Ben Eltham, journalist and academic
On 1 January, the government’s new means test for the pension came into force. The new assets test imposes a stricter “taper” for the aged pension for wealthier pensioners. The taper is the rate at which the pension starts to reduce, as pensioners have greater assets. Very wealthy Australians are not currently able to claim the pension: the new system tightens that wealth test.
The changes means that some pensioners will no longer get the full rate of the aged pension, and some on the part pension will lose their entitlement.
All up, it’s thought about 327,000 pensioners will be affected.
The changes to the assets test were originally proposed back in 2015, and took many months to wind their way through parliament. The University of New South Wales’ Rafal Chomik crunched the numbers back then, and came up with this graph to explain what will happen:
The changes are complex. They affect homeowners and renters differently. Many older Australians are worried about how they will be affected. Labor and some trade unions have criticised the new system, claiming that it will leave many pensioners worse off.
In a nutshell, the new asset test will mainly affect those who have significant net wealth. For example, a single pensioner who doesn’t own a home will still be able to get a part-pension if she has $746,000 of financial assets. A couple can own a house worth millions and have a combined $822,000 in super and still get the part-pension.
In other words, these changes are progressive. They apply the means test more strictly to wealthier pensioners. But they actually raise the assets test threshold for pensioners with more modest net wealth. The vast bulk of pensioners are not wealthy; they won’t be affected at all.
As I argued last year, except for a brief period in the Fraser years, the pension has always been means tested. The new changes simply return the pension wealth taper to where it was in the Howard years.
Osman Faruqi, journalist and former Greens candidate
Despite Scott Morrison’s best attempts to sell these pension changes as a fair measure that targets wealthy retirees, I don’t think those of us on the progressive side of politics should throw our support behind them.
I have two main problems with the changes and the debate around them. Firstly, I don’t think the reform is as progressive as Ben suggests, and I’ll unpack that below.
Second, I think we’re making a strategic mistake by defending (and in the case of the Greens, actually facilitating) this kind of reform instead of articulating a more cohesive vision of a fair and equitable retirement system and a plan to fund it.
Overall these changes stripped $2.4bn out of the pension. That’s not money that was redirected to those who need it. It was used by the government to fund its own priorities, including tax cuts to high-income earners.
Ben argues that these changes will mainly affect retirees with significant net wealth. I don’t think this is true. The biggest group affected are pensioners with savings of over $250,000 (this includes superannuation). They will have their pension payments tapered off at twice the current rate.
Over time, as workers who have lived under the compulsory superannuation system for longer start to retire, the changes will end up affecting more and more people.
Modelling suggests that by 2055, 40% of retirees will be negatively impacted by these cuts, and a higher proportion of women. The real impact of these changes will be to slowly but steadily erode access to the public pension, forcing Australians to rely on their super.
The problem with super is that it discriminates against low-income earners, casuals and contract workers, and on gender. On average, women retire with a just a third of the super balance of men.
As a result of these changes, people retiring with modest super balances (as opposed to the very wealthy, as has been argued) will see their retirement payments cut. Why should progressives welcome this?
Instead of welcoming changes that will cut pension payments for future retirees (today’s young, middle-income earners), we should we opposing moves that slash social services expenditure. Instead, we should be talking about the importance of a well-resourced, accessible public pension system and how necessary that is to an equal society.
BE: Osman is absolutely right to point out that superannuation is a flawed system that discriminates against women and the low-paid. That’s why Australia’s entire retirement income system needs reform, starting with the absurdly generous tax breaks given to wealthy superannuants.
Super should not be allowed to become the basis of Australia’s retirement income system, and we should continue to fight to protect a broad-based pension available to all that need it. The pension should continue to be the foundation of Australia’s safety net for older Australians.
We also agree that the savings accruing to the government from these changes will end up being used in “budget repair”, not in restoring Australia’s increasingly threadbare social safety net.
But the issue here is the pension, and I do take issue with some of Osman’s arguments.
Firstly, Osman is wrong to say these changes are not progressive. In the context of Australia’s tax-and-transfer system, a progressive change is one in which those with the most capacity to support themselves bear the greatest tax burden, and receive the least government support.
The asset test changes to the pension are progressive in this sense. Those affected are those with the most capacity to support themselves in retirement. At the other end of the scale, those with moderate or limited wealth are either unaffected, or get a slight improvement.
The next question becomes adequacy. Is half a million dollars enough to provide a decent income in retirement? The answer is probably no. At current rates of return, most retirees will want to spend some of their capital, rather than just living off the interest from their investments.
But once they do that – and here’s the key point – they will then become eligible for the pension.
It’s worth repeating this, because it seems to have been lost in the debate. Even if the new changes result in some pensioners losing the pension, they will not lose it forever. Once a pensioner spends down her assets in retirement, she will again become eligible for the full rate.
The argument is thus really about whether you think that the state should oblige wealthier Australians to spend down some of their savings before accessing the aged pension. This is the whole point of an assets test, after all.
Given that those currently accessing the pension include some Australians with very high net worths – including houses worth millions – asking wealthier older Australians to rely on their own savings until such time as they again qualify for the pension doesn’t seem like a particularly unfair measure.
Osman rightly observes that we should be campaigning for greater expenditure on social services. I agree, we should. But the best place to do that is surely by targeting social spending to the areas where there is greatest need.
With the greatest respect to older Australians who have paid taxes and raised families, I don’t believe that wealthier pensioners are the citizens in greatest need. There are more pressing issues. I’d nominate Indigenous disadvantage and homelessness, just for two.
OF: If these pension changes were about taking money solely off high-income retirees and redistributing them to the poorest, then they’d be progressive. But that’s not what’s going on.
In net terms, they reduce the total pension outlay by $2.4bn. Yes, a small number of pensioners receive a boost, but as I’ve already argued the biggest chunk of those affected are middle-income earners with modest savings.
Limiting pension payment for nearly half of retirees (remember, the number of people impacted by these changes will continue to grow over time) isn’t progressive.
Let’s take another look at the argument that these changes are good because they impact the wealthiest. As ANU’s Tax and Transfer Policy Institute has argued, the richest retirees actually aren’t impacted because they actually don’t access the pension.
These changes won’t hit them at all. They won’t be forced to be draw down their savings, they’ll still be able to accrue vast amounts of wealth and pass them down to their children, perpetuating wealth inequality.
When Ben says “only the wealthiest will be impacted” he should acknowledge that we’re talking about the wealthiest out of those who currently access the pension.
If we keep reducing who accesses the pension, pensioners at the top of the scale will always be the “wealthiest” – as long as you ignore all those too rich to qualify. The richest 20% of retirees won’t feel a thing, and they’re the cohort we should be focusing on if we want genuine progressive reform, through the closure of superannuation tax loopholes and measures like an estate tax.
Ben is correct to say that pensioners will draw down their savings due to these changes. In fact, Morrison argued that this was the point of the changes.
But surely the question at this point is why are we creating a system that rewards the drawing down of private savings? I understand why economic rationalists are into the idea – it privatises a bigger component of retirement savings.
But I disagree that the goal of progressives should be a retirement system that involves the minimal amount of public funding and draws more on private resources.
With these changes, we’ve ended up in the perverse situation where middle-income earners with moderate savings are forced to draw down their assets to have a comfortable retirement, but the richest are able to live in comparative luxury and pass on their full savings to their children tax free.
If we’re unhappy with wealth inequality and inequity in retirement I’d suggest we support measures that actually target the rich: higher progressive income taxes, closing down superannuation tax loopholes that disproportionately benefit the wealthy and an estate tax.
These genuinely progressive measures could be used to fund a universal public pension, modelled along the New Zealand system, as proposed by The Australia Institute.
