Reform to combat ageing burden doesn’t have to tax the system

There is a disincentive for those of retirement age to keep working into old age because doing so reduces their access to super.

The government’s population statement this week paints a concerning picture. Not simply because the nation is ageing and the national median age has crept up faster, courtesy of Covid. These are global challenges.

The concern comes from the failure of consecutive governments to put the policy levers in place to manage ageing, to stay ahead of challenges as they present themselves.

There is nothing wrong with population ageing. Living longer is the goal of most of us. After all, the alternative isn’t all that enticing. But to take advantage of the wonders of modern medicine allowing more of us to live longer, governments need to do some heavy lifting on the policy front.

We need a tax system that isn’t designed to push the fiscal burden on to younger generations. We need sustainable aged care designed to maximise the sector’s viability and quality. Older Australians must have an incentive to work longer into their lives if they are able to physically and mentally. This point circles back to the design of the tax system.

Australia likes to crow about its superannuation system, but the system is in desperate need of reform to disperse its benefits. Unfortunately, we just haven’t seen the policy discussions necessary to position the nation for the ageing of the population. This week’s report only highlights the urgent need to do so.

Migration favours younger new arrivals, thus lowering the average national age, but the report reveals that the two-year collapse in migration during the pandemic has sped up the ageing of the population: “The median age is expected to be 1.4 years older by 2030-31 compared to pre-pandemic projections.”

Throw in the impact of the large demographic cohort that is the baby boomers continuing to hit retirement age, and the report notes: “Australia’s greatest long-term demographic challenge is the ageing population.”

The proof is in the numbers. As a share of the overall population, the number of Australians who are 65 and older has doubled in the past 70 years. It is a continuing trend. By 2032, 20 per cent of the population will be over 65.

This evolving shift points to why raising the age of retirement has been a bipartisan initiative. But such a tweak is the least of the changes in policy governments must confront to manage ageing so it doesn’t become the crisis many are predicting.

How we tax superannuation simply has to change. I write this entirely against my self-interest, by the way, so bear that in mind as you read on and rail against what’s about to be discussed. Are you opposed to what has to change simply because it goes against your self-interest?

The selfish gene in voters is the biggest barrier to government action. Spineless politicians who merely chase popularity tend to pander to voters who vote with nothing but their selfish gene. This reality has been at the vanguard of the super debate for years. In fact it has been at the vanguard of most debates in Western democracies forever. If democracy has an achilles heel the self gene is it.

Under current tax rules you do not get taxed on earnings from the first $1.7m you have invested in superannuation. For a couple it’s $3.4m. Most returns on super investments nudge 10 per cent, especially in a more inflationary environment.

But, to make the point, let’s limit those returns to just 5 per cent. And remember, we are talking only about what is or isn’t taxed on earnings from super. The principal is never taxed.

For a retired couple with $3.4m invested in super and a mere 5 per cent return on the investment, they will earn $170,000 every year tax-free. If the investment returns are a more realistic 10 per cent annually they will earn $340,000 tax-free. If the couple has more than $3.4m invested in super, the earnings on the returns of the principle amount above that are taxed at only 15c in the dollar.

How we tax superannuation has to change.

While I’m selfishly looking forward to such a comfortable retirement, those like me need to put aside our selfish gene and be more utilitarian in our thinking.

Someone of working age earning only $45,000 a year pays 19 per cent tax on what they earn above the $18k tax-free threshold. It steps up to 32c in the dollar after that, all the way to 45c in the dollar on earnings above $180,000. If a young couple earning $45k each were to try to save for a deposit on a home, they would have to pay 32 per cent tax on any interest on their savings. It doesn’t compare very favourably with wealthy retirees paying no tax.

But the need for reform to combat ageing goes deeper than superannuation.

The family home is untaxed. Unlike most countries we don’t have inheritance taxes, which help alleviate inequality. It’s an area ripe for reform, especially when you consider that when wealthy retirees die, their super principles go to their children.

As for whether Labor should repeal the stage three income tax cuts, most people may be unaware that Australia, unlike many nations, relies more heavily on income taxes than other sources of revenue, thus disproportionately shifting the tax burden on to workers. We need more targeted consumption taxes and fewer income taxes.

The policy paralysis when it comes to ageing extends to a failure to recognise the value in keeping older Australians in work longer. There is a disincentive for those of retirement age to keep working into old age because doing so reduces their access to super. Also, the tax rates they face aren’t reduced, and part-time work can put pensions and Health Care Card benefits at risk.

The fact of private aged care providers losing money is another of the problems that more work on policy needs to address.

All of which is why the entire tax system needs to be reformed. Instead all we got was a jobs and skills summit aimed at softening up the business community in advance of industrial relations reforms not laid out at the election.

This column has laid out a case for the need to do more on the policy front in preparation for the ageing of the population without even discussing the turmoil in the aged-care sector: ballooning government spending, poor health outcomes and now, we learn, private providers losing money, suggesting many will exit the sector as demand becomes more acute.

If aged care is to be funded adequately then the tax-and-spend system needs a substantial, wider overhaul. Without it, government spending will continue to be funded by more debt, and the interest bill will need to be paid back. By who? Younger generations.

Peter van Onselen is professor of politics and public policy at the University of Western Australia and Griffith University.