Monday, June 29, 2015

Pensions and Progressivism

There has been a great deal written about the recent decision by the Australian Greens to support the LNP government’s policy measures to reduce access to the part Age Pension.  These measures will reduce government expenditure on the pension by around $2.5B.  

When I first heard that the Greens had reached a deal with Scott Morrison I was…  not thrilled.  As a Greens voter (and a Greens member to boot) I have a reflexive distaste for the architect of Operation Sovereign Borders that I feel is not unearned.  Indeed, a lot of the criticism of this deal from the left considers Morrison’s involvement to be a significant issue.  An abandonment of the Greens history and “vibe”, for lack of a better word, and giving the LNP what they want.  

The other core issue raised is that of “cutting the pension”.  How can the Greens be considered progressive whilst voting to cut the pension - one of the keystones of a progressive platform?  

This isn’t really a debate over the specific figures; very few, if any, of the commentators for or against this change are experts on retirement income.  I am no different in that regard.  I was initially opposed to the change and gradually came around to being generally in favour as I read more of the relevant research.  

Indeed, having spoken - at length - to one of the senior actuaries responsible for the model underpinning much of the commentary on these changes: there will be no real change for people whose assets/income are in the bottom half of the population.  

So I’m going to go through this and go through what my objections were, what some other people’s objections are, and explain how I rationalise things.  

This will run the gamut from expectations on the Greens, the make up retirement income system we have, the purpose of the elements within our retirement income system, and the importance of future reform.  

Issue 1: “It is inconsistent with the Greens history and ‘vibe’”

The Greens are charged in the Australian landscape as being a protest party to “keep the bastards honest” or “replace the bastards” depending on who you prefer to quote.  Bob Brown also wanted the Greens to “do politics differently”.  At their core the Greens have a policy of building society from the bottom up with strong welfare for those who need it most.  

In this context it is understandable that many have seen the latest deal on pensions as a departure from this vibe.  

On consistency.  
  1. The Greens - under Bob Brown - voted against the introduction of these measures in the first place as they were too generous and were giving money to wealthy retirees
  2. The Greens - under Bob Brown - voted against changing the taper rate (in 2005 I believe) from $3.00 to $1.50

The position the Greens have taken in 2015 is one that is consistent with their historical positions on these exact policies.  

One may argue that financial realities have changed from pre-to-post GFC Australia - an Australia potentially heading into a recession at that - but I have yet to see any analysis that seriously addresses this point.  But this analysis is probably the only thing that would allow you to honestly champion Bob Brown’s opposition to reducing the taper rate whilst at the same time deriding Di Natale’s agreement to increasing it.  

On the vibe, and doing politics differently.  Di Natale made the point when he took over the Greens leadership that he was focused on outcomes.  That if there is worthwhile policy it will be voted for.  

To vote against a policy simply because of which party is proposing it is the same tired politics we have seen over and over in the past decade.  To vote against a policy because it is in the portfolio of a politician you despise - as many do of ScoMo - is also the same tired politics we’ve seen over and over in the past decade.  To base your decision on these purely political considerations is in no way “doing politics differently” and would be against the vibe of the Greens.  

It is telling that this charge is raised specifically in relation to the Greens voting with Scott Morrison’s policy, when the Greens have also voted with any number of ALP policies across 2007-2013 despite their opposition to the ALP policies on asylum seekers and the like.  

You are allowed to have points of agreement even with people whom you oppose on the vast majority of points.  

To me a core tenet of progressivism is finding commonality and moving from there, and accepting that everyone - yes even ScoMo - can have a positive contribution to make.  To do anything else would be to “do politics” in the same tired manner that has exhausted us so completely.

Issue 2: “It erodes the pension as a universal right”

The Age Pension in Australia is not, nor has it ever been, a universal right.  It has been means tested since its inception in 1908.  Yes, Whitlam attempted to remove means testing for persons over the age of 75 (and then 70), but only to have this reversed by Fraser.  

It is worth noting that the average life expectancy in Australia in the 1970s was around 77.7 years of age for a 65 year old male. This was a shift for those cusp of sliding over the threshold into unplanned longevity. Meaning that removing the means test for people was hardly a shift towards universality.  

Again, one may argue that we should be fighting for a universal pension, or indeed for a basic income.  I am sure there would be much support from the Greens and Greens voters and greens members on either of those.  They are, however, not the systems we have, nor are they the systems we have ever had.  

I feel we should fight for positive change within the system we have while also fighting for a better system.  

Issue 3: It doesn’t address the system as a whole / no change in Super tax concessions

I am lumping these together even though I’ve not seen any commentators make the first point, but it is the point worth making over the second.  

It is the opinion of experts that we should not be making piecemeal changes to the retirement income system.  I broadly agree with this.  I also note that overarching change - most notably changes to superannuation tax concessions - was never a possibility during this term of government.  

Should we, as progressives, take no action if the only other option is imperfect action?  

Should we only support when the whole system can be changed?

The retirement income system was unfair on Monday before these measures were passed, and it is still unfair come Thursday after they have been passed.  But it is less unfair.  We still have (a lot) more work to be done to make the system actually fair - but the decisions this week have made it fairer.  As shocking as that is coming from ScoMo.  

Issue 4: Superannuation, the purpose of superannuation, its relationship with the pension, and fairness

We do not have a universal pension - but we have universal retirement income. This takes the form of a system designed around the "three pillars", with the intention to provide a baseline of an adequate level of retirement income.

The Age Pension - the first pillar - is there to provide an adequate level of income. Compulsory superannuation (the second pillar), and voluntary superannuation (the third), are there to substitute or be supplementary with the Age Pension so when all are taken together retirees get a better than adequate outcome.  Access to the Age Pension is supposed to scale in such a way as to be equitable and sustainable with the other two pillars. That's how it was designed.

Currently the purpose of of superannuation,  according to the latest Financial Services Inquiry, is “to provide income in retirement to substitute or supplement the age pension”.  

This review was conducted in 2014 so some may feel that it has been hampered by ideological concerns, in which case I point to the Charter of Superannuation produced in 2013 under the latest ALP government which considers the overarching goals of Superannuation to be:

The findings of the FSI and the first two points (although they are in no particular order) of the Charter align quite readily, and go towards the debate that is currently occurring on these changes.  

Specifically that a reduction in the availability of the part Age Pension will force people to utilise their assets (namely superannuation) until they fall beneath the relevant threshold at which point they will re-qualify for the part/full Age Pension.  

This is the cut to pensioners that is being debated: a cut to the part Age Pension for the upper-middle cluster of retirees.  Retirees in the bottom half of the population will not be adversely affected by these changes.  So I feel it is important to discuss the purpose of superannuation with regards to the Age Pension.  

Superannnuation exists to provide an adequate level of retirement income.  When it is unable to do that job it is up to the part Age Pension - and eventually full Age Pension - to provide additional assistance in order to make that retirement income adequate.  

To quote Rice Warner on the Age Pension:
“It is a welfare benefit for the poorest retirees but it is also a supplementary benefit for middle-income Australians. It is not provided at all to those with sufficient assets to live independently in retirement.

“The means-test is applied to differentiate between its application as a welfare entitlement or a retirement benefit supplement.“


I am going to quote Rice Warner a bit in this area.  They are regarded across the political spectrum as independent experts on retirement income, and they produced the model that is being used by the ACTU / Industry Super to discuss these changes.  

Essentially: the Age Pension exists to make up for the shortfall of superannuation.  Superannuation does not exist to make up for the shortfall in the Age Pension.  

This system has issues, notably:
“Over the past 10 years the proportion of retirees receiving full pensions has fallen. However, the proportion that is self-funded has not shifted by anywhere near as much. This is driven by the generosity of the means testing which means that many retirees with significant assets continue to receive part pensions.” (ibid)

“Currently, many wealthier Australians who have a valuable home and/or contact with a knowledgeable financial planner can access the Age Pension. Yet, when these retirees later pass on a substantial asset tax-free to their estate, the Australian tax payer has effectively subsidised the inheritance.“ 


For example
“a couple who are homeowners with non-housing assessable assets of $750,000 and assessable income of $45,000, are eligible for a considerable part Age Pension payment of over $10,000 per annum, and those with even higher income and $1 million in non-housing assets are still eligible for a partial pension. This suggests that the benefit is poorly targeted under the current means testing system.” (ibid)

Rice Warner are amongst the experts pushing for a total overhaul as discussed in an earlier section.  In their Tax Whitepaper submission they recommend doing away with the part pension entirely, tightening the assets tests on the full Age Pension even further, and strengthening the taxation around superannuation.  That is not the discussion here, I just thought it was interesting.  

What I want to focus on are the concerns they raise around the generosity of a poorly targeted means test which has the taxpayer funding either
  1. the accumulation of private wealth, as in a system where superannuation is filling the gap left by the Age Pension we are subsidising private wealth to grow beyond its intended function of replacing the Age Pension; or
  2. tax free inheritance

Neither of these is progressive, and neither is fair.  

It is not fair in much the same way that the superannuation tax concessions that go overwhelmingly to the top 20% of retirees are not fair.  It is not fair in much the same way that negative gearing is not fair.  Support from the state exists to assist people from the bottom up.  It does not exist to subsidise a tax shelter.  

This is why I broadly agree with the decisions made.  I do not know Morrison’s motivations in proposing these reforms - but they were put forward under the guise of budget savings.  That does not mean they are not worth passing if the outcomes are sound.  

I do not expect that the Greens passed these as a “savings measure” - rather I think they were passed as a matter of consistency with the history of the party and as a step to curb the behaviours described above.  

Issue 5: There is still work to be done

Before these changes the amount of government support paid per decile of population looked roughly like this -

(source: Rice Warner, Tax White Paper 2015)

The left decile is the 10% with the lowest wealth, the right hand decile is the 10% with the highest.  You can see that the top 10% are the greatest beneficiaries of government benefits - while Decile 9 earns around the same amount as Decile 1 - even though they do not draw a pension.  It is important that we consider tax concessions a government benefit being paid lest we get a warped view of how much is being handed out and to whom.  

The broad outcomes of these changes are as follows:
  1. There has been no change to the bottom 50% of the population
  2. The part Age Pension is now harder to acquire, and instead people will have to rely more upon their superannuation as per its intent and design, affecting the upper-middle 30%
  3. No changes to superannuation taxation, meaning no impact on the top 20%

There is one final aspect of these changes that needs to be explored in relation to point 2 above.  With these changes retirees in that upper-middle band of 30% have been hit the hardest by these changes.   

This is because they earn too much to qualify for the Age Pension as before, but do not have sufficient assets to really benefit from the generous tax concessions that so help the top 20%.  This is unchanged from before although it has been made more acute by these changes.  

Policy work needs to be done to redress this imbalance - sooner rather than later - lest these changes drift into unfairness again.  This policy work must include changes to superannuation taxation targeted at the top 20% to reduce their ability to access what is essentially a tax haven in the form of superannuation.  

The tax concessions for superannuation and the eligibility for the Age Pension need to be properly integrated to ensure that everyone has an appropriate income in retirement. It also needs to be structured in such a way that the system does not waste tax concessions on those who would live comfortably without them. Only an integrated system will provide sustainable equity.

Action still needs to be taken - but what action, and by whom?

The right policy for the right reasons

I think this was the right policy for the reasons I have outlined above around the intent, design, and fairness of our retirement income system.  My primary concern is that there is still yet a lot to be done to make the system as a whole fair and sustainable.  

The LNP framed this as a savings measure - but one without a coherent argument for such expenditure reduction. I am hesitant to call it the right policy, but the outcome is the right one. Right outcome, wrong reasons.  

One would expect the ALP to support a measure that assists the bottom 20% and reduces taxpayer funds being used to fund private wealth. But they opposed these changes.  The internal ructions over this decision makes it seem like more of a purely political decision than a practical one - an attempt to find something to campaign against the Greens on in the next 18 months.  Wrong policy, wrong reasons.  

The Greens decision is consistent with their previous stances on the topic; they did not reject it purely because Morrison proposed it, and it aligns with the values of the Greens.  They are also the party most open to ongoing superannuation reform.  They made a decision consistent with their long held policies on the issue as well as a decision consistent with the intent and design of our retirement income system.

Right policy, right reasons.  The Greens will continue to have my support as they not only got it right this time, they are the only party in Australian politics I trust to keep on pushing to get the next bit right too.