Three pillars reform needed to fix pension

There are three ‘pillars’ supporting retirement in Australia. Superannuation, the age pension and the family home. If we are serious about boosting living standards in retirement, and addressing the challenges of the ageing population, all three pillars must be supporting the weight.

Unfortunately, neither the government nor the opposition are willing to accept this simple truth — or do anything meaningful about it.

Labor’s Shadow Treasurer, Chris Bowen, has declared that despite the anticipated tripling of the cost of the pension in the next 40 years, the pension is sustainable in its current form. Further, he suggests that Australian pensioners ‘deserve’ 3.6% of GDP (the anticipated future cost of the pension) because they have worked hard all their lives.

Not only does this analysis ignore the tax implications of a diminishing ratio of workers to retirees (projected to be just 2.7 workers per retiree, down from its current level of 4.5) but it fundamentally misrepresents the purpose of the pension. The pension is not a return for working hard, it’s an income support payment for those who can’t afford to support themselves.

Turning the pension into a quasi-universal income booster for retirees actually harms those worse off by diverting scarce taxpayer funds into supporting those with substantial assets.

Which brings us to the problem with the other side of the house. Social Services Minister Scott Morrison has repeatedly ruled out including the family home in the pension asset test.

However this significantly distorts the distribution of the pension, with homeowners significantly advantaged over non-homeowners. Not only do homeowners face significantly lower costs of living compared with non-homeowners, but they have substantially more wealth as well. Homeowners on the full rate of the pension have on average nine times the net worth of non-homeowners.

Neither side of politics will admit it, but a retirement system centred on a government funded pension won’t deliver the sustained gains in living standards retiree organisations are demanding. If we want to boost pensioner living standards, we need to look outside government.

Fortunately there is an answer, and on Monday we will lay out in some detail exactly how we can boost pensioner incomes by thousands of dollars each year and cut government spending by billions.

Simon Cowan is a Research Fellow at The Centre for Independent Studies and is the co-author of the research report ‘The Age Old Problem of Old Age: Fixing the Pension’ to be released on Monday.