choice.
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