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COUNCIL ON THE AGEING (AUSTRALIA)

Response to Independence and Self Provision

discussion paper for the

National Strategy for an Ageing Australia


Council on the Ageing (Australia)
Level 2, 3 Bowen Crescent
Melbourne Victoria 3004
Phone: 03 9820 2655
Facsimile: 03 9820 9886

Email: cota@cota.org.au

APRIL 2000

Contents

1. INTRODUCTION: INDEPENDENCE? SELF-PROVISION?

2. A ROBUST PUBLIC PENSION SYSTEM

3. LABOUR FORCE PARTICIPATION THE KEY

4. LINKING PRE-RETIREMENT TO RETIREMENT INCOMES POLICY

5. SAVINGS, SUPERANNUATION AND INCENTIVES

6. FUTURE DIRECTIONS

Independence and self-provision

1. INTRODUCTION

Independence? Self-provision?

The implication behind the title of the discussion paper is that the most desirable retirement income system is one in which individuals are largely able to provide for themselves.

However, COTA believes that the concepts of "independence" and "self-provision" should be viewed quite separately. Full or partial receipt of government income support should not impinge on an individual's capacity to live independently later in life.

A broad definition of independence should incorporate the idea of choice in life-style and the maximisation of opportunities for social and economic participation. Independence in older ages will most effectively be enhanced by the achievement of healthy ageing as discussed in our first submission to the National Strategy. In that paper we have conceived of a broad definition of what it will take to achieve healthy ageing:

  • sound economic, social and environmental conditions: these conditions will include adequate and equitable income distribution mechanisms through paid employment and social security provisions
  • well developed communities, high level of accessibility and appropriate living situations
  • a range of health and community service programs to support healthy ageing.

This submission should, therefore, be read in conjunction with the healthy ageing submission which takes an overarching perspective of the National Strategy for an Ageing Australia. This submission, in contrast, is more narrowly focussed on income support issues for older Australians. While the focus is on income support issues, we believe that income is not the only factor in determining the standard of living available to older Australians and supporting independence in retirement years.

Elements of the social wage of importance to older people include:

  • public medical care
  • community care services
  • social and community infrastructure such as public libraries, swimming pools, educational centres etc
  • public transport
  • housing assistance

COTA believes that many people can and do lead independent and healthy lives in older ages irrespective of the source of their income as long as the social wage is sufficient. Many independent older people receive a full rate age pension.

COTA believes also that the concepts of dependence and independence in current debates in relation to both social welfare and the ageing population are generally not useful in promoting social harmony and tolerance which we have specified in our earlier submission as having an essential role in achieving healthy ageing.

It is not possible or feasible for everyone in this society to be self-funding in retirement. This should not affect their entitlements to full citizenship, an adequate income and the respect of others for their contributions in terms of raising children, caring, working, paying taxes over their life time or other contribution. At the same time it is important to recognise that the opportunity for saving for retirement represents the outcome of fortunate life circumstances, sheer good luck and a range of other factors that are not necessarily related to the personal attributes of any one individual.

Our focus in this submission then is the more relevant concept of maximising the income available to people in the years in which people are outside the paid labour force. This period is traditionally called "retirement" although many middle-aged and older people now reject the concept of retirement and envisage an ongoing contribution to society regardless of their relationship to paid employment.

COTA supports the notion that people should be encouraged to save for their retirement so that they will have a higher standard of living than what would be possible if they are solely reliant on the public pension. Even some savings for retirement, which will supplement pension income is a desirable outcome for retirement which should be encouraged.

However, we have a number of qualifications to our support.

The capacity for an individual or couple to maximise their private income for older age will depend largely on their lifetime earnings, their capacity for savings, investment strategies and achievement of home ownership. Clearly there are many factors which erode the capacity of people to maximise their funds for retirement:

COTA believes that policies to support savings for retirement need to be balanced with a sound public age pension system that will provide an adequate income to all those who have insufficient means to support themselves in part or in full in retirement. The issues relating to the public pension system are discussed below.

2. A ROBUST PUBLIC PENSION SYSTEM

Australia's age pension system provides a modest retirement income in comparison to the social insurance payments made to retired people of some OECD countries.

Our system maintains the pension at roughly 25 per cent of Male Total Average Weekly Earnings and provides half yearly indexation. The implementation of tax reform and the compensation arrangements for pensioners are pending. Amongst these changes will be a 2 per cent real increase in the age pension and an easing of the pension taper rate from 50 cents in the dollar to 40 cents.

For an older person who owns their own home, has a small private income to supplement the pension and lives in a community with considerable amenity and social support, the Australian age pension is a modest but adequate income.

However, its adequacy is challenged for people who fall outside this model of living circumstances. COTA's concerns are supported by the Social Policy Research Centre research (Saunders et al,1998 Development of Indicative Budget Standards, Social Policy Research Centre, Policy Research Paper No. 74) which showed that for a single older person renting privately, their income from the age pension would fall some 35 per cent below what they needed for a "low cost budget standard" which is characterised by the Social Policy Research Centre as:

one which may require frugal and careful management of resources but would still allow social and economic participation consistent with community standards and enable the individual to fulfil community expectations in the workplace, at home and in the community. It describes a level below which it becomes increasingly difficult to maintain an acceptable living standard because of the increased risk of deprivation and disadvantage (Budget Standards Unit, Newsheet No. 4, May 1998, p3).

The pension income of a home owner, without private income would be some 20 per cent below the "low cost budget standard" and the income of a public housing tenant would be around 7 per cent below. While there has been some controversy over the Social Policy Research Centre's methodology in calculating the budget standards, COTA believes that the research findings reflect the experience of hardship and difficulties in managing reported to us by older people – in the main, single people in private rental or in owner occupier housing, fully reliant on the age pension with no other sources of income.

COTA is most concerned about the long term health effects on many of these people who are subject to a high level of stress and social isolation as a result of inadequate income. The problem is that many people are reliant on nothing else but the age pension over a very long period. For example, it is not uncommon for a woman to collect an age pension for 25 or 30 years if she had commenced at 60 years and lives until 85 or 90 years. Single age pensioners rather than married couple pensioners are also most at risk in terms of living in poverty on an age pension.

COTA believes that the Government should consider periodic supplementation of the age pension for people who have no other sources of income over the long term. In the context of the National Strategy for an Ageing Australia, it is critical that better protections are built into the safety net for those people who are most at risk of poverty in old age. The broader perspective must include attention to the circumstances of people in their pre-retirement years as discussed below.

3. LABOUR FORCE PARTICIPATION THE KEY

The most important factor affecting the capacity of older people to have some private income in retirement is their ongoing relationship to the labour market in their pre-retirement years.

Our principal concern developed in the past 12 months is that the relationship to the labour market is breaking down for many people over the age of 50. Most recent research shows that the position for this group is improving however for COTA the major concerns are:

COTA argues that the premature tailing off of participation in paid employment and the excessive reliance on income support in pre-retirement years has major consequences for the capacity of individuals to bring savings and private income to their retirement years.

There are also a range of issues relating to employment of people beyond the traditional "retirement" ages of 60-65. Given increased longevity, constantly improving health and vigour of older Australians, later labour force entry, prevalence of interrupted labour force experience, should Australians begin to think of extending their labour force years beyond 60-65, say to 65-70. In some countries, there is a phased increase in retirement age in train. In Australia, the Pension Bonus Scheme is aimed at providing incentives for people to remain in the work force after the age that they become eligible for the age pension. For COTA however, the principal issue at this point in time is less about extending the traditional retirement age up from 60-65, but rather enabling more people to continue to work until this age.

As a matter of urgency, we have requested the Federal Government to take action in the area of mature age employment. This includes implementation of new labour market policies as well as attention to the income support policies which affect people in the pre-retirement years. Our policy positions in these areas are articulated in our report, Older Australians: Working for the Future. We wish to see the issues raised in this report considered in the context of the National Strategy both in terms of the Independence and Self-Provision issues paper and the Employment for Mature Age people issues paper.

In developing an incomes policy for older Australians, it is important to recognise that there will always be people who will be unable to take advantage of labour force participation as a means of savings for retirement – or whose labour market attachment is so marginal that they are not able to save for retirement. Many of these are identified in the discussion paper and include women, migrants, people with disabilities and older workers (see pages 40-47 of the report). To this list COTA would add long term carers.

COTA agrees with the discussion paper that access to an adequate age pension will be important for these groups into the future.

However, much more must be done to create opportunities for all these groups to reap the benefits of paid employment as much as possible. Examples of the sort of interventions needed include:

A number of these options have been discussed in the Interim Report of the Reference Group on Welfare Reform released in March 2000.

COTA believes that attention to maximising the labour force opportunities for as many of the Australian population as possible is the key to optimising the private income available to older Australians in retirement. It is a task that will require vigorous commitment and resources on the part of Government.

4. LINKING PRE-RETIREMENT TO RETIREMENT INCOMES POLICY

Maximising the labour force participation of mature age people must be combined with attention to pre-retirement incomes policy and the links to retirement incomes policy. COTA has found that many aspects of current government policy as they apply to mature age people in the pre-retirement years are compromising their capacity for maximising their private income for retirement.

The Assets Test

There are significant numbers of unemployed mature age people who are not eligible for any income support due to the social security assets test. Newstart Allowance is not payable to people with financial assets over the following amounts (March-June 2000).

Assets test for home owners

Family situation

  

Single

$127 750

Partnered (combined)

$181 500

Assets test for non-homeowners

Family situation

  

Single

$219 250

Partnered (combined)

$273 000

In the context of an asset base which would provide a reasonable level of independence from government income support in retirement, these assets limits are set at quite low levels. In addition there is no tapering of eligibility for Newstart Allowance, such that one dollar over the threshold, disqualifies an individual from any assistance at all.

The reasons for the strict assets test are well understood by COTA. The assets test has assisted in keeping outlays for unemployment payments in check and has ensured that assistance is targetted to those most in need. Poverty alleviation has been and continues to be its primary purpose. Nevertheless, the issues raised by the people in COTA's focus groups raise important questions about short term goals in social security financing versus long term goals for Australia's retirement incomes system. There is also an important question about the lifecycle context of the income support system.

COTA proposes that there is an inherent inconsistency in applying the same assets test for people in their fifties as is applied to younger people given that people naturally accumulate financial assets for retirement and old age as they age. Assets are also required due to retrenchment payouts which is often the single largest amount of money that people receive throughout a lifetime.

The problem for many mature age people is that once an asset base has been depleted opportunities for building it up again are severely limited by lack of employment or new income generating opportunities. These issues are not faced to the same extent by younger people. Therefore it is not reasonable to apply the same rules to older people and younger people.

For all the mature age people we have spoken to, protection of the assets for retirement and old age is a primary goal. They do not consider disposing of assets for frivolous purposes with a view to be able "to go on the pension". In addition to protection of existing assets, all the people we have spoken to, wish to add to the asset base for retirement purposes. For many people, the fifties may be the first opportunity they have to save once children are off their hands and the house is paid off. The cost of raising and educating a family is very high. In addition the later age of marriage and child rearing may significantly delay the saving process.

COTA believes that the social security assets test for mature age people should be revised to more realistically reflect lifecycle factors affecting savings and to be cognisant of the retirement savings requirements of older Australians. This may lead to the development a graduated age-related assets test.

Lack of assistance through the Job Network

As many mature age unemployed people do not qualify for Newstart Allowance, they also do not qualify for any assistance that is available to income support recipients through the Job Network. While there is considerable dissatisfaction with those services on behalf of those who did qualify, it is very important that training and assistance with job search should be available.

Those who rely on their own sources for income commented on the high costs of undertaking courses for the purposes of skills upgrading and the barriers that this created in terms of their employability.

In addition, where people do rely on their own assets in hope of quickly regaining a job, the length of unemployment becomes longer than anticipated, the assets dwindle and they eventually forced on to income support payments.

At this point however, a number have already become long term unemployed and are more disadvantaged than they would have been, had swift remedial action been taken when they had first loss of a job.

Adequacy of Newstart Allowance

In the event that a mature age unemployed person qualifies for Newstart Allowance under the assets test, the following issues emerge:

The average duration of unemployment for people in their fifties calls into question whether or not Newstart Allowance is the appropriate payment for this group. If poverty alleviation is a serious goal of the social security system, then the adequacy of Newstart Allowance as the primary means of support for unemployed people in their fifties experiencing long term unemployment must be questioned.

Newstart Allowance for older unemployed people should be increased or replaced with another payment that more realistically reflects the duration of unemployment they are likely to experience: the current level of a pension payment would be appropriate. This new payment should be introduced for people 50 and over – or even 45, the age at which age discrimination begins to manifest itself. The income test for this payment should also be lifted to the same income test as for a pension income.

An earnings credit scheme, which annualises income earned from casual employment for the purposes of the Centrelink income test should be reinstated.

In addition, an Earnings Credit Scheme which provided incentives for people to take up casual jobs, should be reinstated with an earnings limit increased substantially (COTA will need to do further research to establish a reasonable limit but possibly $2500 a year which equates to additional income of around $50 per week). This was a particularly useful program for older people who have opportunities for periodic spells of employment rather than continuous part-time work. It may be particularly useful for measure for people in rural and regional areas where there may be opportunities for seasonal work.

Superannuation assets and income support for people over 55

For those 55 and over, dependence on government income support is only possible for 39 weeks (although their average duration of unemployment is around 104 weeks), after which any superannuation or rollover assets are taken into account as per the assets test limits in the table above. This requirement has the effect of forcing a person in receipt of Newstart Allowance or any other income support payment into approaching their superannuation fund for the release of an income stream for current living costs, although they may wish to continue to work. They will then be unable to make further contributions to the fund should they subsequently find a job.

Superannuation has been promoted by the Government as the 21st century savings vehicle for retirement. The opportunity of adding any more savings to a superannuation fund are relinquished once and for all when the superannuation fund has been opened to provide an income stream. Given the relatively tight level of the assets test, an individual could be financially very disadvantaged by this requirement in the long term because it cuts across the advantages that could be gained by maintaining and adding to their savings in the superannuation fund until retirement. The highest level of compounding interest for a superannuation fund occurs in the immediate pre-retirement years. It is poor retirement incomes policy to reduce opportunities for people to maximise their final superannuation entitlement with a result being long term dependence on government income support in retirement.

COTA is well aware of the Government's rationale for the policy in that it brings into line those people 55 and over in receipt of income support with those who choose to retire on their superannuation at 55. There is a small savings to Government from the policy as well. The policy nevertheless has serious failings:

Examples of the effect of the requirement that entitlement to Newstart Allowance ceases after 39 weeks for those unemployed over age 55 with superannuation benefits.

Unemployed people over age 55 lose government support after 39 weeks if their accrued superannuation entitlement is over the amount at which the assets test applies. This can have serious effects on the prospective post-retirement income of people unfortunate enough to be in that position.

The examples below illustrate possible effects. Many other possible cases can be considered and other assumptions made, in particular fund earnings rates could be quite different. No particular merit attaches to the examples considered and the figures are rounded. The object of the examples is to illustrate possible outcomes in order to demonstrate the problems which may arise.

Example 1

A single man, non-home owner, became redundant at age 53. He had been earning $800 per week and had $150,000 in superannuation and $20,000 in other assets. By age 65, if the fund earns an average return of 8% per annum, his entitlement would amount to $377,000.

He becomes entitled to Newstart plus rent allowance amounting in total to $200 per week. By age 58 he has used his few assets other than his superannuation entitlement, which has grown to $220,000. He now ceases to receive Newstart allowance and has to use his superannuation benefit for living expenses. He needs $250 per week initially, increasing at less than 8% per annum. At age 65 his superannuation entitlement amounts to $255,000.

With superannuation benefit of $377,000, he would have generated enough income to be self-supporting and would have no entitlement to age pension. Reduced to $255,000, his entitlement is below the assets test upper limit, he becomes entitled initially to a part age pension, and as he supplements his income from his superannuation benefit the amount of the benefit reduces and he becomes entitled to a full age pension.

Example 2

A married couple own their own home. The husband is employed and earns $70,000 per annum. He becomes redundant in his early fifties and when he reaches age 57 he has exhausted his other assets and because he has superannuation entitlement his Newstart allowance ceases. He has to use his superannuation asset for living expenses. The amount standing to his credit is $320,000. If it were to increase by 7% per annum, the couple would have $515,000 to provide retirement income from his age 65 - sufficient to provide a CPI-linked pension of $35,000 per annum, or half of his remuneration before redundancy.

As it now is, he has to use his superannuation for living expenses. The couple reckon they can live on $25,000 per annum. Allowing for a slight increase in living expenses over the eight year period, the amount remaining at age 65 would be about $290,000.

At age 65, instead of living in retirement on their own resources, they become entitled to a part pension as their assets are just over the lower asset test limit and shortly as their assets reduce they become entitled to a full pension.

Instead of living independently in retirement, they become full pensioners. There is a good chance that the taxpayers will have to meet a greater outlay in pension benefits than they would have had to meet in Newstart allowance or Mature Age benefit.

NOTE: The above examples relate to persons who are unemployed and seeking work. It would be possible for a person in either of the above cases to give up seeking work and become retired. It would then be possible to apply their superannuation benefits to an allocated annuity and become eligible for some age pension, subject to the income test appropriate for lifetime income streams. Because the draw-down of income from the superannuation benefit would start early, the amount of income from age 65 would be reduced as compared with the amount expected. The amount of the reduction would depend on the age at which retirement took place and the amount of income drawn down, but would in all cases result in a reduction in the post-retirement standard of living for any person forced to use superannuation benefit before the expected age.

COTA believes that the assets test for unemployed people 55 and over in receipt of government income support over 39 weeks should exclude superannuation assets in order to ensure that people 55 and over are able to maximise superannuation savings available for retirement and old age.

5. SAVINGS, SUPERANNUATION AND INCENTIVES

Clearly the Government must be involved as much as possible in developing and maintaining policy settings which maximise the capacity for people to save for their retirement. However, such settings must be fair and equitable. For example, COTA would object to excessive tax concessions for savings while starving the revenue base needed for funding public pensions.

At this point in time, COTA has insufficient policy background on superannuation to comment substantively on the present taxation arrangements for superannuation discussed on page 39 of the discussion paper. The analysis presented in the report suggests that the present system reasonably balances incentives to save through superannuation as well as contribute to the revenue base. However, COTA will be undertaking further work in this area in the second half of the year in the context of the inquiry into retirement incomes announced by the Federal Treasurer late in 1999.

In addition, we have insufficient current policy background to comment on the adequacy of present Superannuation Guarantee arrangements whereby employers will be required to contribute 9 per cent of employees income to a complying superannuation fund by 2002. We will be analysing this issue in the context of the forthcoming inquiry.

Financial planning, advice and education

It is desirable, of course, for everyone in the community to begin financial planning, savings and investment as early as possible in life to the extent that they are able in the context of the demands of daily living costs, raising and educating children and buying a home.

The need for financial planning and advisory services becomes sharper later in life when some savings have been accumulated, when lump sum payments from superannuation or retrenchment packages become available or inheritances are obtained.

It is critical that people are protected as far as possible in acquiring information and making investment decisions regarding these funds. Financial planners and investment advisors must be subject to strict regulatory requirement. Older people also need access to sound, independent advice such as that provided by the National Information Centre on Retirement Investments (NICRI).

6. FUTURE DIRECTIONS

A sound, adequate and equitable retirement income system will be a critical strand for the National Strategy for an Ageing Australia. Adequate income support is not an end in itself but a means to an end which COTA has articulated in the Healthy Ageing paper.

The National Strategy for an Ageing Australia must articulate a plan for ensuring that all older Australians are able to maximise their independence broadly defined by COTA. The plan should include

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Copyright © 2000 Council on the Ageing. All rights reserved.
Date: 22 June 2000
Revised: 30 October 2001

Council on the Ageing (Australia)
Level 2, 3 Bowen Crescent, Melbourne Vic 3004
Tel (03) 9820 2655 Fax (03) 9820 9886
email cota@cota.org.au