Wednesday, 4 March 2015

The Intergenerational Report is redundant. Hockey should abandon it | John Quiggin

The Intergenerational Report is redundant. Hockey should abandon it | John Quiggin

The Intergenerational Report is redundant. Hockey should abandon it

The idea that budget deficits constitute ‘robbing our children’
remains a staple in calls for reform. In fact, intergenerational
inequity was resolved in the 1990s

‘Hockey’s transparent manipulation would be a benefit to Australian
public debate if it led to the IGR being abandoned, once and for all.’
Photograph: Mick Tsikas/AAPIMAGE

The 2015 Intergenerational Report, released on Thursday, had been pre-announced by treasurer Joe Hockey
as a piece of political advocacy, designed with the specific aim of
making us “fall off our chairs”. Of course, nothing is easier than to
make a forecast look scary when you are projecting 40 years into the
future and you get to choose the parameters that suit your case.

The point of this exercise, as Hockey openly admits, is not to
provide the Australian public with a considered view of our fiscal
policy options over the next four decades. The real time frame is closer
to the next four weeks: first, to keep Abbott and Hockey in their jobs
that long; and second, to set the scene for debate leading up to the
budget in May. The release of the Intergenerational Report (IGR) was
legally required in early February, well before the budget session, but
it has been delayed in the hope of maximising its political impact.

Hockey’s transparent manipulation would, however, be a benefit to
Australian public debate if it led to the IGR being abandoned, once and
for all. The report was originally proposed as an assessment of the
relative distribution of fiscal benefits and costs across generations,
but it has never delivered on that promise. Rather, it is yet another
example of how the dead hand of the political generations of the 1980s
and 1990s continues to dominate Australian politics.

To see why intergenerational issues were of such concern to the
political class at that time, it’s necessary to look at retirement
incomes policy as it stood in the late 1970s. The age pension was
available to women at 60 and men at 65. There was no assets test, only a
very generous income test applicable to those under 70. As a result,
77% of the age-eligible population received the pension.

those in white collar jobs, retirement was even more appealing. The
standard mode of defined-benefit superannuation was income based,
providing retirees with an indexed benefit based on their final
salaries. These benefits, heavily tax-subsidised then as now, were
available at 55, which was increasingly seen as the ideal retirement

And of course, people were living longer. When the age pension was
introduced in 1909, a 60-year-old woman could expect to live another 18
years, and a 65-year-old man another 11. Those numbers have increased to
27 and 19 respectively.

Meanwhile, increased access to education meant that young people,
most of whom had previously begun work at the school leaving age of 15,
were now staying longer at school and university, often into their 20s.
The potential result, it seemed, was a society in which workers aged
between 25 and 55 would simultaneously bear the private burden of
raising their children, and supporting the previous generation over a
retirement that might easily be as long as their working life.

In these circumstances, issues of intergenerational equity were of
serious concern. But the direction of public policy and the labour
market changed from 1978 onwards. First, income and assets tests were
reintroduced. Then, beginning in the early 1990s, defined benefit
superannuation schemes were replaced by defined contribution schemes,
which put the burden on workers to plan the retirement investments on
which they live.

The final step, beginning in the late 1990s, was a progressive
increase in the age of eligibility for retirement incomes of all kinds.
The pension age for women was increased gradually to 65, a process
completed last year. Further changes in 2009, began the process of
increasing the pension age to 67 by 2023.

In the 2014 budget, a further increase was foreshadowed, to the age
of 70. When this process is complete, it will have cancelled out a
century’s worth of increased life expectancy for women, and most of the
increase for men. Ages of early access to superannuation benefits are
also being raised. Given these changes, there is no longer any serious
issue of intergenerational equity facing Australia, except perhaps for
the excessive tax subsidies for superannuation.

In fact, by the time the first IGR was released in 2002, the problem
had already been largely resolved, and the remaining measures were
generally anticipated. The resolution of the intergenerational fiscal
problem was a major public policy achievement of the reform era of the
1980s and 1990s. But a political class still fixated on the most
ideological version of the reform agenda, in which cutting public
spending is desirable in and out of season has refused to drop the club
of intergenerational equity. The idea that (very modest) budget deficits
and public debt levels constitute “robbing our children” remains a
staple in calls for “reform”.

The idea that public spending today places an unfair burden on the
younger generation is belied by even the most cursory examination of the
2014 budget cuts. Some of the biggest proposed cuts were imposed on
school (the abandonment of the forward commitments under Gonski) and
university students (fee deregulation and funding cuts).

As a community, we need to assess the extent to which we are willing
to meet social needs through public expenditure, which must ultimately
be financed by taxation. This is an issue which neither side of politics
has been willing to address honestly. Scare stories about future fiscal
disasters don’t help.

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