How much does working until 70 save the budget bottom line?

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How much does working until 70 save the budget bottom line?

Posted 25/11/2013 by Carol Ey

Female pensionerLast week, the Productivity Commission released a research paper on the ‘economic issues raised by population ageing’, which included a recommendation to raise the age for eligibility for the Age Pension to 70. This proposal has been widely condemned by interest groups including the ACTU and National Seniors Australia, with one group claiming that implementing the policy would ‘see grandmothers and grandfathers joining the dole queue’. A Grattan Institute report released yesterday also includes this proposal as one of the ‘tough choices’ that may be required to balance the budget.

The Productivity Commission’s proposal is that once the current legislated increase to 67 for the age of eligibility for the Age Pension takes full effect in 2023, the age should continue to be gradually increased until it reaches 70 in 2035. The estimated saving is $4.5 billion (in 2011-12 prices) in 2035-36, but will fall to around $3 billion per annum (pa) in the long term. This does not include the expected increase in tax receipts from having more people in the workforce.

In part the reduction in those eligible for the Age Pension would be offset by those claiming other income support payments such as the Disability Support Pension (DSP). The paper estimates that around 19 per cent of the 65-69 age group would continue to receive other income support payments. In addition, a significant proportion of the age group would not be eligible for the Age Pension because of high levels of income and/or assets. It is estimated that around 45 per cent of men and 35 per cent of women currently aged 65-69 do not receive the Age Pension because of the means test, and this is likely to rise with increased superannuation savings among younger cohorts.

An article in the Parliamentary Library’s Briefing Book for the 44th Parliament noted that increasing the Age Pension eligibility age would probably have limited impact while there continued to be a significant gap between it and the age at which superannuation savings could be accessed. While the age at which superannuation can be accessed is also gradually increasing—from 55 to 60 years—an increase in Age Pension eligibility age to 70 would mean a gap of 10 years.

The Grattan Institute proposal addresses this concern by raising the age at which superannuation can be accessed to 70 years as well, and also accelerates the increases so they take effect more quickly. This is estimated to mean savings of $12 billion pa by 2023 rising to $35 billion by 2035. Of course these savings are based on the assumption that older workers will be able to continue working without displacing others in the workforce.

The Grattan Institute also proposed other savings such as reducing the threshold for concessional contributions to superannuation to $10,000 pa ($6 billion pa in savings), taxing the earnings of super funds for those aged over 60 ($3 billion) and including owner-occupied housing in the Pension assets test ($7 billion).

As noted in the Parliamentary Library article, indexation is another driver of Age Pension costs. The Age Pension (along with other income support payments such as DSP and Carers Payment) is indexed in line with whichever is the greater of the Consumer Price Index (CPI), Male Average Weekly Ordinary Time Earnings (MTAWE) and the Pensioner and Beneficiary Living Cost Index (PBLCI). Other income support payments are indexed at the rate of the CPI only.

In recent years, MTAWE (which reflects wage increases) has typically increased at a much faster rate than the CPI. This has meant that since 2000 the Age Pension has increased almost 30 per cent more than it would have if it had been indexed to the CPI. Not only does this mean an increase in the payments, but as higher rates increase the means test cut-off limits, more people are eligible for pensions.

The Centre for Independent Studies has recently argued for all income support payments to be indexed to the CPI. It has estimated that this would save around $1 billion in the first year and an additional $1 billion for each subsequent year (for example, meaning a saving of $5 billion in the fifth year of implementation). This would also reduce the growing divide between pensions and other income support payments.

The Government’s election commitments suggest it is unlikely to consider changes to either superannuation arrangements or pension indexation. It promised not to ‘move the goalposts’ in relation to superannuation, while the only move on indexation is in the opposite direction, with a commitment to extend wages-linked indexation to veterans’ pensions. Raising the Age Pension age may have some appeal, but without a change to the rate of implementation, the effects on the budget will not be felt for some time.

Image Source: Wikimedia

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