Pension Reform strikes the right balance, but Government wrong on super

Welcoming the passage of the age pension reform bill last night, ACOSS described the policy reforms as sound and fair, while calling for the Government to conduct its retirement incomes review in good faith with an openness to superannuation reform.

“The changes to the Pension assets test passed by the Parliament last night help ensure that the Pension is going to people who need it, including improving the adequacy for people who have limited assets. The tightening of the assets test to pre-2007 levels reinforces the role of the pension as a safety net payment to prevent poverty,” said Dr Cassandra Goldie.

“ACOSS also welcomes passage of legislation abolishing the Seniors Supplement. This Supplement is very poorly targeted, going to older people who are not eligible for the Age Pension due to their substantial assets.

“However, whilst we support the policy reforms passed last night, we are concerned by the expedited parliamentary process. The changes to the pension are significant and complex and warranted a Senate Committee hearing.

“We also strongly criticise the Federal Government for ignoring the groundswell of opinion about the need for superannuation reform. The changes to pensions now legislated must be coupled by reform to superannuation to deliver an a robust and effective Retirement Income System that will stand the test of time.”

“Right now, the benefits of our superannuation system flow disproportionately to those who would be able to provide for their own retirement futures. Those in the top 10% currently receive the one third of the benefits of superannuation tax concessions, costing the Federal Budget over $30 billion a year.

“Reform of superannuation has attracted widespread support from diverse parts of the community, including the Committee on Retirement Income System, ACOSS, COTA, the Chair of the Government’s Commission of Audit, Tony Shepherd, the Business Council of Australia, David Murray in the recent Financial System Inquiry, the Grattan Institute, the Australia Institute, and Alan Jones. Both the Opposition, and the Greens have also urged appropriate reform.

“Our submission to the Senate pension reform bill review recommended two mechanisms to ensure the overall adequacy, balance and sustainability of the retirement incomes system:

  • A retirement incomes review
  • A regular review of payment adequacy

“The Retirement Incomes Review must be comprehensive and conducted in good faith, with all reform options on the table for consideration. This must include reforms to superannuation tax concessions. The Review must also include the three key pillars of secure retirement: adequate income; affordable housing; and universal health care.

“The Retirement Income Review must settle the core purposes of the Age Pension, Superannuation and the Retirement Income System as a whole. The Review must make clear recommendations about reform to Superannuation, and set out a method by which future reforms will be developed, considered, and carefully implemented, ideally with bipartisan support.

“We need a clear mechanism for future governments to ensure adequacy of the Age Pension in the decades to come consistent with its core purpose, as well as superannuation.

“The adequacy of pensions is important but they are one part of a wider social security system. For example, adequate allowances for unemployed people and family payments are also essential to prevent poverty. A regular review of incomes support adequacy should be conducted by an independent expert body to take some of the short-term politics out of the settings of payment levels, and the way they are adjusted over time.

“This should be done by reference to  the adequacy of base payments, indexation and supplements by reference to basic living costs, community living standards and measures of poverty and deprivation. Decisions on payment levels and indexation would be made by Parliament, based on recommendations from these independent reviews.

“We must get the balance right. People cannot have a secure retirement without affordable housing, health and aged care. The government spends over $60 billion a year to support retirement incomes – much of which goes to people who don’t need help – while at the same time it starves the States of funding they need to provide health care. Very little is being done to reduce the cost of housing and the present tax system is making matters worse,” Dr Goldie said.

Media Contact: Fernando de Freitas 0419 626 155

Key points:

  • The changes to the pensions assets test will  wind back the excessive easing of the assets test in 2007. These changes meant that currently, a couple with a million $1.1 million in assets (including superannuation and other assets such as investment housing) in addition to their home receives a part pension. Around three quarters of people over 65 receive a pension of some kind.
  • The main changes are to increase the assets test ‘free areas’, and increase the ‘taper rate’ from $1.50 per fortnight reduction in pension for each $1,000 of assets above the ‘free area’ to $3 per $1,000.
  • The changes take effect in January 2017.
  • The effect of these changes is to increase pensions for people with modest assets and reduce them for people with more substantial assets, with reductions occurring once people reach the following asset levels:
    • About $290 000 for single homeowners
    • About $450 000 for couple homeowners
    • About $535 000 for single non-homeowners
    • About $700 000 for couple non-homeowners
  • Currently the wealthiest one quarter of people over 65 are not eligible for the Age Pension, so they will not be affected by these changes. The changes will mainly affect people in the top 50% (those between the top 50% and 75% of all retirees). While not wealthy, those affected have less need for protection against poverty than people with lower assets.
  • An important policy goal of the superannuation system (and reason superannuation savings attract tax breaks) is to encourage people to contribute to their superannuation during working years, and then draw it down during retirement to reduce their reliance on the pension. If the assets test is not strict enough, this goal will not be achieved.
  • People affected by the changes can restore their income by drawing down part of their savings. Encouraging people to draw down on their assets to fund their retirement reduces the cost of the Age Pension. The pension will still be there to support them once they no longer have sufficient resources to support themselves.