Cuts to the age pension, legislated in 2015, have begun. The main change is to the assets test taper rate.
For every additional $1000 in assets, pensioners now lose $78 a year (raised from $39). Previously, a homeowner couple with $1,178,000 in assets would have qualified for a part pension. This upper limit has dropped to $816,000. (These figures do not include the family home.)
In June 2015, Green Left Weekly reported on these cuts. We argued that the pension cuts represented an attack on the welfare state, and were critical of the Greens for supporting them.
Now, the federal government is ramping up its attacks on welfare recipients. While the Greens have been critical of the Centrelink robo-debt debacle, its support for the age pension cuts has left them unable to present the bigger picture.
Labor, trade unions and One Nation have all opposed the pension cuts. However, Labor has not agreed to reverse them. One Nation is also campaigning for aggressive welfare cuts.
Means testing versus universal pension
Supporters of the pension cuts have argued that people with more than $1 million plus a home are rich and should not get welfare. If you are young with a lifetime of income-earning work ahead, that argument sounds reasonable.
But if you are older and no longer working, the situation looks less rosy. Retirees are now expected to draw down their assets and are told to expect the pension later in life. However, retirees are generally cautious and realise that further pension cuts are likely.
Focusing on people’s assets is also problematic. To compare financial situations, you need to compare people’s income (from work or interest on assets).
The age pension is currently means tested, with separate tests on income and assets. Pensioners receive the lower of the calculated payments. Progressives have long argued for a universal age pension — no means testing. Indeed, during the post-war period, Australia was moving towards a universal age pension. From the late 1970s, the income test was tightened. The assets test was introduced in 1985.
Australia has also long offered generous tax concessions for superannuation. The main beneficiaries have been people on higher incomes. The value of these tax concessions has grown rapidly, and was predicted soon to exceed the total age pension budget. The Australia Institute argued that it would soon be cheaper to pay a universal age pension than to subsidise superannuation savings.
Since then, the government has slightly reduced tax concessions for the wealthy; however, much of the Australia Institute’s argument is still valid.
The overall effect of pension cuts plus superannuation concessions is that government assistance flows mainly to the poor and to the rich. Those in the middle are losing out. Their numbers will grow in the future: compulsory superannuation means that eventually about half of retirees will be affected by the pension cuts.
A hidden agenda
Aside from the argument about whether a universal pension is cheaper, there are other reasons why means testing is problematic.
Under means testing, payments reduce as income and assets rise. The rate of reduction is the “taper rate”. High taper rates can lead to perverse impacts. Prior to the recent assets test changes, governments were extremely cautious about changing taper rates, because of effects on pensioners’ behaviour.
Currently, under the income test, pensioners working part-time could lose 70 cents for each additional dollar earned, due to income tax plus reduced pension payments. This “effective marginal tax rate” is much larger than that faced by high income earners.
The new assets test is much worse. Pensioners subject to the assets test now get $78 per year less in pension for every additional $1000 they own — a 7.8% loss — far higher than typical interest rates. Indeed, the best performing superannuation fund earned only 6.6% over the past 10 years.
This will deter people from saving for their retirement. Affected pensioners are now being advised to reduce assets, such as by upgrading their homes or taking an overseas holiday. Indeed, according to my calculations, pensioners who spend $100,000 today could conceivably get the same amount back over 20 years in increased pension.
These perverse effects suggest that the pension cuts are not just about cutting government expenditure. There are other agendas.
The most obvious is that it will usher in further attacks on the welfare state — and we see this starting.
The Coalition is also undoubtedly preparing to include the value of the family home in the age pension assets tests. This has been flagged by the Productivity Commission.
Here the government is exploiting the current housing bubble to play one generation off against another. Pensioners living in inner Melbourne or Sydney may well live in homes valued at more than $1 million. Yet, when the housing bubble finally bursts, these values will probably drop dramatically. Moreover, should pensioners really be sent away from their communities to live in regional areas where homes are cheaper?
Another agenda of the Coalition may be to divide Labor and the Greens. Indeed, Scott Morrison has been very clever in convincing the Greens to sell the pension cuts.
Why did the Greens support these cuts?
The conduct of the federal Green MPs in supporting pension cuts was astonishing. Initially, they were broadly supportive, but wanted a Senate Inquiry to consider the complexities.
Richard Di Natale then took over as Greens leader from Christine Milne. The Senate Inquiry was conducted with unseemly haste. In contrast to normal practice, there was little time for public submissions and no opportunity for public hearings. Various submissions demonstrated how the government’s claims and analyses were misleading.
The Greens noted these concerns but still supported the legislation.
The Greens justified their support by claiming — wrongly — that they were just reversing a 2007 decision by the Howard Coalition government to change the assets test taper rate. In fact, prior to 2007, pensioners could get partial exemption from the assets test. Hence the current assessment regime is much harsher than prior to 2007.
The Greens have also tried to represent these pension cuts as a redistribution — taking from richer retirees and giving more to the poor. But this is mainly an illusion.
The redistribution illusion
The Greens and Coalition have claimed that many pensioners will benefit from the pension cuts, due to the lifting of the threshold on the assets test. For example, a home-owning couple can now supposedly have $375,000 (raised from $286,500) in assets to qualify for the full pension. They claim that around 171,000 pensioners would see an increase in their pension.
This figure may be correct, but it refers, mainly, to pre-2015 pensioners who are assessed under old rules. New pensioners with financial assets in this range, however, are unlikely to benefit, because they will be assessed under the income test, which kicks in before the assets test. Indeed, it will become even worse for them once interest rates start to rise.
Here the government has played the game of giving a small benefit to some existing pensioners, but ensuring that few new pensioners are eligible. They are also exploiting the fact that most people do not fully understand the complexities of pension calculations and how these have changed over time.
If the pension cuts were actually a redistribution, you would expect the poorest to benefit. (Indeed, this was previously Greens policy.) Yet, pensioners with the fewest assets get nothing from these changes. Astonishingly some government ministers are claiming otherwise. For example, Special Minister of State Scott Ryan reportedly claimed that “the most vulnerable pensioners are seeing an improvement to their circumstances”.
This is untrue. The most vulnerable see no change.
Judging from social media commentary, it seems that many supporters of the pension cuts are hoping that the budgetary savings would be directed to poorer pensioners. These supporters want the pension “pie” to be distributed differently.
If this were actually the case — if this change was actually a redistribution — we could debate its merits. But it is not. It is a cut, designed to give the illusion of a redistribution. It will justify further welfare cuts. And it was implemented in a way that has split the left.