Economics and finance, Government and governance | Australia

18 March 2015

Does Australia have a welfare crisis, or is the problem one of revenue, writes John Hewson.

We are told constantly of a welfare crisis, and of the need for belt-tightening against runaway welfare spending.

To most punters, welfare reform is code for reduced benefits, as are expressions such as “an end to the age of entitlement”, an attack on “middle class welfare”, and so on.

It is a very difficult political area. Any reductions in welfare benefits, focused as they are necessarily on the lower income groups in our society, will be seen, inevitably, as inequitable, even if they only actually reduce or remove benefits from those who are not eligible.

Moreover, a benefit given can become a ‘right’. Something that is difficult to take back, or reduce, even if the circumstances in which it was given originally have changed fundamentally.

Pensions are an excellent example. How often do you hear it said that “I have worked hard, and paid my taxes, all my life, so I have earned my right to a pension, I am entitled, irrespective of my financial circumstances at the end of my working life?”

Yet, the aged pension has been both means and asset tested since its inception back in 1909, although governments have come and gone on just how committed they were to such targeting.

As the impact of our ageing population on the annual Budget increases, as it will for the next 30-40 years, governments will be under even more pressure to constrain expenditure on pensions, both by toughening eligibility rules, and encouraging superannuation, to ensure more people are funded for their retirement, and will not need to draw a public pension.

One proposal being pushed by the Abbott Government, against mounting backbench and community resistance, is to change the annual indexation of the pension from average wages to the Consumer Price Index (CPI), at least until the budget is back in surplus.

As the CPI tends to increase by less than wages, this will erode the relative position of pensioners, threatening to leave them as something of an underclass in our society, with the pension slipping below an acceptable poverty line.

My colleague at The Australian National University, Peter Whiteford, has estimated that “if a future government failed to change the indexation back to wages, by 2055 the single rate of age pension would fall to not much more than 16 per cent of average wages, a level considerably lower than we have seen at any time in the last 50 years”.

So, it is not just a question of targeting, but also of ensuring that the pension level is adequate for those who do qualify, which suggests that the level of the pension may need to be increased, raising the possibility/necessity of an increase in taxation.

There are also serious anomalies in the present system, which differentiates against non-homeowners. Our pension system was designed in a world where house prices were low and rents were affordable, but investment returns are now low and rents much higher, so application of the asset/income tests make it particularly difficult for non-homeowners to maintain a pension.

On the other side, the superannuation system is failing, in the sense that the proportion of aged people on a pension is predicted to remain pretty constant through to the middle of this century.

Moreover, the system is almost obscenely inequitable, heavily skewed in favour of the wealthy. Tax concessions for super cost about the same as the aged pension, but are rising faster. This raises the possibility/necessity, on equity grounds, of a tightening of these concessions to fund a restructure of the aged pension.

To be realistic, we spend less on welfare (cash payments to households), we are much more aggressive in targeting welfare spending to lower income groups, and much more efficient at it, than just about all advanced economies. However, we also under tax relatively, and have again skewed those benefits towards the wealthy.

While the system can always be improved, the real problem – or crisis – is more about revenue than expenditure.

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