Chapter 8
The Age Pension
8.1
The Age Pension is broadly recognised as a critical means of providing
Australians with economic security in retirement. This importance is reflected
in the fact that it is one of three retirement income pillars in Australia (the
others being compulsory superannuation and private savings).[1]
Evidence received during this inquiry highlighted the importance of the Age
Pension in providing economic security for women in retirement. In particular,
witnesses noted that unlike the current superannuation system, the Age Pension could
provide for a decent standard of living in retirement irrespective of a
person's income throughout their life. Moreover, the Age Pension is also better
able to recognise and reward unpaid work for their families and communities,
which women are more likely to undertake than men.
8.2
This chapter summarises and assesses evidence received during the
inquiry on the importance of the Age Pension, and makes recommendations aimed
at protecting its value and integrity.
The importance of the Age Pension, now and into the future
8.3
The Age Pension is an important contributor to the financial security of
a majority of Australian men and women of retirement age, with about
70 per cent of people of pension age receiving the Age Pension.[2]
As noted in chapter 2, compared to men, women are more likely to receive and
rely upon the Age Pension. COTA advised that 56.6 per cent of full
Age Pension recipients are women, and 67.9 per cent of single, full
Age Pension recipients are women.[3]
COTA also noted that a 2012 Rice Warner study found that 49 per cent
of females relied solely on the Age Pension to fund their retirement, compared
to 40 per cent of males.[4]
The incidence of women relying solely on the Age Pension is compounded by
longevity risk. As ANZ explained, women 'at every decade of life are forecast
to significantly outlive their super savings, with female baby boomers
potentially outliving their savings by 16 years, which means they are
relying on the age pension alone'.[5]
8.4
Even as the superannuation system matures, the Age Pension will remain a
critical component of Australia's retirement income system. The continued
importance of the Age Pension for the foreseeable future was made clear in the
2015 Intergenerational Report. Noting that about 70 per cent of people of Age
Pension age were receiving the Age Pension, the Intergenerational Report
suggested that this number was only projected to decline to
67 per cent by 2054–55.[6]
8.5
The Age Pension is particularly important for the current cohort of
women approaching retirement age, who have faced gendered structural
disadvantages throughout their working lives that have limited their ability to
build their superannuation balances. The Australian Education Union (AEU)
pointed to some of the common types of disadvantage faced by its female
members, especially those members who are now approaching retirement:
For example, in some states, upon marriage, women were
excluded from teachers' superannuation funds and only allowed access to 'married
women' schemes with inferior conditions. In most states, superannuation was
only available to 'permanent employees' and being a permanent employee meant
being full time and available for any position across the state, thus excluding
many women who were part time or were unable to move due to family
responsibilities. Before unpaid maternity leave was secured in the mid 1970s,
many women had to resign in order to have children. Upon returning, many found
themselves unable to regain their permanent status and therefore unable to
regain access to their previous superannuation scheme. Others found that they
had lost recognition of prior service for superannuation purposes. Married
women were given options to opt out of the married women's schemes, sending the
message that superannuation for women wasn't important. Many of these women
took on primary care of children with the understanding that their husband's
superannuation would provide the family's retirement income, but then lost
access to this money due to marital breakdown.[7]
8.6
No amount of 'tinkering' to the current rules around superannuation, the
AEU concluded, would address the compounding financial disadvantage faced by
many women nearing or in retirement. The AEU therefore concluded that 'the
primary strategy for ensuring that [these women] maintain some economic
security in retirement is to build on the existing Age Pension'.[8]
8.7
Similarly, Unions NSW emphasised that while it was important to promote
fairness and equity in the superannuation system, the system needed to be
underpinned by a strong Age Pension system. This was particularly true, it
argued, for women currently approaching retirement:
Reforming super, closing income gaps and remunerating the
care work that women perform are crucial in promoting economic security in
retirement. But, even if we were able to make all these reforms, it would take
several decades for these benefits to be seen in women's retirement incomes and
their lives in retirement. For some women, it will be too late for reforms to
superannuation and the accumulation of retirement incomes to benefit them;
therefore, it is crucial that, for these women and for women going forward, we
continue to have a strong safety net in the age pension.[9]
8.8
The AIFS also explained that changes to the superannuation system and
other changes to address underlying structural biases would provide little
benefit for women who are currently in retirement:
Changes to superannuation policy to address the issue of the
gender gap in superannuation savings, along with policies that encourage the
increased labour force participation of women, may assist retirees in decades
to come. However, these changes will have no effect on the standard of living
of the current cohort of retirees. For those already in retirement, policy
reform targeting assistance to those in genuine financial hardship is the only
type of reform that will bring real improvements to their living standards.[10]
8.9
Anglicare Australia noted that looking at the incomes of women already
retired was 'a bit like time travel', in the sense that these incomes reflected
the social norms and social policy of up to 40 years ago:
The positive side of that observation is that the solutions
to this can be fairly small if started early enough in someone's life. However,
the other side is that there is a need for larger interventions required for
those already in or approaching this age group as they have got little time to
catch up.[11]
8.10
Other witnesses also expressed concern that the attention of
policymakers, and the public discourse on retirement incomes more broadly,
tended to focus on the superannuation system at the expense of the Age Pension
system. Professor Siobhan Austen, talking to the submission made by the Women
in Social Economic Research (WiSER) Cluster at Curtin University, explained
that the main theme of the submission was that the Age Pension has:
...a central role in ensuring the economic security of women in
retirement and also in ensuring that an efficient retirement income system is
achieved. We expressed our concern about a clear policy direction to diminish
the importance of what we call the pension pillar of Australia's retirement
system. We see that as being negative for gender equity, negative for the
economic security of older women. We know that it is coming at a very large
cost. That cost has been very well documented. It is associated with the large
tax expenditures on superannuation. But also generally the shift towards what
we also call the superannuation pillar of the retirement income system is
reducing the levels of control because of the handing of responsibility of
retirement income provision onto individuals and households and that can leave
women in very vulnerable circumstances, especially towards the end of their
lives when their vulnerability is highest.[12]
8.11
Professor Austen further expressed concern that the shift in emphasis
from the Age Pension pillar of the retirement income system to the
superannuation pillar would generally exacerbate gendered financial inequality
within households:
In most households, there is going to be an increase in
concentration of the household resources in the hands of the male partner. Some
people come back at us and say that is okay for their wives—their wives will be
able to benefit from those large superannuation accounts. I am sure that will
happen in many households, but there are no guarantees and there are no real
safeguards in our system. You can end up in a situation where you are married
to someone, he owns all the money, and you have got to essentially negotiate
around how that money is used. Sometimes this is really significant for women
because, if we are talking about the type of annuity that is purchased to
generate income to support the retirement needs of the individuals in a
household, if the annuity is based on his longevity then potentially the woman
ends up with a shortfall of resources right towards the end of her life because
she lives longer than him, on average. Additionally, women are usually younger
than their spouses by a number of years, so both longevity and age differences
contribute to this potential risk for women. You do not get these problems if
you have got an age pension. The money can go into your account; you get as
much as your husband. So there is a much more equal distribution of bargaining
power.[13]
8.12
WiSER's submission made the point that in contrast to superannuation,
'the age pension pillar of Australia's retirement system does not reinforce
patterns in the distribution of income and wealth associated with the performance
of paid and unpaid work'.[14]
Asked if this meant the Age Pension was a better mechanism than the
superannuation system for addressing women's retirement needs, Professor Austen
responded:
Yes, very clearly, both because it does not penalise women
because of the larger unpaid work roles that they take on and also because it
is more efficient, for a number of reasons. If we are focusing on this
discussion of paid and nonpaid work, it does not create incentives for
particular types of work. It does not alter the incentive to participate in
paid or unpaid work, if you know what I mean. It does not favour one over the
other. But there are other really important aspects to it. The pension is more
suitable to women's longevity. It provides much greater insurance against
longevity risk.[15]
8.13
Similarly, the Australia Institute submitted that unlike the Age
Pension, the superannuation system 'effectively takes the gendered income
inequalities that exist during people's working lives and magnifies them in
retirement'. It argued for increasing the Age Pension, and suggested the cost
of doing so was 'trivial compared to the enormous, and rapidly growing, cost of
the existing tax concessions provided for superannuation'.[16]
Access to the Age Pension
Recent changes to asset testing for
the Age Pension and the 'taper rate'
8.14
On 7 May 2015, the government announced changes to the Age Pension
assets test and 'taper rate', which is the rate at which the pension declines
when asset thresholds are exceeded. The changes, which are due to come into
effect in January 2017, increase the value of assets below which the full
Age Pension is paid (the 'assets free area'), while at the same time increasing
the rate at which pension payments taper off when those thresholds are
exceeded. Moreover, the maximum value of assets people can hold (excluding the
family home) and still be eligible for the part pension has been reduced.
According to the former Minister for Social Services, the Hon Scott Morrison
MP, the changes will leave 170,000 pensioners with modest assets better off by
an average of more than $30 per fortnight, including an additional
50,000 pensioners who will now qualify for the full Age Pension. However,
approximately 91,000 current part pensioners will no longer qualify for the
pension, and a further 235,000 will have their part pension reduced.[17]
8.15
Some witnesses were critical of the effect these changes would have on
the interplay between the superannuation system and the Age Pension. ISA
suggested that for a large number of people on middle incomes, and in
particular women on middle incomes, the changes would reduce the efficacy of
additional savings in superannuation, because these savings would simply be
offset by reductions in the Age Pension. Ms Campo told the committee:
One of my colleagues has a colourful way of describing it:
that without fixing this interplay between the age pension and the super
system, we will just be firing blanks in terms of any improvements in
retirement income savings. For additional super savings, it is almost one for
one in what you lose in age pension. The brunt of that is borne by women—women
in the middle-income distribution earning under $75,000 per annum.'[18]
8.16
Referring to modelling presented by ISA, Ms Campo concluded that
policymakers 'need to ensure that the interplay of the two systems does not
disturb incentives for people to save, in particular for groups who are below a
comfortable retirement level'.[19]
8.17
Women in Super also stressed the importance of understanding the
interplay between the Age Pension and superannuation when making policy aimed
at improving women's economic security in retirement:
Most women in retirement or who are facing retirement in the
coming five to 10 years will receive a combination of super and age pension
payments. It is vitally important for single women, and the proposed changes to
the age pension could further disadvantage them.[20]
8.18
Stressing the point that the Age Pension is 'essentially a safety net'
and it is 'a bottom line in longevity insurance but it should not be the
aspirational goal of our retirement system', Women in Super emphasised the need
for a holistic approach that takes account of the interplay between the pillars
of the retirement income system.[21]
Differential Age Pension asset
testing
8.19
Some witnesses raised the possibility of reforming the Age Pension
assets test in ways that might help bolster women's incomes in retirement.
Notably, Mercer raised the prospect of the means test of the Age Pension being
more generous for single women, 'as they are expected to live longer and
therefore their superannuation needs to be extended for a larger number of
years'.[22]
Age Pension access age
8.20
The current qualifying age for the Age Pension is 65 years of age or
older. Under changes introduced by the Labor government in 2009, from 1 July
2017 the qualifying age will increase to 65 years and 6 months.
Thereafter, the qualifying age will increase by 6 months every 2 years, until
reaching 67 years by 1 July 2023. In May 2014, the then Treasurer, the
Hon Joe Hockey MP, announced that the pension age would continue to
increase gradually to 70 years of age by 2035. At this stage, the changes
announced in 2014 remain unlegislated.[23]
8.21
The increase in the qualifying age for the Age Pension, and the prospect
of further increases to come, was cause for concern for a number of witnesses.
Referring to comments by women participating in its study on women's retirement
incomes, Dr Parkinson from Women's Health in the North, noted that many
women were concerned about the rising access age for the aged pension. Dr
Parkinson observed that the women in the study used words like 'painful' and
'terrifying' when they thought about the future.[24]
8.22
Ms Kearney from the ACTU agreed with the proposition that while public
discussion often pointed to uncertainty regarding superannuation policy, there
was also growing uncertainty about the Age Pension. This uncertainty often
centred on changes to the access age:
We talk a lot about an ageing population and how this is
going to cost a great deal, and I think people do worry about the pension and
whether it will be there when they are older. There is a lot of talk about
people having to increase retirement age and feeling that they will never ever
get to a point where they can access the pension. Particularly for my old
industry, nursing, the concept of having to work until you are 70, for example,
is just a complete anathema. I do not think people feel that they would
physically be able to do that, so they worry that they will be retiring without
a pension and that it is something that may well be getting beyond their grasp.[25]
8.23
Other witnesses noted that with the pension age rising, increasing
numbers of women were being forced to rely on the grossly inadequate Newstart
Allowance. The Newstart Allowance is currently $527.60 a fortnight for singles,[26]
much less than the single Age Pension which is $794.80 per fortnight.[27]
Anglicare Australia reported that many workers, and many women, were in effect
being involuntarily retired before pension age because of their inability to
perform certain duties. This problem, it noted, would become particularly acute
if the pension age moved to 70. Being forced to survive on Newstart, Anglicare
suggested, 'is certainly no way to approach your retirement age'.[28]
8.24
COTA also reported that many women in the years before pension age face
'significant barriers to retaining their job and to re-entering employment if they
become unemployed', and therefore have no option other to move to the Newstart
Allowance. COTA cited statistics showing that matured aged women were
overrepresented in the number of long-term Newstart Allowance recipients, with
women in the 50–59 age range the single largest age and gender cohort of
long-term Newstart recipients. COTA added:
For the grouping of people who subsist on Newstart later in
working life, often for extended periods in the decade preceding retirement,
the loss of income and savings can be catastrophic for longer term economic
security. Many eat into and exhaust savings and other resources to manage
through the time on the Allowance, and indeed the conditions for receipt of
Newstart require the draw-down of financial resources other than
superannuation. Clearly this will have an impact on their ability to fund
retirement.[29]
8.25
Compounding the problem, COTA suggested that the government's current
but as yet unlegislated policy to continue extending the pension eligibility
age to 70 years old 'creates a significant worry that many older
people, unemployed due to age and sex discrimination and lack of jobs, will
stay on Newstart Allowance for years longer'. In addition to recommending that
the government increase the level of Newstart paid and index the payment to
average full-time wage levels, COTA recommended that the Age Pension
eligibility age should not be further increased until the government
implemented an agreed package of measures to remove discrimination and other
barriers to mature age employment.[30]
8.26
The ACTU expressed its opposition to raising the Age Pension eligibility
age to 70 years of age, stating that:
...workers should not be forced to arbitrarily continue to work
at ages when it is generally recognised that significant numbers of workers,
particularly in manual occupations, will simply be unable to meet the demands
of the roles they are being required to perform.[31]
The adequacy of the Age Pension
8.27
Some witnesses questioned the general adequacy of the Age Pension for
retirees who depend on it as their sole source of retirement income. For
example, Rice Warner noted that the OECD defines poverty as being below
50 per cent of median income. Rice Warner stated that with the median
income in Australia being $53,457, the single Age Pension would need to be
$26,728, or 19 per cent higher than it currently is, to meet this
benchmark. Funding for pension increases, it suggested, might be secured by
including the family home in the pension assets test (at least above a certain
threshold).[32]
8.28
Some witnesses, such as the Grattan Institute, submitted that additional
assistance to Age Pensioners should be targeted to those who do not own their
own home, either through targeted increases to the Age Pension or increases to
the rate of Commonwealth Rent Assistance.[33]
These proposals are discussed in chapter 9.
Indexation and benchmark
arrangements
8.29
The current method of indexation for the Age Pension is explained on the
Department of Social Services' website:
Base pensions are indexed twice a year, in March and
September, to reflect changes in pensioners' cost of living and wages. The
pension is increased to reflect growth in the Consumer Price Index and the
Pensioner and Beneficiary Living Cost Index, whichever is higher. When wages
grow more quickly than prices, the pension is increased to the wages
benchmark. The wages benchmark sets the combined couple rate of pension at
41.76 per cent of Male Total Average Weekly Earnings. The single rate of
pension is two thirds of the couple rate.[34]
8.30
In the 2014–15 Budget, the government announced that starting from 2017,
pensions and pension-equivalent payments would be indexed according to
movements in the Consumer Price Index (CPI) only, rather than the existing
indexation method. On 7 May 2015, the government announced that the
changes would not proceed.[35]
8.31
The AEU endorsed the position of the ACTU that the value of the Age
Pension 'must be consistently linked to earnings so that a decent pension is
always available to those who still need such a level of support'.[36]
8.32
ACOSS told the committee that it was 'very pleased' that the indexation
changes had not proceeded, and reiterated its view that 'adequate indexation
for pensions tied to wages is crucial for their sustainability into the future'.[37]
8.33
The Australian Services Union also stressed that an adequate and
appropriately indexed Age Pension was 'absolutely imperative for women', and
would remain so into the future.[38]
8.34
National Seniors recommended retaining the 'current method of annual
increases to the Age Pension to ensure it keeps pace with living expenses and
is adequate as a safety net for women in retirement'. It noted that, as of
2009–10, only 10.3 per cent of women in retirement derive their main
source of income from superannuation or annuity, compared to
17.4 per cent of men. Given the high proportion of women dependent on
the Age Pension, 'it is important that this safety net is adequate to meet
their day-to-day living costs'.[39]
8.35
For its part, the ACTU advocated a new benchmark of
35 per cent of Full Time Adult Average Weekly Ordinary Time Earnings
(AWOTE) and a single–couple equivalence of 70 per cent. The ACTU
suggested this could be achieved by 2025.[40]
Committee view
8.36
The committee views the Age Pension as an integral component of
Australia's retirement incomes system, and considers an adequate and accessible
Age Pension to be critical in ensuring the economic security of women in
retirement. As many of the experts participating in this inquiry point out, the
Age Pension is not only important for women currently in retirement, but will
remain important for the foreseeable future, even as the superannuation system
matures.
8.37
The committee notes and shares the concerns expressed by various experts
and organisations in this inquiry regarding changes to the Age Pension that the
government has proposed or implemented in recent years. In particular, the
committee is concerned that the proposed move to increase the eligibility age
for the Age Pension will leave many workers, and a disproportionate number of
women, trapped on Newstart Allowance for longer periods. While the government
has abandoned plans to index the Age Pension to CPI, the committee observes
that evidence received in the inquiry highlighted the damage this change would
have had on the incomes of the 70 per cent of Australians of
retirement age who receive a full or part Age Pension payment.
Recommendation 17
8.38
The committee recommends that, in order to provide certainty and
security for the majority of Australians who will receive the Age Pension in retirement,
the government:
- abandon its proposal to increase the Age Pension retirement
eligibility age to 70; and
-
commit to maintaining the current method of indexation and
benchmarking for the Age Pension.
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