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Saturday, 19 April 2014

The land where entitlement runs riot? Hardly

The land where entitlement runs riot? Hardly

The land where entitlement runs riot? Hardly

Updated
Thu 17 Apr 2014, 9:25am AEST
Perhaps the reason Joe Hockey gets so
excited about the age of entitlement whenever he travels overseas is
because he needs to leave Australia to find an example of it, writes
Greg Jericho.
Since the election, Joe Hockey has
been talking big about the need for the government to cut expenditure.
Unfortunately his sales pitch rests on the fallacious view that
Australia needs to end its age of entitlement.


At a glance

  • Australia has one of the smallest welfare budgets in the OECD
  • The level spent on benefits in Australia now is slightly below where it was in 2003
  • Reducing welfare spending tends to hurt low-income earners
  • Tax concessions for superannuation see the government foregoing around $27.6bn in revenue


He also seems determined to force Tony Abbott to break his election promise told to SBS News
the night before the election that there would be "no cuts to
education, no cuts to health, no change to pensions, no change to the
GST and no cuts to the ABC or SBS".


On Sunday, news was leaked that the government was likely to cut funding for the ABC, and then Joe Hockey,
speaking from Washington DC, made it clear that changing the pensions
was very much on the table - from raising the eligibility age to 70, to
changing the indexation and the asset test.


You can see why he
might consider changing the indexation of the pension from average male
weekly earnings to either the inflation rate or the pensioners cost of
living index:




Over the past 10 years, average male
earnings have increased by nearly 22 per cent more than the inflation
rate and 18 per cent more than the ABS's cost of living index for
pensioners. So such a change would certainly temper increases in the
government's pension bill.


However, this would also exacerbate
inequality - as has occurred for those attempting to exist on Newstart,
which is indexed to CPI.  


But behind all the talk about galloping
government expenditure is the view that Australia is somehow now a land
where entitlement runs riot.


This view is complete bollocks.

Talk
of out of control welfare entitlement might sound true when said in a
press conference where the vibe can seem more real than actual facts.
But the reality is Australia does not have, nor ever has had a large
sense of entitlement.


After first attacking the disability-support pension, which, as I noted last month, involved the government ignoring a fair bit of reality, now the talk has shifted to the aged pension.

The
reason the pension is a concern is pretty much down to demographics.
There are fewer people in the prime earning (and tax revenue paying) age
of 25-54, and also fewer young people coming along to replace those
retiring:




So yes, it's an issue - one the previous
government took steps to deal with when it changed the pension age to 67
for anyone born from 1957 onwards - around three quarters of the
population.


And there is a case for suggesting we could work a bit longer.



Among OECD nations, Australian men retire
later than the average and women retire pretty much on average. The
reason women retire earlier is mostly because until this year they
could. But from now on the retirement ages for men and women are the same.


So
we're not shirkers when it comes to work, but because our life
expectancy is among the longest in the world, Australians spend more
years retired than most nations.


But before we get too carried
away by the problem of paying for our retirees, let's put Joe Hockey's
words in some context. Hockey loves to talk about our huge welfare bill,
and yet you rarely hear him talk up the fact that Australia has one of
the smallest welfare budgets in the OECD:




Only Korea, Mexico, Chile and Iceland spend
less than Australia does on welfare. And as for it growing out of
control, the level spent on benefits in Australia now is slightly below
where it was in 2003.




While it has increased since 2007 (as it
has for almost all nations due to an increase in unemployment benefits),
our increase was well below the average observed by other OECD nations.
Part of the reason is that we have one of the best welfare systems in
the world.


No bugger it, we have the best welfare system in the world.

As ANU economist Peter Whiteford noted, the OECD has recently published its latest edition of social indicators.
It found that Australia directs more of its cash benefits to the
poorest 30 per cent and less to the richest 30 per cent than any other
nation:




Perhaps one of the reasons why Joe Hockey
seems to get so excited about the age of entitlement whenever he travels
overseas is because he needs to leave Australia to find an example of
it.


But as the OECD notes, when you have a very targeted welfare
system like Australia's, reducing welfare spending tends to hurt
low-income earners unless you are very careful.


Even on pensions Australia is not just kicking goals; we are winning the World Cup (to use Tony Abbott's tortuous analogy). Using the most recent comparable figures, Australia spends the fourth least on pensions as a percentage of our GDP:



Little wonder that German insurance company Allianz
named Australia as having "the most sustainable pension system in the
world". It cited the fact that our "two-tiered system of lean public and
highly developed funded pensions - seems to be most sustainable in the
long run".


Oddly, no one in the government has been bragging about this report.

But
our two-tiered system also provides two ways to approach growing
expenditure and declining revenue. For while Australia's cash benefits
system is tightly means tested, our tax system is less so - particularly
with regards to superannuation exemptions.




Even now the age that you can access your superannuation (the preservation age)
is well below the pension age. Those born after 1964 will be able to
access their superannuation at 60 years old - seven years before they
will become eligible for the pension. And of course those who can afford
to retire only on their superannuation are inherently wealthier than
those who need the pension.


But rather than raise the preservation
age to that of the pension age, the current system attempts to keep
those people in the workforce by providing significant tax benefits for
those over the age of 60.


All up, tax concessions
for superannuation see the government foregoing around $27.6 billion in
revenue. To put that in context, the government spent $39.4 billion* on
the aged pension this financial year.


Yes, there is a case for tightening some pension eligibility rules
for those with low income but high wealth, but changes to the pension
indexation and increasing the age eligibility will save money by mostly
hitting the poorest.


Hockey has been talking big about everyone
sharing the burden. But he also only talks of expenditure cuts, not
revenue increases. He says he wants a discussion about the pension; he
also needs to talk about superannuation. He talks about expenditure; he
also needs to talk about revenue.


And while he's at it he might also talk about why he thinks Australia is in an age of entitlement, when it plainly is not.

*Editor's
note (April 17, 2014): An earlier version of this article incorrectly
said the government spent $54.8 billion on the aged pension this
financial year. That figure was the "total assistance to the aged". Aged
pension expenditure was $39.4 billion. The Drum regrets the error.


Greg Jericho writes weekly for The Drum. He tweets at @GrogsGamut. View his full profile here.


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