Welfare payments Reforms to pensions

Budget Review 2009-10 Index

Budget 2009 10: Welfare payments

Reforms to pensions

Peter Yeend

The Government presented several substantive reforms to the provision of income support to the retired aged (the age pension) and most other pension payment recipients in the 2009–10 Budget under the heading of ‘Secure and Sustainable Pensions’.[1] These proposed measures are:

• a one-off increase in the single rate of pension of $30 a week. The increase will apply to the Age Pension, Disability Support Pension, Service Pension, Carer Payment, Wife Pension, Widow B Pension and Income Support Supplement. The increase is not to be provided to Parenting Payment – Single (PPS) recipients
• a new Pension Supplement which replaces the current Utilities Allowance,[2] Pharmaceutical Allowance,[3] Telephone Allowance[4] and the Goods and Services Tax (GST) pension supplement.[5] The Pension Supplement is to also be paid to recipients of Widow Allowance, Partner Allowance and other income support payment recipients over Age Pension age
• an increase in the pension income test taper rate, for income in excess of the income test free area, from 40 cents in the dollar to 50 cents in the dollar
• a new income test treatment of earned income from employment. Only half of the first $500 of fortnightly employment income will be included in the income test. Pensioners can get a maximum benefit of $125 per fortnight under this Work Bonus
• the closure of the Pension Bonus Scheme
• the upgrading of the indexation requirements for the pension from the current 25 per cent of Male Total Average Weekly Earnings (MTAWE) to 27.7 per cent of MTAWE
• an increase in the qualification age for the Age Pension from age 65 to age 67 to be phased in from 2017 to 2023
• revised pension lump-sum advance payment arrangements allowing higher lump-sum payments amounts and more than one advance in a year
• a new seniors supplement payment for recipients of a Commonwealth Seniors Health Card[6] or Gold Card combining both the current Seniors Concession Allowance (SCA)[7] and the Telephone Allowance, and
• the development of the Pensioner and Beneficiary Living Cost Index (PBLCI).[8]

Harmer review of pensions

There has been public agitation for increases in the rate of the pension, especially for age pensioners, for some time.  The Government announced a general review of the tax system on 13 May 2008.[9] As part of the review, the Minister for Families, Housing, Community Services and Indigenous Affairs, Jenny Macklin, announced that the Secretary of her portfolio department, Dr Jeff Harmer, would undertake a review of the pension system. The Pension Review (Harmer Review) undertook an investigation into measures to strengthen the financial security of seniors, carers and people with disabilities. The Government released the findings of the Harmer Review on 12 May 2009.[10] The key findings of the Harmer Review addressed through the pension reforms announced in the 2009–10 Budget are:

• single full rate pensioners should be a priority. The existing single rate of pension does not adequately recognise the costs for those wholly reliant on the pension to support them
• the relativity of the rate of pension for singles to that of couples is too low and should be in the range of 64 to 67 per cent.  Currently it is around 60 per cent
• the payment of existing supplements and allowances could be simplified by integrating them into either a pension supplement or the base rate
• pension payments should be tied to changes in the actual cost of living faced by pensioners and
• there is scope to target pension increases to those who have little or no private means.

One-off increase in the single rate of pension of $30 per week

Finding number 3 of the Harmer Review stated:

The Review finds that, on the basis of its analysis of the outcomes achieved by pensioners, evidence provided in the consultations and its analysis of relative needs, the relativity of the rate of pension for single people living by themselves to that of couples is too low.[11]

There was no couple rate of pension from 1909 to 1961, just one rate paid to all persons who qualified. There was then a split to a lower partnered rate recognising that two persons sharing the same accommodation enjoyed some benefits and the costs were not double that of one person; for example, rates and the cost of utilities could be shared.

The Harmer Review also commented on the pension rate and adequacy issue:

Finding 6: The Review finds that, taking into account the totality of the package of the current pension base rates, supplements and the value of the Seniors Bonus, the rate of pension paid to couples appears to be adequate for those pensioners living in their own homes or public rental housing, and without unusually high costs of health or disability.[12]

The Harmer Review concluded that, in the main, the totality of assistance to coupled pensioners was adequate. However, the Review’s analysis did identify an additional group for whom the current rates of total assistance do not appear to be providing a basic acceptable standard of living, that is, pensioners who do not own their own homes and rent privately:

Finding 7: The Review finds that there is strong evidence that many pensioners in private rental housing face particularly high costs and have poor outcomes. Rent Assistance and social housing have complementary roles to play in addressing the financial security of these pensioners. The Review notes that the government has proposed an increased investment in social housing and considers that reforms to Rent Assistance would complement this.[13]

There are thus two main reasons for the one-off increase in the rate of the single pension. Firstly, its relativity to the combined partnered rate of pension. Secondly, the pension rate is inadequate for pensioners to live on against the increasing cost of living, where the pension is their only means of support. The current rates of pension from 20 March 2009 are $569.80 per fortnight (pf) for singles and $475.90 pf for each member of a couple.[14] The one-off $30 per week increase plus the $2.49 Pension Supplement will bring the single rate of pension to 66.3 per cent of the combined partnered rate of pension.

Pension rate increases against increases in the cost of living

As a matter of legislative requirement, pension rates are indexed twice a year to either Consumer Price Index (CPI) increases or to 25 per cent of Male Total Average Weekly Earnings (MTAWE). Whichever factor provides the greater increase is the factor used.  Since 1997, when it was made a legislative requirement, it has been the indexation to MTAWE that has in most cases provided for the pension rate increases, not the CPI increases. Prior to that the previous Hawke and Keating governments maintained the pension rate at 25 per cent of MTAWE as a matter of policy, providing for three separate one-off ad hoc increases above the CPI factor.

Table 1 tracks the relativity of pension rates to the CPI from March 2003 to March 2008.

Table 1: Increases to the single pension rate under actual and alternative scenarios, March 2003 to March 2008

Source: Department of Families, Housing, Community Service and Indigenous Affairs (FaHCSIA), Annual report 2007–08, Canberra 2008, p. 137, viewed 19 May 2009, http://www.fahcsia.gov.au/about/publicationsarticles/corp
/Documents/2008%20Annual%20Report/default.htm

As can be seen, against cost of living increases (that is, the CPI) the pension rate has more than maintained its adequacy. This is due to its indexation against 25 per cent of MTAWE.  However, as the Harmer Review suggested, those in the private rental market have done less well. The Government has claimed the proposed single pension rate increase is to improve the financial security of pensioners.[15] It is aimed at addressing the problem of those in private rental. Table 2 demonstrates that age pensioners in private rental have done less well, in real terms, compared to those not in private rental.

Table 2: Maximum payments to recipients of pension: index of real pension rates, June 2003 to June 2008

Source: Department of Families, Housing, Community Service and Indigenous Affairs, Annual report 2007–08, Canberra 2008, p. 135, viewed 19 May 2009, http://www.fahcsia.gov.au/about/publicationsarticles/corp/
Documents/2008%20Annual%20Report/default.htm

Other measures in the pension package are aimed at addressing the issue of the future maintenance of the rate of pension. These are the proposed new indexation factor of 27.7 per cent of MTAWE and the new indexation benchmark, the PBLCI. From September 2009, the rate of pension will be indexed to three factors: movements in the CPI, 25 per cent of MTAWE and the proposed new index for pensioners and beneficiaries, the PBLCI.  There is no indication yet as to what factors the PBLCI will consist of.

Pension Supplement

The pension changes presented in the 2009–10 Budget feature a collapsing of several supplementary pension payments into a new Pension Supplement. The Pension Supplement will be $1462.76 a year for a single person or $2199.60 for couples. For the 20 September 2009 rate increases, the Pension Supplement rate will increase the amounts provided to single pensioners by $2.49 per week  and $10.14 per week (combined), or $5.07 per week each, for partnered rate recipients.

The new Pension Supplement replaces the current Utilities Allowance, Pharmaceutical Allowance (PhA), Telephone Allowance and the Goods and Services Tax (GST) pension supplement. The Pension Supplement is to be paid fortnightly from 20 September 2009 and from 1 July 2010 pensioners will have the choice to be paid quarterly. The Pension Supplement is also to be accompanied by a Seniors Supplement which will combine both the current Telephone Allowance and the Seniors Concession Allowance for CSHC holders.[16]

Pension Supplement income test

The Pension Supplement, unlike the payments it is replacing, can be reduced by income. Currently, the supplement payments that are to be replaced are not income tested, with entitlement contingent only on a person being entitled to a qualifying pension or benefit payment. With the proposed new  Pension Supplement, even were income reduces the qualifying pension or benefit payment to zero, the Pension Supplement can still be paid and then reduced by income. The reduction rate will be at the same rate as the proposed new pension income test taper rate, that is, 50 cents in the dollar for excess income over the free area. The Pension Supplement can be reduced to $15.20 a week for a single or $22.90 a week for couples before it is also not payable.

Comment

The Pension Supplement will enable the simplification and rationalisation of several different payments. Currently the PhA and the GST pension supplement are part of the pension rate but the Utilities Allowance and the Telephone Allowance are not part of the rate. For the first time, persons whose income exceeds the income test cut-off point for the basic pension may still be entitled to some supplement payment in the form of the Pension Supplement.

The pension rate increases and the Pension Supplement are not to be provided to recipients of the PPS. The PPS originated in 1973 as the Supporting Mother’s Benefit, then later the Supporting Parent’s Benefit and later the Sole Parent Pension. Since its inception, it has been paid at the pension rate of payment and using the pension means testing arrangements. Not including the PPS with the other pension payments in relation to the one-off $30 increase and the increased income test taper rate, will indirectly create a new tier of income support. The PPS will be paid at a higher rate than the other allowance payments (such as Newstart Allowance) but at a lower rate than the other pension rate payments.

The increased taper rate of 50 cents in the dollar of excess income returns the pensions’ income test taper rate back to the rate it was before July 2000.  This was when it was reduced to 40 cents in the dollar under the compensation arrangements for the introduction of the Goods and Services Tax. A higher taper rate allows fewer people with higher incomes access to a pension. Under the proposed new income test rules, the income test cut-off limits will be reduced from $47,444 to $38,693 per annum and for couples, their combined income from $72,423 to $59,228. This targets the pension to those on lower incomes and will realise savings.

Some pensioners will benefit from transitional arrangements that will apply to those currently on a part-rate pension who would otherwise suffer a loss of payment rate under the new higher taper rate. Their rate will be preserved in real terms and they will also get the benefit of the new Pension Supplement until they are better off under the new rules. This is achieved by way of the pension rate increasing over time due to the indexation arrangements—see ‘Pension rate increases against increases in the cost of living’ above. Around 70 per cent of all existing pensioners will be immediately better off following the reforms and will move to the new system immediately. This includes around 93 per cent of all single rate pensioners.

The separate and new income test (Work Bonus) for earned income has the benefit of encouraging employment. However, it adds some complexity to the income test.

Change to nursing home daily care fee

One of the concerns expressed about any increase in the pension rate has been the resultant increase in the daily care fee charged for persons in residential aged care. The Aged Care Act 1997 (ACA) stipulates that the maximum amount of the daily care fee for a person in residential aged care is currently 85 per cent of the basic single rate of pension. A raising of the single rate of pension by $30 per week would normally see 85 per cent of this increase added to the fee. The Government has announced that it intends amending the ACA to reduce the maximum fee amount down to 84 per cent of the basic single pension rate.[17]

Raising the age pension age to 67

The 2009–10 Budget includes a proposal to gradually raise the Age Pension access age to age 67, commencing July 2017 and reaching age 67 from 2023. The Age Pension access age has been 65 since its inception in 1909. In fact, in 1909 the access age was 65 for both men and women, but it reduced to age 60 for women in 1910.  The age pension access age for women has been incrementally raised from age 60 to 65 and this will be completed in 2014.

Life expectancy at birth in 1901–10 for males was 55.2 years; and for females, 58.8 years.[18] Life expectancy at birth in 2005–07 was for males, 79 years; and for females, 83.7 years.[19]

Other countries have recently announced increases in their age pension access age.  In the United Kingdom (UK), the Parliament is currently debating pension reforms presented in a 2006 White Paper. Reforms include taking into account increasing longevity and encouraging extended working lives. It is proposed that the State Pension age will rise gradually from age 65 (men and women) to age 68 by 2044. In the United States the access age is being incrementally raised to age 67 by 2027. In Germany, between 2012 and 2029, the normal pensionable age will rise from age 65 to age 67 with eligibility requiring at least 5 years contributions from employment income into their personal pension fund amount. In Germany for persons born after 1964, the pensionable age is 67. From 2012, the full pension is payable at 65 with at least 45 years contributions.

Table 3 outlines how the proposed Australian changes will affect different age groups.

Table 3: Proposed raising of the age pension age in Australia: who will be affected

Source: J Macklin, (Minister for Families Housing, Community Services and Indigenous Affairs), Secure and sustainable pension reform: Age Pension age, media release, Canberra, 12 May 2009, viewed on 21 May 2009, http://www.jennymacklin.fahcsia.gov.au/internet/
jennymacklin.nsf/content/age_pension_12may2009.htm

The Pensioner Beneficiary Living Cost Index

The establishment of a new and extra indexation factor for the pension rates, the PBLCI, was announced in the Budget.[20] It will be interesting to see whether such a pensioner/beneficiary specific price index will realise a different factor for indexation. The argument has been made that the basket of goods used for the CPI is not representative of the spending of aged pensioners. This may equally be  true  for other population groups. However, the ABS has constructed several population sub-group specific indices, the earliest going back to 1981 and latest covering the period 1998 to 2005.[21] All of this work has shown that these specific indices (and there is one for aged pensioners) are changing at virtually the same rate as the overall CPI.

Using the latest example, over the period June 1998 to June 2005, the ABS’ aged pension household specific index rose by 23 per cent while the All Groups CPI rose by 22.6 per cent. What this means is that the basket of goods and services that aged pensioners are buying rises in price (inflates) at around the same rate as the basket of goods used to calculate the All Groups CPI.

Cost of the age pension

The tables below set out the cost of the age pension since the 1996–97 Budget.

Table 4: Costs of the age pension 1996–97 to 2007–08 ($ billion)

(a) The 1998–99 Budget saw the change from cash accounting to accrual accounting. All amounts from the 1998–99 Budget onwards are accrual. All amounts up to the 1997-98 Budget are cash.

Source: Parliamentary Library—data compiled from Portfolio Budget Statements 1996–97 to 2007– 08.

The Age Pension cost estimates as presented in the 2009–10 Budget are outlined in Table 5, below:

Table 5: Budgeted expenses for income support for seniors

Source: Australian Government, Portfolio budget statements 2009-10: budget related paper no. 1.7: Families, Housing, Community Services and Indigenous Affairs portfolio, Commonwealth of Australia, Canberra, 12 May 2009, p. 91, viewed 19 May 2009, http://www.fahcsia.gov.au/about/publicationsarticles/corp/
BudgetPAES/budget09_10/Pages/PortfolioBudgetStatements2009-10.aspx

The Age Pension is the single biggest program item cost in the Federal Budget. The following points help to place the proposed changes into some perspective.

• cost of the Age Pension for 1996–97 was $13.03 billion which was 10 per cent of then total Commonwealth outlays of $129.68 billion for that year
• the estimated cost of the Age Pension for the 2009–10 year is $29.2 billion, which is 8.6 per cent of estimated total Commonwealth outlays of $338.2 billion
• the estimated cost of the Age Pension for 2012-13 is $36 billion, which is 9.6 per cent of estimated total Commonwealth outlays of $375 billion for that year
• the cost of providing the Age Pension at about $30 billion is a large amount for any single program, especially when compared to the whole of the Defence budget, which in the 2009–10 year is estimated to be $20.9 billion. Therefore, any Government is likely to proceed carefully with any policy decision to increase the rate of the Age Pension, let alone all pensions. Despite the decline in Age Pension expenditure as a proportion of total Commonwealth outlays, $30 billion remains a very large amount.

[1].       Australian Government, Budget measures, budget paper no. 2: 2009–10, Commonwealth of Australia, Canberra, 2009, pp. 240-246, viewed 14 May 2009,
http://www.aph.gov.au/budget/2009-10/content/bp2/html/index.htm

[2].       Utilities Allowance is paid quarterly to a person on a qualifying income support payment being Age Pension, Disability Support Pension, Carer Payment, Partner Allowance, Wife Pension, Widow B Pension, Bereavement Allowance or Widow Allowance. From March 2009 Utilities Allowance is $259.40 per member of a couple and $518.80 for a single annually.

[3].       Pharmaceutical Allowance (PhA) is paid fortnightly to a pension payment recipient, or an income support allowance payment recipient during a period of temporary illness or is aged 60 or more. From March 2009 PhA is $3.00 per week for a single or $3.00 per week for a couple combined.

[4].       Telephone Allowance is payable to a holder of a Pensioner Concession Card or a Commonwealth Seniors Health Card. From March 2009 the quarterly rates of Telephone Allowance are $23.00 single or $11.50 partnered each. A higher rate of $34.60 single or $17.30 partnered each is payable where the recipient has an Internet connection.

[5].       The pension GST supplement was introduced as part of the 1 July 2000 Tax Reform Package. It was based upon 4 per cent of the then value of the basic rate of pension. After a deal with the Democrats, it was aimed at ensuring pensioners were not disadvantaged by the price increases resulting from the GST. The GST supplement is indexed to the CPI. From March 2009 the GST pension supplement is $19.50 single or $16.30 partnered each.

[6].       The CSHC is issued to persons over Age Pension age with annual adjusted taxable incomes of less than $50,000 single or $80,000 combined.

[7].       The Seniors Concession Allowance (SCA) is payable to a holder of a CSHC. The annual rate of SCA at 20 September 2008 is $514.00 per year paid quarterly.

[8].       W Swan (Treasurer) and J Macklin (Minister for Families, Housing, Community Services and Indigenous Affairs), Secure and Sustainable Pension Reform: A pension that keeps up with the cost of living, media release, Canberra, 12 May 2009, viewed 21 May 2009, http://www.jennymacklin.fahcsia.gov.au/internet/
jennymacklin.nsf/content/pension_cost_living_12may2009.htm

[9].       W Swan (Treasurer), Australia’s future tax system, media release, Canberra, 13 May 2008, viewed 19 May 2009, http://www.treasurer.gov.au/
DisplayDocs.aspx?doc=pressreleases/ 2008/036.htm&page
ID=003&min=wms&Year=2008&DocType=0

[10].     Australian Government, Tax review report on the retirement income system, Commonwealth of Australia, Canberra, 12 May 2009, viewed 19 May 2009,
http://www.fahcsia.gov.au/about/publicationsarticles/corp/
budgetpaes/budget09_10/pension/pages/pensionreviewreport.aspx

[11].     Tax review report on the retirement income system, p. xiii.

[12].     Tax review report on the retirement income system, p. xiv.

[13].     Tax review report on the retirement income system, p. xiii.

[14].     These rates do not include PhA of $6.00 per fortnight single and $3.00 per fortnight partnered couple each.

[15].     Budget paper no. 2: 2009–10, pp. 242-243.

[16] .    Seniors Concession Allowance is paid quarterly to holders of a CSHC and from 20 March 2009 is $129.70.

[17].     Budget paper no. 2: 2009–10, pp. 317-318.

[18].     Australian Bureau of Statistics (ABS), Australian Historical Population Statistics, 2008, cat. no. 3105.0.65.001, ABS, Canberra, 2008, viewed 20 May 2009,
http://www.abs.gov.au/AUSSTATS/abs@.nsf/
DetailsPage/3105.0.65.0012008?OpenDocument

[19].     Australian Bureau of Statistics (ABS), Deaths, Australia, 2007, cat. no. 3302, ABS, Canberra, 2008, viewed 20 May 2009,
http://www.abs.gov.au/AUSSTATS/abs@.nsf/ProductsbyCatalogue/
C67A858BA00CB846CA2568A9001393C6?OpenDocument

[20].     W Swan (Treasurer) and J Macklin (Minister for Families, Housing, Community Services and Indigenous Affairs), Secure and Sustainable Pension Reform: A pension that keeps up with the cost of living.

[21].     Australian Bureau of Statistics (ABS), Analytical Living Cost Indexes for Selected Australian Household Types: Update to June 2005, cat. no. 1350.0, ABS, Canberra, 31 August 2005.