Opposing the assets test change is not opportunism if committed to comprehensive reform

Andrew Podger

Professor of Public Policy at

Australian National University

My view on the Government’s proposal and the Opposition’s proposals to change superannuation tax arrangements is that they are piecemeal measures. They are dressed up for popular support by images of millionaires receiving unjustified benefits. Equally opportunistic is the Prime Minister’s insistence that any change to superannuation arrangements would amount to an attack on people’s hard-earned savings.

What we really need is a considered, coherent and comprehensive review of retirement incomes policy.

There are weaknesses in the Government’s proposals. I think the assets test change is problematic and it may make wider reform harder, not easier.

A well-designed means test focuses on the maximum level of the pension (what is an adequate amount to ensure protection from poverty) and the rate of taper applied as non-pension income and also assets increase (what rate would retain reasonable incentives to work and to save). The point at which eligibility cuts out is simply a function of these two variables. The Government has focused almost entirely, however, on the cut-out points, highlighting the fact that for couples they are currently above the magical one million dollars of assets. Little if any explanation has been given to the impact of the rate of taper needed to achieve the new cut-out points. A comparison with the better designed pension income test demonstrates the problems involved.

The income test has a withdrawal rate of 50% and, for a couple, there is a ‘free area’ of over $7,000 a year. So the cut-out point is just under $75,000 a year given the maximum combined pension of over $33,000. The taper was set following a recommendation from the Harmer Review and no-one is now suggesting reducing the ensuing cut-out point. To generate an income of $75,000, including drawing down the capital as well as living on the interest, a couple in their late 60s would need nearly $1.5 million at normal interest rates (as much as $2 million at current abnormally low interest rates). To reduce the cut-out point to below the equivalent of $1 million in assets (ie to an income of around $50,000 or less) would require a taper of around 75%.

The Government’s assets test has an effective taper that is much higher than this, because it involves not only a cut-out point of $823,000 for a home-owning couple, but a ‘free area’ of $375,000. $78 of pension is lost for each $1,000 of assets between these two amounts, or well over 100% of the income (including some drawdown of assets) that could reasonably be derived from the extra $1,000.

The consequences for incentives are significant. For example, unless they have already accumulated over $800,000, a couple in their 50s or early 60s who have superannuation savings of $300,000 or more would probably be wise to reconsider contributing more than the mandated amount of 9.5% of their wages, and focus instead on paying off the mortgage. Yet our superannuation arrangements are intended to encourage greater contributions, particularly at this time in their lives.

Couples in their 70s will be discouraged from any downsizing plans to free up assets for other consumption purposes as the impact on their age pension entitlement could be dire.

None of this is to suggest there is no room to tighten the means test. Consideration could be given to include the value of the home above some threshold. Also, the income test deeming rules could be more closely aligned to the incomes people could derive from their assets including from drawing down the capital over their retirement years. This would allow the income test and assets test to be merged, as recommended by the Henry Review, encouraging older people, and the whole community, to stop thinking in terms of accumulated savings (and the apparent huge amounts involved), and focus instead on retirement income streams and the (much more modest-appearing) amounts most people would wish to live on.

The likelihood that a majority of the aged would still receive some pension is not a matter for alarm. That was always expected, and is simply a function of an adequate maximum pension and a reasonable means test taper. What our superannuation system is successfully achieving is a sharp shift away from allowing most older Australians to receive full-rate pensions to ensuring most only receive a part-rate pension (with a not insignificant increase also in the proportion receiving no pension).

Comprehensive reform, of course, must go beyond the age pension and include the level and fairness of superannuation tax arrangements and the effectiveness of those arrangements in delivering adequate and secure incomes over people’s retirement years.

The Government’s concession to the Greens to broaden the Tax White Paper process may be a step in the right direction, but a more independent and comprehensive review seems more likely to encourage bipartisan – and community – support for genuine reform.

Professor Podger is also a  member of the Committee for Sustainable Retirement Incomes.