Issues with the assets test and the taper rate highlight the need for considered, coherent and comprehensive reform of retirement incomes policy, argues ANU Professor and CSRI member Andrew Podger,
Former Labor government minister Craig Emerson has argued Labor’s decision to oppose tightening the superannuation assets test was opportunistic, likening it to the 1989 decision by the Hawke government to subsidise an Australian factory of doomed camera film company Kodak.
But is Emerson right?
More opportunistic is the government’s proposal itself, as is the Opposition’s proposal to change superannuation tax arrangements. Both are piecemeal measures dressed up for popular support by images of millionaires receiving unjustified benefits. Equally opportunistic is Prime Minister Tony Abbott’s insistence that any change to superannuation arrangements would amount to an attack on people’s hard-earned savings.
What we really need is a considered, coherent and comprehensive review of retirement income policy.
Emerson, an important advocate of long-term reform, rightly draws attention to some of the weaknesses in the government’s proposals, and criticises the Greens for pre-empting the Senate inquiry reviewing the legislation. But I think he fails to appreciate just how problematic the assets test change is and that it might make wider reform harder, not easier.
A well-designed means test focuses on the maximum level of the pension (what is an adequate amount to ensure protection from poverty) and the rate of taper applied as non-pension income and assets increase (what rate would retain reasonable incentives to work and to save). The point at which eligibility cuts out is simply a function of these two variables. The government has focused almost entirely, however, on the cut-out points, highlighting the fact that for couples they are currently above the magical $1 million of assets. Little, if any, explanation has been given to the impact of the rate of taper needed to achieve the new cut-out points. A comparison with the better-designed pension income test demonstrates the problems involved.
The income test has a withdrawal rate of 50¢ in the dollar from a little over a “free” $7000 a year. With a maximum combined pension of more than $33,000 a year, this makes the cut-out point just less than $75,000. The taper was lifted from 40¢ following a 2009 Harmer Review recommendation and no one is suggesting reducing the ensuing cut-out point. To generate an income of $75,000, including drawing down the capital, as well as living on the interest, a couple in their late 60s would need nearly $1.5 million at normal interest rates and as much as $2 million at the current abnormally low rates. To reduce the cut-out point to less than the equivalent of $1 million in assets (ie, to an income of about $50,000 or less) would require a taper of about 75 per cent.
The government’s assets test has an effective taper that is much higher than this, because it involves not only a cut-out point of $823,000 for a home-owning couple, but a “free area” of $375,000. Seventy-eight dollars of pension is lost for each $1000 of assets between these two amounts, or much more than 100 per cent of the income, including some drawdown of assets, that could reasonably be derived from the extra $1000.
The consequences for incentives are significant. For example, unless they already have more than $800,000, a couple in their 50s or early 60s who have superannuation savings of $300,000 or more would probably be wise to contribute no more than 9.5 per cent of their wages and focus instead on paying off the mortgage. Yet our superannuation arrangements are intended to encourage greater contributions, particularly at this time in their lives.
Couples in their 70s will be discouraged from any downsizing plans to free up assets for other consumption purposes because of the impact on their age pension entitlement.
None of this is to suggest there is no room to tighten the means test. Consideration could be given to include the value of the home above some threshold. Also, the income test deeming rules could be more closely aligned to the incomes people could derive from their assets, including from drawing down the capital over their retirement years. This would allow the income test and assets test to be merged, as recommended by the Henry review, encouraging older people, and the whole community, to stop thinking in terms of accumulated savings (and the apparent huge amounts involved) and focus instead on retirement income streams and the (much more modest-appearing) amounts most people would wish to live on.
The likelihood that a majority of the aged would still receive some pension is not a matter for alarm. That was always expected and is simply a function of an adequate maximum pension and a reasonable means test taper.
What our superannuation system is achieving successfully is a sharp shift away from allowing most older Australians to receive full-rate pensions to ensuring most receive only a part-rate pension, with a not-insignificant increase also in the proportion receiving no pension.
Comprehensive reform, of course, must go beyond the age pension and include the level and fairness of superannuation tax arrangements and the effectiveness of those arrangements in delivering adequate and secure incomes over people’s retirement years.
The government’s concession to the Greens to broaden the tax white paper process might be a step in the right direction, but a more independent and comprehensive review seems more likely to encourage bipartisan – and community – support for genuine reform.
Andrew Podger is ANU professor of public policy and a member of the Committee for Sustainable Retirement Incomes. This post originally appeared in the Australian Financial Review on 8 July, 2015.