A longevity insurance scheme?
Former Prime Minister Paul Keating has recently renewed his call for a government longevity insurance scheme. The proposal, which Mr Keating has also referred to as ‘Super Mark 2,’ or ‘Super Phase 2,’ is to introduce a levy on wage earners, which would be used by the government to insure older Australians against some of the costs incurred in old age.
This FlagPost examines Keating’s proposal, and considers the historical treatment of national insurance proposals in the area of superannuation, which have been bedevilled by issues of complexity and affordability.
Is there a need for the scheme?
The Superannuation Guarantee, which was introduced in 1992 was, Mr Keating argues, intended to provide a supplemental level of income to the Age Pension, but only up to age 80. Mr Keating argues that the superannuation system is inadequate to meet the costs of Australians living longer, and the risk they will run down their superannuation savings and become exclusively reliant on the Age Pension.
The policy problem Keating frames is therefore a risk of higher government expenditure on the Age Pension and lower standards of living in retirement. There is a difference of opinion as to whether Age Pension spending is likely to be a problem in the future. Treasury projects that the proportion of retirees drawing a full Age Pension will decrease because of higher superannuation savings, but that overall the level of Age Pension spending will not decline. Modelling by Rice Warner has shown that the overall proportion of people drawing an Age pension will fall. Using Treasury estimates of life expectancy, the Grattan Institute has found that most retirees today and in the future can expect to be financially comfortable.
The proposed scheme
Mr Keating argues that in addition to increasing the Superannuation Guarantee from the current 9.5 per cent to 12 per cent of wages, the government should introduce a levy for a government insurance scheme to fund costs in old age. At different times, Mr Keating has proposed a levy ranging from 1 or 1.5 per cent to 3 per cent of wages.
In total, therefore, the proposed scheme would involve individuals paying between 13 or 13.5 per cent to 15 per cent of wages towards retirement benefits. The higher 15 per cent total figure is one that Mr Keating has argued for in the past.
The levy would be used to create an insurance fund, open to people who reached the qualifying age. Mr Keating has at different times suggested that the longevity insurance apply to those aged 80 and over, or 85 and over.
It is unclear whether Mr Keating contemplates the insurance fund being used for specified purposes, or as an income stream. In the past, Mr Keating has written that the levy would be ‘devoted to health maintenance, income support and aged care.’ Earlier this year he was reported as saying that the government should offer a 'calibrated’ product that would ‘help people meet the costs of health, accommodation and other expenses.’ Most recently he has said that the levy would guarantee ‘income support, aged care accommodation and health.’
If it were an income product, there would be complexity involved in how the public insurance scheme would interact with the private annuity market. The government has taken steps to change the tax treatment and means test implications of deferred annuities, with a view to removing impediments to their take-up. Detail is also needed on how the proposed fund would interact with the public health and aged care systems, which already provide public insurance for old age costs.
As an insurance fund, those who paid the levy but did not reach the qualifying age would miss out on the benefits of the insurance. There are potential distributional implications of this, given that increasing longevity is not spread evenly across the community: higher levels of affluence and educational attainment have been associated with longer lives.
If the longevity insurance scheme were implemented, it would create a fourth pillar to the retirement income system, which would be comprised of the Age Pension; the Superannuation Guarantee; voluntary private savings, and longevity insurance. In addition, housing is often referred to as an unofficial pillar in the retirement income system, given its impact on standard of living in retirement.
Previous proposals for an insurance scheme
Two historical proposals for government old age insurance highlight the issues of complexity and cost associated with the idea.
In 1973, the Whitlam government charged a committee of inquiry with recommending the design, cost and means of financing a government insurance scheme for superannuation. Notwithstanding the contributory tax which would be used to finance the scheme, the model of national superannuation proposed by the inquiry had a shortfall of $2.1 billion, which would have required government funding to top up.
Similarly, in the early 1980s, the Labor Party was considering the introduction of national superannuation scheme financed by a tax levy, however the imposition of another levy was not considered electorally feasible. At the same time, there was a growth of occupational superannuation schemes. The more of these schemes that were established, and the more workers who were covered, the more complex it would have been to introduce a government scheme on top. Jeremy Cooper, who headed the Super System Review in 2015, observed that policy makers today are unlikely to be interested in adding a further funding layer on top of the pension system.
What kind of levy?
The introduction of longevity insurance would mean that wage earners pay two flat tax levies: the Medicare levy (which takes in funding for Medicare and the NDIS) and the ‘longevity levy.’ If the funds were treated like the Medicare levy they would not be hypothecated but instead placed in general revenue. Unless funds are tied to an individual, a future government could use the longevity levy funds for purposes other than longevity insurance.