Pensioners should not be ring-fenced from budget repair

Last weekend Scott Morrison gave the first signals that the government is considering backing down on yet another 2014 budget measure.

The 2014-15 budget proposed to index the Age Pension to price increases and cease the current practice of topping up the maximum (single) rate to 27.7% of Male Total Average Weekly Earnings (MTAWE) if CPI indexation is insufficient to maintain it at the MTAWE benchmark.

Last week’s release of the Intergenerational Report (IGR) provided the perfect political context for the Opposition to remind pensioners that the pension could fall to as low as 16% of MTAWE by 2055 and vow to “fight these unfair changes“.

But is indexing the pension to prices, rather than male wages, unfair?

CPI indexation will still ensure that the pension maintains its current value so it is not correct to call this a “cut to pensions“.

However, the lack of a sunset clause in the budget measure invites the sort of projections that Labor is making. If MTAWE were to grow at 4% a year, and CPI were to remain at 2.5%, the maximum rate of the Age Pension for singles would remain at $19,916 in today’s dollars while MTAWE would climb to $127,520 by 2054-55.

But it is not as if pensioners are being asked to shoulder the burden of budget repair on their own.
The 2014-15 budget contains no plans to return bracket creep to the wage earners who pay for pension increases and the IGR assumes that bracket creep will continue until 2020-21.

Under these assumptions, a wage earner with earnings equal to MTAWE will see their income increase by $6,496 in real terms between now and 2020-21. But five years of bracket creep will see their average tax rate increase from 22.6% to 25.6% after taking into account income tax, the Low Income Tax Offset and the Medicare Levy. A single pensioner on the maximum rate does not pay any tax net of the Senior Australians and Pensioners Tax Offset.

After taking out the additional tax, this wage earner’s real income will increase by only $2,694. While better than nothing, it is not a particularly large increase for five years of toil. A fairer political compromise would be to index pensions to average earnings, after income tax, for men and women.

In any event, it is highly unlikely that the pension will remain frozen for five -let alone 40 – years. The IGR predicts that by 2054-55, more than one in five Australians will be aged 65 and over. Even if the government is able to increase the age of pension eligibility, age pensioners will remain a large and growing constituency, one that has gotten used to receiving MTAWE increases since the days of Whitlam.

 

Matthew Taylor is a Research Fellow at The Centre for Independent Studies.