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Thursday, 4 April 2019
Page: 14912

Pensions

Dear Mr Vasta

Thank you for your letter of 23 November 2016 to the Minister for Human Services, the Hon Alan Tudge MP, regarding Petition PN0024 about changes to the pension assets test that take effect from 1 January 2017. Your letter was referred to me as the matter raised falls within my portfolio responsibilities. I regret the delay in responding.

Having carefully considered the issues raised in the petition, and acknowledging what a difficult area this is, it appears worthwhile to mention some background information to the issues that the petition raises before discussing specific changes to the Age Pension announced in recent Budgets.

The role of the Age Pension in the retirement income system is to act as a safety net payment that is designed to support a basic, acceptable standard of living, particularly for those with few other resources. The Age Pension is funded by taxpayers, and targeted through the means test to those who need it most. As a non-contributory social security payment, eligibility for the Age Pension is not based on past income or contributions, or taxes paid during a person's working life.

As the 2015 Intergenerational Report identified, the number of people of traditional working age (being 15 to 64 years old) for every person aged 65 and over has fallen from 7.3 people in 1974-75 to an estimated 4.5 people in 2015. By 2054-55, this is projected to nearly halve again to only 2.7 people. This means that there will be a smaller and smaller proportion of people paying taxes available to pay for a larger proportion of people requiring the

Age Pension. The idea that taxpayers pay taxes to then enjoy their pension once they reach the age of retirement is not an accurate portrayal of how the mechanics of the tax and transfer system works. What happens in a structural sense in the economy is that this generation of taxpayers is paying taxes to allow this generation of pensions to be paid. If the Australian Government was to make no changes, payments made through the age and service pensions are projected to increase from 2.9 per cent of Gross Domestic Product today, to 3.6 per cent by 2054-55.

Failure to deal with this growing spending problem will mean that future governments will be forced to reduce spending on other social programs in health or disability, or invest less in programs in education and infrastructure that ultimately assist in growing the economy and help to pay for the Age Pension. Alternatively, government deficits and debt will increase, and this is just something that the Government does not consider to be a viable long-term option. Without any changes, the expenditure on the Age Pension was projected to rise from $39.5 billion in 2013-14 to $72.3 billion in 2023-24. This left the Government with the difficult task of identifying where restraint could and should be exercised.

As part of the 2014-15 Budget, the Government put forward a number of proposals to improve the sustainability of the Age Pension. This included increasing the Age Pension qualifying age from 67 to 70 from 1 July 2025 to 1 July 2035, and indexing pension payments by the Consumer Price Index from 1 September 2017. These changes would have ensured that spending on the age and service pensions would be projected to account for 2.7 per cent of Gross Domestic Product by 2054-55, which is similar to today's level. As you would be aware, the Government was unsuccessful in having these measures pass the Senate.

However, any rational government cannot walk away from the necessary goal of having a pension system which is sustainable for future generations. The Government maintains its policy to increase the Age Pension qualifying age to 70, however has decided not to proceed with plans to index the pension to Consumer Price Index only. With this in mind, the Government implemented an alternative approach in the 2015-16 Budget.

Under the reform of Australia's pension system, the assets test has been changed to ensure that resources are focused on those with lower or moderate private wealth outside of the family home. The family home will continue to be excluded from the assets test and as at 1 January 2017, the asset free area for pensioners has increased. For couples with a family home, this increased from $296,500 to $375,000. This has resulted in around 165,000 pensioners with moderate assets receiving an increased pension by an average of about $25 a fortnight, including around 47,600 pensioners qualifying for a full pension. Assets tested couples who own their own home with additional assets of less than $453,500 have received a higher pension.

The effect of this is that around 90 per cent of pensioners and other Australians who receive pension-linked payments are either better off, or have had no change to their arrangements under these new rules.

In terms of the changes to taper rates and the assets test cut off, it is fair to point out that the changes the Government has introduced only reverse the changes made by the Howard Government in 2007. Pension payments are reduced by $3 a fortnight for every additional $1,000 in assets above the minimum threshold for a full pension, rather than $1.50. This results in the assets test cut off, excluding the family home, being set at $550,000 for single home owners and $827,000, for couple home owners.

The lower taper rate introduced by the Howard Government had put an extra 110,000 people on the part-pension, which in the context of the time, while generous, was at least for a short time affordable. This change was introduced at a time when the budget was in surplus, and there was $40 billion in the bank. Due to the state of fiscal disrepair left by the former Labor Government, this measure is no longer affordable. The sad reality of the present situation is that any expenditure in pension payment growth that cannot be restrained by this Government will be expenditure on pensions funded by debt and required to be repaid by future generations of taxpayers.

It is also important to note that during the 2016 election, Labor ultimately acknowledged the importance of budget repair and confirmed they would not be reversing the Government's changes to the assets test were they to win government.

The Government appreciates that these changes affect a number of pensioners. In the worst case scenario of the recent budget changes, anyone negatively impacted will require a drawdown of less than 1.9 per cent on their additional assets to maintain their current level of income. From commencement of the changes all people who had their pension and associated Pensioner Concession Card cancelled because of these changes were guaranteed eligibility for the Commonwealth Seniors Health Card and/or Health Care Card, which provides the same concessional access to pharmaceuticals as is given to those on the pension.

In addition, as announced in the 2017-18 Budget, the Pensioner Concession Card will be reinstated to former pension recipients who lost entitlement to the Pensioner Concession Card on 1 January 2017 because of the changes to the assets test. This change will be implemented from 9 October 2017, and will facilitate these people accessing hearing services through the Department of Health, as well as discounts and concessions offered by the states and territories and private providers. These recipients will also continue to benefit from access to Commonwealth concessions for pharmaceuticals and Medicare services.

Consistent with the Health Care Card and Commonwealth Seniors Health Card they currently have, the Pensioner Concession Card will be automatically reissued with an ongoing income and assets test exemption. Other eligibility requirements, such as portability conditions, will still need to be met. These people will also retain the Commonwealth Seniors Health Card to ensure they continue to receive the Energy Supplement. The Health Care Card will become redundant and will be deactivated and not be reissued.

These changes to the assets test should not act as a disincentive for people to save for their retirement. Analysis based purely on income loss as a result of a reduced part-pension, does not recognise the capacity of people to draw down on their assets to support themselves in retirement. It suggests that people should be able to earn income from their superannuation and other retirement savings while retaining their capital base intact, with the Age Pension operating as an income top-up. This would mean that the Age Pension system would support wealth maintenance, rather than savings, including from superannuation, being used for self-support in retirement.

For those most affected by the changes announced in the 2015-16 Budget (partnered home owner couples who have $827,000 in assessable assets and single home owners with $550,000 in assessable assets from 1 July 2017), their level of assets held, not including their home, equates to almost 24 years of the full rate of partnered or single pension. Rather than being disadvantaged by having substantial savings, retirees affected by the assets test changes could still support a significantly higher standard of living in retirement than the maximum rate of pension through a combination of investment earnings, capital drawdowns and eventual pension entitlements.

For example - assuming the drawdown of investment returns and capital over a 35 year period, and long-term investment returns averaging five per cent, the partnered couple could generate a total income (including investment returns, capital drawdowns and eventual pension entitlements) of over $59,000 a year in real terms, which is approximately $24,000 a year higher than the partnered full pension, and the single person could generate a total income of around $40,000 a year in real terms, which is approximately $17,000 a year higher than the single full pension.

Allowing the Age Pension to support wealth maintenance, by acting as an income top-up on superannuation earnings, while allowing retirees to keep their capital base intact, would go against the original intent and design of the superannuation system, that original intent being to reduce demand on the Age Pension system by building up savings for individuals' use to support themselves in retirement. The Age Pension is a safety net designed to provide assistance to those who do not have the means to provide for their retirement.

While more people, including those on average incomes, will be affected by the changes to the Age Pension over time, this is not surprising. The key driver of the projected lower future Age Pension coverage is higher superannuation balances. This will occur as the superannuation guarantee further matures and retirees, including those on average incomes, have had a lifetime of superannuation contributions. This is the superannuation system doing its job. More people will retire on higher super balances reducing their call on the Age Pension.

Thank you again for putting this petition to the Government. I trust this information is of assistance.

from the Minister for Social Services, Mr Porter(Petition No. PN0024)