Elderly Poor Are the Victims of an Unfair Pension System
March 3, 2009
Reforms are needed to ensure benefits reach the people in need.
A pension system that paid benefits to the wealthy but left hundreds of thousands of others living in poverty would fail a basic test of fairness, right? Sadly, that's exactly what Australia's retirement income system now does.
The latest research from the National Centre for Social and Economic Modelling, commissioned by the Brotherhood of St Laurence, contains some extraordinary findings. Although most age pensioners had lower incomes than average, 2 per cent, or 51,200 people, were in the highest income quartile. The age pension is also not well targeted in terms of wealth. Fourteen per cent of people receiving the age pension are living in the wealthiest 25 per cent of households, with an average net worth of $1.6 million. This included owner-occupied housing that's not assessable as part of the means test for the pension.
At the other extreme is the struggle faced by single age pensioners who rent in the private market.
A 2007 analysis by the Australian Housing and Urban Research Institute showed that 6.5 per cent of older recipients of government rent help paid more than half their income on rent.
That's almost 14,000 older people left with less than $23.50 a day to live on after paying their rent. Many tens of thousands are only marginally better off. Little wonder that welfare organisations are beginning to find elderly pensioners undernourished and living in fear of becoming homeless.
Something has gone dramatically wrong here. The age pension was created by social reformers in 1909 to protect those unable to save against poverty in their old age, at a time when many old people were left in extremely dire straits.
Thankfully our expectations of the pension have increased in the century since then. In addition to providing shelter, nourishment and warmth, today we expect the pension to provide older people with a comfortable and dignified retirement. Many pensioners are rightly angry today because the pension isn't delivering on this promise. But reformed and properly targeted, it could.
Over time and unintentionally, the idea of the pension has changed from a safety net against poverty in retirement to an almost universal entitlement. Within certain bounds, this is understandable; after all, we all create wealth and pay taxes and expect the nation to provide for us in return. But in recent years reasonable bounds of fairness have been breached because income and assets tests have worked in favour of the well-off and not the most in need.
Worst of all, in the age of superannuation and rising asset prices, the principle of fairness is being undermined by sophisticated retirement planning unforeseen by governments. By restructuring their assets and income, many wealthy retirees are now able to skirt the spirit of the tests to maximise their eligibility not just for the pension but also for the pensioner concession card.
Now, the centenary year of the age pension, is the time to clean it up and protect future pensioners from poverty. In principle, the pension should be increased, but with the benefits aimed at those most in need, and the changes should be paid for in part by cutting back some of the most obvious anomalies.
Single pensioners and renters are more likely to be in poverty than married pensioners and home owners. The base rate for single pensioners and rent assistance should therefore be increased immediately and significantly.
The system sets up an incentive for people to reorganise their assets to qualify for a part-pension — often not so much for the pension itself, which can involve only small sums, but to qualify for concession entitlements. To make this unnecessary, the Government should introduce a universal concession card for everyone over 65.
But two other big changes are needed to make our system truly fair. The more than $20 billion in superannuation concessions that benefit the wealthiest taxpayers should be slashed to help pay for pension increases. Many of these concessions now have less to do with retirement incomes than with tax minimisation for the super rich.
More controversially, high-value owner-occupied housing should be subject to the pension assets test. This is bound to raise noisy objections, but is it fair that so many people sitting on enormous property wealth are exempt from the assets test when much poorer renters gain no such benefit?
In the worst cases, people are intentionally pouring money into their homes to qualify for higher pensions. Reverse mortgage arrangements, for instance, could allow people to draw down on the value of their home to create an income stream in their retirement years.
With the housing asset test set at a high enough level — say well more than $1 million — most homes that have increased in value through house-price inflation over the past decade would be excluded.
This is challenging, certainly. But unless changes are made, as our population ages, more and more wealthy people are going to be supported unnecessarily in their retirement by the taxes of a decreasing proportion of younger Australians who lack substantial assets but have children to raise.
Worse, without reform, the money will not go to the pensioners who are doing it the hardest.
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