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Social Security and Other Legislation Amendment (Pension Reform and Other 2009 Budget Measures) Bill 2009

CHAIR —Thank you for your patience. I welcome the representative from the Australian Council of Public Sector Retiree Organisations and the Association of Independent Retirees Australia. I will just check that the association is available to take part by teleconference.

Dr Ritchie —Yes, I am here.

CHAIR —Thank you very much. You both have information about parliamentary privilege and the protection of witnesses. Mr Hayes, we will start with your making an opening statement and then, Mr Ritchie, we will go to you. In the room, Dr Ritchie, the committee members who are present are Senator Mark Furner from Queensland, Senator Rachel Siewert from Western Australia, who is Deputy Chair; Senator Sue Boyce from Queensland, and Senator John Williams from New South Wales.

Dr Ritchie —Thank you.

CHAIR —Mr Hayes.

Mr Hayes —Thank you. The Australian Council of Public Sector Retiree Organisations has 11 affiliated organisations, which include the Defence Force Welfare Association, the South Australian Superannuants, the Superannuated Commonwealth Officers’ Association and similar retiree organisations in New South Wales, Victoria, Tasmania, Western Australia and Queensland. Together, our 11 organisations have 700,000 members. The average public sector retirement pension paid to these members varies between $25,000 and $30,000 per annum. Most of these members presently receive a part age pension, with their entitlement being determined by the income test.

Before commenting on the changes to the income test, I need to say that my organisation supports the announcement in the federal budget of the base rate of the age pension being raised and the single pension rate becoming two thirds of the couple’s rate; however, we are most concerned with the intention to raise the income-test taper rate from 40c to 50c in the dollar. There is to be no change in the asset-test taper rate. Dr Hickman of the South Australian Superannuants has provided the committee with papers that set out the combined impact of the increases in the age pension and the increase in the taper rate, so I will avoid going into that detail.

The first of the brief points that I want to make are that the income-test taper rate change will go far beyond the stated intention of just preventing the full flow-on of the base rate increase. Existing income tested part age pensioners will be forced on to the new higher taper rate. People who will be adversely affected include people of modest means, such as couples with combined private incomes of as little as $12,000 per annum. It appears that income tested part age pensioners are the only group of Australians required by government to accept a reduction in their standard of living. Income tested part age pensioners appear to be the only group of retirees being asked to contribute towards the cost of an increase in the age pension base rate. Income tested part age pensioner couples of very modest private means will be not only contributing to the cost of the increase in the base rate for those worse off than themselves but also contributing towards the cost of providing an increase for asset-tested pensioners who are much better off. We believe that the base rate should be increased without any change to the means testing, until a fair and more equitable change to means testing has been devised.

I need to say something about the grandfathering provisions or the so-called transitional safety net that has been announced by ministers. There is no doubt that most retired couples receiving part age pension will quickly find themselves worse off than they would be under the present arrangements with no increase in the base rate. Existing part age pensioner couples who are income tested are destined to have their age pension entitlements reduced compared with what those entitlements would be if the taper rate were not changed. Over time, they will find themselves moved to a pension calculated by using the new higher taper rate. The time it takes for this to happen depends on the amount of private income that the couple has. People with relatively small private incomes will find themselves on the new lower pension relatively quickly. A couple with a private income of $30,000 per annum, such as a public sector retirement pension, will be moved over to the new taper rate gradually. After eight years, they will be $40 a week worse off than they would be under the present arrangements with no increase in the base rate. All this is set out in the tables contained in the papers provided by Dr Hickman. Thank you.

CHAIR —Thank you. Dr Ritchie, would you like to make an opening statement?

Dr Ritchie —Thank you. AIR represents the interests of self-funded retirees and its concern is primarily with the change to the income tested taper rate from 40c to 50c. About 800,000 retirees are on a part pension, according to the report from the Henry tax review into retirement incomes. About 700,000 of those get over 90 per cent of the full age pension. As a result, all of those people, as a proportion of the three million retirees—a large group—receive private incomes not very much over the full age pension amounts. They are not wealthy and they have few assets. In addition, they have great uncertainty about issues such as how long they will live, whether their money will last and their risks of having to change their accommodation and of poor health. The increase in the taper rate means that they will not be able to maintain their wellbeing, which they need to do, and they will use up their assets faster. This will cause their income to fall faster and they will move faster to higher pensions and a reduced standard of living. The end result of this is that they will have a reduced standard of living and the government will have to meet higher costs in the long term. So, for a short-term gain, the government will incur long-term costs.

Let us look at the order of magnitude of the proposed change. A retiree couple with a 90 per cent full age pension presently receives about $575 a week, compared with the full age pension of about $500 a week, and they contribute about $125 of their own money. For the same contribution of $125 a week, under the proposed new taper rate, they will receive about $563 a week; that is, their income will fall by $12 a week. While this might seem a small amount to those with a lot of money, it will be a large amount for individuals who are living at these levels. So the drop is quite substantial and it covers a very large number of people—some 700,000.

The pension can be considered as a wage paid by the government to retirees and, in that sense, it can be related to the industrial relations system. Effectively, the wage which is to be paid is to be reduced by $12 a week. Very few unions would accept this proposition, and no other group in Australia is being asked or forced to reduce their income at this time. It seems unreasonable that this should be thrust purely on part age pensioners.

The proposal pre-empts the Henry tax review, which has stated that it will review part age pensions as a part of its review to be reported at the end of the year. The present proposal is ill considered, the transition arrangements make little sense, the effect on the standards of people with UK and New Zealand part pensions has not been taken into account and it is retrograde. It would be far better to wait for the Henry tax review to introduce a measure of such importance to pensioners. Thank you.

CHAIR —Thank you.

Senator SIEWERT —You have made a point about 75 per cent of retirees being on over 90 per cent of the pension. How many of your members will be affected by these changes?

Dr Ritchie —The last survey we have is from 2006, when about 80 per cent of our members had a part pension.

Senator SIEWERT —You talk about part pension; what would be the average percentage?

Dr Ritchie —I do not have that figure for our members. The figure that I have is from the Henry tax review, which says that about 800,000 of them are on a part pension, most of which are quite close to the full age pension level.

Senator SIEWERT —But they would not count as self-funded retirees, would they?

Dr Ritchie —Yes. We count self-funded retirees as those who fully or partly support themselves from their own investments, if that makes sense.

Senator SIEWERT —How many people do you calculate will be affected by the taper rate?

Dr Ritchie —The figure shows it to be about 800,000.

Senator SIEWERT —We will move over completely to the new system in 2013. Is that right?

Dr Ritchie —Yes. Of course, by 2013, the number will be 800,000 plus the increase in retirees between now and then; so, in that sense, it is difficult to give you an actual figure. At present, the 800,000 people will not be directly affected but they will move, as Tom Hayes has said, fairly quickly to be affected by this.

Senator SIEWERT —In terms of—

Dr Ritchie —The transitional arrangements.

Senator SIEWERT —At estimates, the department said that, between now and 2013, they will check constantly to see whether you are better off under the new system or the old system. You say that they will not be affected immediately, but they will be by 2013.

Dr Ritchie —That is correct; but they will be affected much earlier than that because of changing circumstances. Every one of those people has to have their pension redetermined every year and what happens to their part pension depends on the performance of their investments.

Senator SIEWERT —The way the department described it is: if you are better off in the old system, you stay in the old system; and, if you are better off in the new system, you go to the new system. That is how they are characterising it, and we can double-check that with the department this afternoon. But, basically, they say that for the next five years they will check. In theory, it is supposed to be that, whichever way you are better off, you remain or are on that system. Is that how you understand it?

Dr Ritchie —Yes; except that I must say it is extraordinarily difficult to understand.

Senator SIEWERT —Yes, I know. It took a long time to ask the department and get to the bottom of it.

Dr Ritchie —I cannot understand how one will become worse off from the new system if, as the budget says, existing people will have their present rights retained. That does not make any sense to me, I have to say.

Senator SIEWERT —We will follow that up again with the department this afternoon.

Dr Ritchie —But I am sure that, as presently planned, the effect will be that those people will move much faster on to the new arrangements than the five years referred to.

Senator SIEWERT —That is in relation to the taper rate. What do you think of the other two amendments that relate to changes in the pensioner index and to MTAWE?

Dr Ritchie —We very much support the change to the percentage of the MTAWE that moves the single pension to 67 per cent and then proportionally across to couples; we strongly support that. We support the new index. But, remember, the ultimate measure is the percentage of the MTAWE. So, if the new index increases costs to people, that will be brought back again—if I can use that term—when the percentage against the MTAWE is determined. So the index really only provides small changes in between the periods when the percentage of the MTAWE is determined. I am sorry; can you understand what I have said?

Senator SIEWERT —No, I am sorry; I did not follow that.

CHAIR —We will give that argument to the department and see whether they can make it clear, because that is certainly not how I understood it.

Senator SIEWERT —As I have said, we spent quite a bit of time during estimates trying to work out how they were doing it and what was the interaction between the various indexation rates. When I came out of that, I must admit that I thought, ‘Oh yeah, it sounds okay,’ but maybe I misinterpreted what the department said. Would you mind commenting on the age pension age being increased from 65 to 67? Do you have any thoughts on that?

Dr Ritchie —As an organisation, we do not have a comment on that. Our members are retired already, so I have to say that the issue of raising the retirement age from 65 to 67 by 2014 is not of great interest to them.

CHAIR —Mr Hayes, do you have a comment to make on that?

Mr Hayes —We are in the same situation as Dr Ritchie. Our members are all retired, so we do not have anything special to say about it.

Senator SIEWERT —It is just that I presume you will continue to get more members—that is all—who may be affected by this.

Mr Hayes —Yes, we will. But I think we have to look at these community-wide decisions and make our own judgements about whether they have some reasonableness behind them. I think you could pass the increase in the age pension age on that test, but you cannot pass the increase in the taper rate on that test. It is discriminatory, and Dr Ritchie has made an excellent case as to why it is. With all due respect to the department, the use of ‘better off in the present system or better off in the new system so that they will always be better off’ is just a cloud of dust. This measure is going to save $1.2 billion over the forward estimates. It has to come from somewhere and it is coming from part age pensioner couples in particular. That is exactly what Dr Ritchie has said, and he and I are absolutely at one on this.

Senator BOYCE —At the risk of confusing ourselves even more, I would like to explore the grandfathering aspect a little further. Do I understand you to say that the reason for it cutting in in less than five years is that people have a lot of variation in their pensions on an annual basis and, therefore, they will fall out of the grandfathering provisions potentially with those changes to their assessments each year?

Dr Ritchie —Yes, that is what I am saying. That will happen and then it becomes a matter of what the actual formula to be used is. If people who are already on the 40c in the dollar taper rate continue to operate on it for five years and to get all of the other benefits, how do they ever become worse off, if you like, than if they were on the 50c taper rate? I just cannot understand what that means and I cannot determine from the bill what the precise meaning of that is intended to be.

Senator BOYCE —Mr Hayes, do you have something to add?

Mr Hayes —They will continue on the 40c taper rate, but their part age pension will be indexed only in so-called ‘real terms’. That means they will be indexed according to CPI, which is less than the way the part age pension is presently indexed and will continue to be indexed. The age pension and part age pension are indexed to wages or MTAWE. When you index something to CPI, it will fall behind gradually by between one and two per cent per year, and that is what will erode the part age pension. They will be on the 40c taper rate, but their part age pension will be eroded by the lower indexation until such time as they would be better off switching to the higher taper rate. That is the only way you can make sense of what the government has announced.

Senator BOYCE —I think I understand that. Just to try to put some figures around that: how many of the 800,000 people to which you have referred would have a variation year to year? Do the majority continue to have the same level of pension every year, or is it a moving feast?

Dr Ritchie —No. The great majority change each year.

Senator BOYCE —Mr Hayes?

Mr Hayes —I do not want to make a statement about what percentage change or do not change, but a pensioner couple receiving a part age pension at the present time of $50 a week, for example, immediately will get the $10.14 per week improvement that has been promised by the government. Then it goes on increasing but according to the CPI; it is a slower rate. Eventually at some point, had their part pension been calculated according to the new taper rate of 50c, they would fall to that level and that would take over. That is the crucial point. It will start impacting on most part-pensioner couples in about two years time. The $10.14 means that they will see an increase immediately; but the lower indexation will cut in after that and, within two years—certainly three years—most of them will be worse off than they are today.

Senator BOYCE —But they will not be worse off compared to others; so they would stay on the 40 per cent and not go to the 50 per cent. Is that what you mean?

Mr Hayes —Within two years, they will be worse off than had the $10.14 not been awarded and the taper rate left alone. That is because their pension would have been indexed with MTAWE.

Senator BOYCE —So the whole benefit of the pension increase will be gone within two years and then slowly they will start going backwards. Is that what you are saying?

Mr Hayes —Yes, they will be sliding backwards, although not in dollar terms. Each year they will see an increase but comparatively. Take two pensioner couples living side by side. One couple has this new arrangement imposed on them and, for some reason or another, the other couple are living in old time with nothing changing. If they compare their pensions year by year, the couple in new time will see their pension improve by $10.14 and they will think they are better off but, within two to three years, they will be worse off than the couple that did not get the $10.14. I hope that makes it clear.

Senator BOYCE —Yes, that makes it very clear. I have one general question for both of you, and I think Dr Ritchie touched on this earlier. There is a general impression that self-funded retirees are very busy booking their holidays to the Bahamas and buying condominiums in Spain. You have quantified that by pointing out that the vast majority of self-funded retirees, having so little extra income, are entitled to the full pension. Could you give us a sense with some descriptive material of what life is like for a self-funded retiree?

Dr Ritchie —Yes, I can try to do that. I did not say that a large number are on the full age pension; I said that they are on 90 per cent of the full age pension.

Senator BOYCE —Thank you.

Dr Ritchie —That is, they receive a very large amount of full age pension. I think the first thing to say about that is that the figures I quoted you are that a couple who at the moment are on the full age pension get about $500 a week. That is regarded as a safety net figure, giving a minimum living standard. Under the new system, a self-funded retiree receiving 90 per cent of the full age pension, which is the case with the great majority, will receive an extra $63 a week to live on, although they will contribute $125 a week from their own savings. The difference, of course, is the part pension. The sum of $63 a week is not a lot of money to live on above the minimum safety net position of the full age pension. So we are not talking about part age pensioners living on $2,000 or $3,000 a week; we are talking about the majority of them living on about $563 a week. There are about 20,000 to 25,000 fully self-funded retirees who have an income greater than the top of the 40c in the dollar marginal tax rate—that is, on incomes of about $150,000 a year. So it is only 20,000 of those people in Australia that one could think of as being wealthy. The other 800,000 self-funded retirees do not fit in that category at all. I think perhaps that is the best way to explain it. I know there is a feeling in the community that self-funded retirees are wealthy; the fact is that that is not true. Then, of course, on top of those receiving a part age pension, there are those who get the Commonwealth seniors health card; that represents about another 120,000 self-funded retirees. That demonstrates, I think, that the number of wealthy self-funded retirees is extremely small: only 20,000 to 25,000 people out of three million.

Senator BOYCE —Mr Hayes, would you like to comment?

Mr Hayes —Our members, of course, are existing on public sector retiree pensions; by and large, those pensions are very modest: $25,000 to $30,000 a year. They are not people with a lot of capital. They are ex-policemen, postal services people, teachers and so on. I do not think you could ever categorise any of them as wealthy members of the community. These people will be hit hardest by this change in the taper rate, as it is aimed at a more severe test of private income; your public sector pension is private income. It is hard to understand why the government could be persuaded to increase the age pensioner rate and at the same time get stuck into part pensioners in such a severe way.

Senator BOYCE —I just want to confirm some of the figures in the material from Dr Hickman. You suggest that, with the change to the taper rate, a pensioner would be $673 a year worse off after four years, which would rise to a maximum of $3,854 after 10 years. Is that correct?

Mr Hayes —Yes, that is correct.

Senator FURNER —Thank you for coming along to this inquiry today. I just want to rely on the evidence of the submission of the South Australian Superannuants. In his submission, Mr Ray Hickman draws upon the assumptions of changes in the taper rate moving from MTAWE to CPI. He relies upon the current CPI March 2009 annual figure of 2.5 per cent as opposed to the MTAWE figure of four per cent. Historically, the CPI figure for December was 3.7 per cent; if I take you back even further to June 2000, when the previous government introduced GST, it was six per cent. Is the real concern here about an erosion of the taper, based on it relying on the CPI figure? That is the feeling I am getting. Mr Hayes and Dr Ritchie, could you both respond to that, please?

Mr Hayes —For the transition to achieve the savings forecast by it, the government is relying on an expectation that the CPI will be significantly less than MTAWE; otherwise, the transition does not make any sense. So, by indexing existing part age pensioners to the CPI, they will slide down gradually. If we have some totally bizarre development in the economic landscape whereby CPI exceeds MTAWE, that would be totally disruptive; but nobody expects that to happen. The Henry review and all the economists expect that the CPI—as it has behaved for quite a while now—will be less than MTAWE.

Senator FURNER —I guess that is the problem with CPI figures: they relate to the economy, the price of living and all those other variables at the time; there is no projection on what they might be.

Mr Hayes —The CPI these days is a measure of pure inflation and not of prices on the shelf. Prices on the shelf are corrected for perceived improvement in quality; they are discounted for that if there is an improvement in quality, because that is not pure price increase. Australia has followed world standards and world practice in this, which is why the government for many years now has been obliged to index the age pension to MTAWE. That is not done because of their generous heart; it has been done because it is necessary to keep the age pension abreast of shelf prices. CPI is not a reflection of shelf prices.

Senator FURNER —Dr Ritchie?

Dr Ritchie —I can only support what Mr Hayes has said and I cannot really add anything to it.

Senator FURNER —Earlier today, we heard evidence from one group—in part, this relates to the retirement age being increased to 67—based around lifting, in parallel, access to the superannuation age and also advocating that it be mandatory. What is your view on that occurring to bring it into line? The situation, particularly for your members, will be of their being able to access their superannuation at, say, 55 or later—between that and the retirement age. If that were the case, what sort of impact would it have on your members?

Mr Hayes —I will go first because I think this question is primarily for Dr Ritchie. It does not affect our members, but I do know a little bit about it. To align that with the increased age pension age, I think, would be a very severe blow to the superannuation system.

Senator FURNER —Dr Ritchie?

Dr Ritchie —Again, I cannot speak for the association on this, but I would tend to support the movement of the preservation age to being the same as the age pension age simply because it gives a view in the community of consistency in approach. It says that the benefits of superannuation will occur at the same time as the benefits of the age pension. That makes logical sense because the superannuation system itself contains incentives to encourage people to work and to continue to work to benefit their eventual retirement. I believe that consistency is the sensible way to move.

Senator FURNER —Part of the proposed incentives of the package is to introduce a change to the work bonus—and I am sure that you are aware of it—which is the ability to have a test of indexation of $500 per fortnight. Of your membership, how many who are in some form of employment might benefit by that scheme?

Dr Ritchie —A very high percentage of our members above the age of 65 still work part time. They will benefit directly from that, even though in many cases their earning rate is greater than $500 per week.

Senator FURNER —You have said ‘a high percentage’; what sort of percentage are you referring to?

Dr Ritchie —We tend to think that people do not work after they have retired, but the figure of those who do is around 10 per cent. You can use me as an example, if you like: I am just coming up to 76 and I stopped working six months ago.

Senator FURNER —Good on you.

Mr Hayes —I really cannot add much to that. It is a sensible improvement to the system. It encourages people to stay in work, and we have to applaud that. But I am not able to give you any figures about the percentage of our members who are still partly employed.

Senator FURNER —Thank you very much.

Senator WILLIAMS —Dr Ritchie, I imagine that many self-funded retirees rely on dividends from the stock market.

Dr Ritchie —Yes. The vast majority of self-funded retirees, including those on a part pension, have investment, either through superannuation or self-funded investment. That is the dominant form, apart from property, of the way in which assets are held.

Senator WILLIAMS —Obviously, as a result of the crash of dividends in the stock market, a lot more people would have been reliant on a larger pension intake because of the shrinking of their dividends. Would that be correct?

Dr Ritchie —That is quite correct. In addition, their assets, of course, have reduced markedly, which makes it very, very difficult for them to perceive how they will manage over the full life of the 30-or-so years that they still have to live.

Senator WILLIAMS —Hence, if we do not see a marked improvement in the stock market and the dividends from those investments, we will see more people being affected by this taper rate change in years to come.

Dr Ritchie —Yes, absolutely; and the government will be up for a much higher cost in the future, as people are forced to move to higher part pensions and then to full pensions.

Senator WILLIAMS —Thank you, Dr Ritchie. I commend you on your work ethic. I am sure that working longer did you more good than harm.

Dr Ritchie —It kept me interested and away from my wife.

Senator WILLIAMS —Well done.

CHAIR —As there are no further questions, we thank you, Mr Hayes and Dr Ritchie. If you think of anything else that you want to add, please get back into contact with us when you can.

Dr Ritchie —Thank you, Madam Chair.

Mr Hayes —Thank you, Madam Chair, and thank you, Senators.

[11.40 am]