Provision for the Age Pension in the Future

Decisions that have allowed increased access to the age pension program, while immediately appealing to beneficiaries, are likely to have a significant impact on the future cost to government outlays.

As at June 2007, 1 952 686 people were receiving the age pension, and 210 562 were receiving the veterans’ service pension. The cost to government for the provision of income support to the retired aged (age and service pension) is the single biggest program expense item in the Commonwealth Budget—the estimated cost for the 2007–08 financial year of the age pension program being $23.9 billion. The service pension (which is substantially made up of provision for the age service pension) is estimated to be $2.8 billion. This expenditure of almost $27 billion is 11.5 per cent of total estimated Budget expenses for 2007–08 ($235.6 billion). This compares with the estimated expenditure of $19.9 billion (8.4 per cent) on Defence for 2007–08.

The second intergenerational report (2007) provided some future cost estimates for the provision of income support to the retired aged:

Australian Government payments to individuals are projected to increase as a proportion of GDP from 6.7 per cent in 2006–07 to 7.1 per cent in 2046–47. This is due to an increase in spending on age pensions which is projected to rise by 1.9 per cent of GDP by 2046–47, partially offset by a decrease in other payments to individuals.

Projected Australian Government payments to individuals

Most of the increasing expenditure on age and service pensions is a result of the ageing of the population. However, government decisions have also increased the future cost of providing for the retired aged. The major decision was the reduction in the income test taper rate in the pension income test from 50 cents in the dollar down to 40 cents in the dollar—this change was made in the context of compensation for the introduction of the goods-and-services tax initiatives that commenced on 1 July 2000. The other decision was the virtual doubling of the pension asset test cut-off limits that took effect on 20 September 2007. This was achieved by halving the asset test taper rate, for assets over the free area, by reducing the pension rate by $3 in every $1000 down to $1.50 in every $1000.

The following table shows the asset test cut-off limits, above which no pension is payable, before and after the change in the asset test taper rate.

Asset test cut-off limits, March and September 2007

Source: Australian Government, A Guide to Australian Government payments, 20 Sep–31 Dec. 2007.

In regard to the asset test decision, the Howard Government said that an estimated 300 000 older Australians would be able to access the pension for the first time or get a higher rate of pension. This expanded access to the age pension was not factored into the projected cost outlays given in the second intergenerational report (see the chart on the previous page).

Both of these decisions allow (or will allow) increased access to a part-rate pension, but they do not provide any further assistance to full-rate pensioners, being those with lesser amounts of income and/or assets. In 1989, 73 per cent of pensioners were paid the maximum rate; in 2000, this proportion had fallen to 63 per cent, and by June 2007, to 60 per cent. Future retired aged will have increased access to superannuation and other income sources. Nevertheless, there will be significant increases in the numbers of people receiving a pension, albeit a decreasing proportion will receive a full-rate pension and an increasing proportion will receive a part-rate pension. A part-rate pension is of some significance to beneficiaries as it provides access to the Pension Concession Card and the associated cost savings, especially access to subsidised medications under the Pharmaceutical Benefits Scheme.

Documentation

Department of Treasury, Budget Strategy and Outlook 2007–08, Budget Paper No. 1.

Australian Government, Intergenerational Report 2007, Commonwealth of Australia, Canberra, 2007.

Department of Families, Community Services and Indigenous Affairs, Portfolio Budget Statements 2007–08, Budget Related Paper No. 1.8, Canberra, 2007.

Minister for Families, Community Services and Indigenous Affairs, Mal Brough, More to Receive Higher Pensions from September, Media Release, Canberra, 7 September 2007.

Department of Families, Community Services and Indigenous Affairs, 2006-07 Annual Report, Department of Families, Community Services and Indigenous Affairs, Canberra, 2007.