Labor eyes pension rise to offset tax

THE government is in the advanced stages of modelling an increase in the age pension to compensate for the introduction of the carbon tax

THE government is in the advanced stages of modelling an increase in the age pension to compensate for the introduction of the carbon tax, but senior ministers are divided on exactly how the rise should be calculated.

The expenditure review committee, which takes new policy and spending proposals to cabinet, is looking at whether to make the increase an annual top-up, which could change if the carbon price changed, or an increase in the pension calculated as a percentage of average wages.

The age pension is just under 28 per cent of average earnings.

Cabinet is expected to consider the proposal when it next meets, but did not discuss details yesterday.

Wayne Swan and Finance Minister Penny Wong are believed to be pushing for a yearly top-up amount rather than increasing the pension calculation as a percentage of weekly earnings. The concern is that increasing the percentage calculation would make the increase one that continued to rise with weekly earnings, potentially putting pressure on the budget.

A top-up could be adjusted if the carbon price changed, giving the government greater flexibility and allowing it to make an annual payment or spread that amount out in fortnightly payments.

A spokesman for the Treasurer refused to deny the government was looking at raising the age pension or that there was division over exactly how to do so.

"We have made a commitment that every cent of revenue raised under a carbon price will go to assisting households with price impacts, supporting jobs in the most affected industries and investing in programs to tackle climate change," the spokesman said.

Raising the percentage calculation could put the budget under additional strain in future as the government attempted to return to surplus by 2013-14 before beginning the process of paying off government debt.

Treasury documents released last month, under Freedom of Information laws, showed that a $30 price on carbon was estimated to increase the cost of living for households by an average $867 a year

Best estimates of raising the pension to offset the cost of a carbon tax on pensioners would be about $3 billion a year.

Kevin Rudd's carbon pollution reduction scheme would have provided aid in the form of a 2.5 per cent rise in pensions and a range of allowances such as family tax benefits, a $390 increase in the low-income tax offset and direct grants of up to $700 over two years to those missed by other compensation measures

"The CPRS included pensioner-specific compensation so it is hardly surprising that increasing the aged pension is on the cards" a senior government source told The Australian.

Pensioners cannot be compensated via tax cuts, so an increase in the age pension is the most obvious way to offset carbon tax impacts on the cost of living.

It is understood the increase in pension will not be included in the May budget because the government has already said that the carbon tax and various compensation packages needed to be extensively modelled and tested with stakeholders before being settled on.

Julia Gillard's language has been tailored to imply there would be compensation for older people ever since she was asked about the issue on the ABC's Q&A program on March 14. Labor sources said they believed the government had a special problem with older voters who have disproportionately reacted negatively to pricing carbon, reflected in the party's internal polling.

Images of older Australians attending the rallies against the carbon tax coupled with the older demographic that tunes in to talkback radio, which has criticised the carbon tax, highlight that Labor needs to reconnect with older voters.

In Labor's first term, the government initially refused to give in to opposition demands to lift the age pension by about $30 a fortnight when Brendan Nelson was Liberal leader, before eventually increasing it after cost-of-living pressures mounted. It was revealed during the election campaign that as deputy prime minister, Ms Gillard argued in cabinet that a big rise in the pension was excessive because "old people never vote for us".

She refused to detail cabinet discussions when the revelations were aired but denied that was her final position and said she supported the increase.