Pension reform: Pensioner against pensioner or old against young?

Upon announcing that the opposition would not support the government’s budget measure to move the wealthiest age pensioners off payment, Bill Shorten accused the government of “setting pensioner against pensioner”. But in refusing to back this reform, Labor is setting old against young.

The government proposes to reduce the asset test thresholds at which the full rate of the pension is reduced and increase the rate of reduction from $1.50 for every $1,000 of assets to $3. The result is a reduction in the level of assets where the pension cuts out completely.

For example, a couple who own their own home will be pushed onto a part pension at $375,000 and moved off the pension if their assessable assets exceed $823,000.

This is estimated to save $2.4 billion over four years with 91,000 of the wealthiest pensioners moved off payment and the payments of a further 236,000 reduced. The 170,000 of pensioners with assets just above the old thresholds will see a modest increase in their payment.

According to media reports, the opposition was moved by independent modelling that showed a homeowner couple with $900,000 in superannuation would lose the pension, a significant hit to the income of a couple living off their minimum annual superannuation drawdown of $45,000.

According to Labor, those with almost $1 million in assessable assets – who may have considerably more wealth tied up in home equity – are among those who “…are not rich people, they are not on high incomes” and “deserve dignity and security in their old age”.

While they certainly deserve dignity in their old age it is far from clear that they require taxpayer’s money.

The question is not whether they are rich but whether they could make additional super withdrawals to make up the income lost from the pension reform between now and when they pass on.

Let us make two bleak assumptions about the future of retirement incomes. Suppose the real return on super stayed at just 2.5% for the next 35 years and that the maximum rate of the age pension was frozen in real terms.

If this couple began retirement with $900,000 in super and made the minimum super withdrawals, the tightening of the means test would result in a significant reduction in their income.

Despite this they would be back on the pension at age 69 and would be almost on the full rate once the wife reached her average life expectancy. But with a super balance of more than $370,000 they would still be well placed to dip into their savings before putting their hand in the taxpayer’s pocket.

However, were this couple to make additional drawdowns to make up the income lost from the pension reform, they could continue to maintain the same standard of living. Even then, they would be back on the pension at 68 and on the full rate at 89 with $250,000 of super left.

A recent study of 5,365 age pensioners who passed away between 1999 and 2007 found the median age pensioner died with 89% of the assessable assets they held in 1999.

The opposition has been railing against ‘unfair’ budget measures since Budget night 2014. But how is it fair to expect younger taxpayers to shoulder the $44 billion cost of the pension if it is going to those who have significant savings to draw upon?

The same question could be asked of the $625 billion in pensioner home equity that makes up 70% of pensioner net worth and is completely excluded from the pension assets test, an asset that will remain exempt after the budget measure makes its way through the Senate with the help of the Greens.

The pension should be targeted at those who do not have enough assets to look after themselves, not to preserve wealth so it can be handed on to children as bequests.

We can have a fairer and more sustainable retirement incomes system but not if we continue to use the pension to subsidise inheritances.