Intergenerational Report: Pensioners hold the cards in the surplus equation

The latest Intergenerational Report sends a clear message to policymakers that the nation can no longer afford to continue to ring-fence older Australians from the task of budget repair.

If the 44th parliament fails to return the Age Pension eligibility age to within cooee of projected life expectancy and reign in increases in the maximum rate of payment to pensioners’ cost of living, expenditure on the Age Pension will increase from its current level of $42 billion to $165bn in 2054-55 — and that’s just in 2015 dollars.

This trebling of Age Pension expenditure, in part, reflects the ageing of Australia’s demography. The IGR predicts more than one-in-five Australians will be aged 65 and over by 2054-55.

This is not the only factor driving this massive increase in pension spending.

When Peter Costello unveiled the first IGR back in 2002, there were 1.8 million age pensioners –there are now 2.4 million. A large increase in expenditure between IGR 2002 and IGR 2015 was inevitable.

What was not inevitable was the increase in expenditure per age pensioner. This leapt from $9,758 in 2002-03 to $16,711 in 2013-14. That is an annual rate of growth of 5 per cent, when prices were increasing at 2.7 per cent.

This was a policy decision, it was not the result of ageing boomers.

At present there is an automatic increase in the Age Pension on the 20th of March and September each year. This increase is in line with the Consumer Price Index or the Pensioner and Beneficiary Cost of Living Index, depending upon which has increased by the greater amount.

If, after indexation, the single rate of the pension falls below 27.7 per cent of Male Total Average Weekly Earnings, it is topped up to that amount. For couples the top-up is 41.8 per cent of MTAWE.

In the 2014-15 budget, the government sought to remove the MTAWE benchmark from September 2017 but keep CPI indexation in place. This has the potential to save $331 million in 2017-18 and to reduce spending on the Age Pension by as much as $6.9bn in 2024-25.

Under the current pension indexation arrangements, in years when wages grow faster than prices, pensioners receive the benefit of this. In years when prices jump ahead of wages, pensioners are shielded from any reduction in the real value of their payment in a way that the incomes of wage earners are not.

The removal of the MTAWE benchmark is an important aspect of budget repair but, as with so much of budget 2014-15, it is yet to be legislated.

Proponents of the MTAWE benchmark argue that it is necessary so that pensions do not fall behind community living standards. But MTAWE is not a measure of any particular standard of living, let alone one that reflects a generally accepted community standard.

In fact, the high rate of growth in the rate of pension payments has been the result of strong growth in MTAWE. This growth rate of 4.6 per cent since the first IGR has not only outstripped price increases by almost 2 per cent, it has also outpaced age pensioners’ cost of living, which has been growing at 3 per cent.

This is for a payment that the IGR states is to “provide pensioners with a basic standard of living”.

Even if one accepts that pensions should be tied to the living standards of wage earners, MTAWE does not account for the taxes paid by wage earners. It is a measure of gross income, not disposable income.

If expenditure on the Age Pension is to more than triple in real terms over the next 40 years, this will require tax increases or an expansion of Commonwealth debt — higher future taxes. While the MTAWE benchmark might ensure the living standards of pensioners keep pace with wage earners, it disregards the fact that these tax increases will lower the living standards of those wage earners.

According to the IGR, if the government were able to bank the savings outlined in budget 2014-15 the Commonwealth would be back in the black to the tune of 1% of GDP by 2028-29, leaving the government with “… more capacity to revisit the level of Government support to groups such as Age Pensioners”.

It would be unreasonable to deny age pensioners a pension increase, in real terms, indefinitely. However, it is equally unreasonable for them to shoulder none of the burden of budget repair.

With the modeling in the IGR built on the assumption of a return to pension benchmarking at Average Weekly Earnings in 2028-29 it is relying on this large, and growing, constituency to happily accept a freeze in their standard of living for over a decade. This seems unlikely.

Matthew Taylor is a research fellow at The Centre for Independent Studies.