Millennials and Baby Boomers are often cast as natural foes fighting in some kind of economic Hunger Games.
But what if I told you that economic and social policy doesn’t have to be zero-sum? I believe we could give material benefit to younger generations by being kinder to older people.
Targeting superfluous super
The Productivity Commission says we have too many superannuation accounts. Peter Martin explains the logic.
I’m talking about bring back a Whitlam-era idea and making the age pension universal for everyone over a certain age.
Nice idea, but we could never afford it. Right?
Well, actually the net cost may not be as much as you’d think. And it would have a few economic benefits that help younger people too.
Currently 2.7 million Australians – three out of four people over the age of 65 – are paid a full or part pension, either an age pension or a Department of Veterans Affairs service pension.
The cost is $49 billion a year, according to last year’s federal budget.
Extending a full pension to everyone would certainly increase the gross cost. Professor Andrew Podger and Professor Peter Whitefordat the Australian National University estimate it would cost half as much again, a possible increase of up to $25 billion.
Illustration: Simon Bosch
But we also spend an extraordinary amount of money on superannuation tax incentives, with the stated aim being to reduce the pension burden for taxpayers. Surely this is robbing Peter to pay Paul?
Treasury measures the cost of the super tax breaks two different ways.
The first is the “revenue forgone” model – measuring the difference in tax paid between someone who received a concession and someone who did not. On this basis super concessions cost $32 billion in the 2013 financial year, and rising.
The second is the “revenue gain” method, which takes into account the likely behavioural change as taxpayers shift investments from super into other tax-effective options. Under this model, super tax breaks still cost $23 billion a year in 2013.
The superannuation reforms that come into effect this July will help, but super still remains one of the best legal tax shelters going.
It might seem that giving the age pension to everyone is inherently unfair if millionaires are getting it too.
But this could be fixed by winding back some of the super tax breaks, which disproportionately benefit the wealthy.
You’d want to tackle family trusts while you’re at it, because financial advisers are already touting this as a tax-effective alternative to super.
You’d also fund it through tax. Whiteford says this is how it’s done in New Zealand and parts of Europe; you have a universal age pension, but it’s taxable.
Australia’s age pension is officially taxable, but in reality there are various offsets that mean pensioners don’t pay tax. By the time you start paying tax on your income you also start losing pension entitlements.
Whether reducing tax incentives for older people could fully fund a universal pension is debated by experts. Podger says the argument is “respectable” and one he used to support, but he recently decided it’s too expensive.
But there are other benefits.
First, it’s far simpler. You could get rid of or redeploy the battalion of Centrelink staff whose job it is to assess pension eligibility. It’s hardly an efficient system at the moment.
Second, it has economic value by removing incentives that distort the system.
If your pension was untouchable, then you might be encouraged to work part-time to supplement the household income.
Increasing workforce participation boosts economic productivity and government revenue from income tax. Working also has psychological and social benefits for older people. Of course, if you prefer to put your feet up in retirement you can do that too.
Our current system also gives pensioners a disincentive to downsize their home.
Your principal place of residence is exempt from the assets test for the age pension. This is inherently unfair to pensioners who rent.
In an attempt to even up the score, policymakers give non-home owners an assets threshold that is $200,000 higher than the assets threshold for home owners.
But everyone knows the typical home is worth a lot more than $200,000.
The problem is there are many pensioners who are open to the idea of downsizing if the extra income would improve their quality of life, but they won’t do it because they’ll lose pension payments as a result.
Some financial planners have even been encouraging retirees to upsize their homes in order to preserve their entitlement to a part pension.
That fuels the housing affordability crisis, especially in our big cities.
Empty-nesters in big houses close to jobs, transport and schools, while families are squeezed into tiny apartments or pushed out to the outer-suburban fringes? Economists would call that an inefficient use of scarce resources.
Many people have emotional ties to their home and I’m not suggesting anyone be forced to sell. I’m talking about removing the disincentive.
If you stay in your big house, you get the pension. If you downsize, you get the pension plus the capital you’ve unlocked by trading down.
It’s still a matter of choice, but it’s not distorted by the wrong incentives.