Ideas@TheCentre – The Centre for Independent Studies

Ideas@TheCentre

Ideas@TheCentre brings you ammunition for conversations around the table.  3 short articles from CIS researchers emailed every Friday on the issues of the week.

G20 growth plan found wanting

21 November 2014

ideas-image-141121-1 Every G20 host country likes to have a signature initiative, and Australia's was the Brisbane Action Plan to lift the economic growth performance of all G20 countries in a sustainable fashion. This was a laudable initiative, and certainly one of the best possible targets for G20 attention in the circumstances of sub-par economic growth in many countries in the wake of the global financial crisis.
 
The Brisbane Action Plan aims to increase growth of the G20 countries' economies (not the global economy, but close to it) by 2% by 2018. To be clear, this does not mean a 2% annual economic growth rate, or a 2% addition to annual growth, but that the level of GDP will be 2% higher by 2018 than it otherwise would have been. Measured from the 2013 base year, the target implies an addition of about 0.4 percentage points to the average annual growth rate that would otherwise occur.
 
This is modest but realistic, given the difficulty in getting twenty countries to agree to any concrete action at all. Some countries that are clearly performing well below their potential, such as India and Brazil, could easily boost their growth rates by much more than 0.4% a year with the right policies.
 
Although the Brisbane Action Plan is commendable in principle, the details do not stand up well under close scrutiny. Leaving aside doubts about actual implementation, some of the specific measures to which countries have committed are vague or would have occurred anyway. The effects are so difficult to quantify that the 2% figure should not be taken too seriously. And given that the target is expressed as an outcome relative to an unknown counterfactual, nobody will ever know whether it has been achieved.
 
Most importantly, it is difficult to see how some of the measures will promote growth at all. A good example is the United States commitment to increase the federal minimum wage, which is more likely to damage the economy than give it a boost. The inclusion of such a proposal makes one wonder about the quality control that was exercised in putting the action lists together.  No doubt the Australian officials involved did their best, but they would have been under enormous pressure to accept some pretty dodgy proposals.
 
The commitment of G20 leaders to setting the foundations for stronger and more durable growth would be more credible if they were not at the same time smothering their financial systems under layer upon layer of new regulation, and if they showed more purpose in reviving global trade liberalisation and putting their public finances onto a sustainable footing for the long term. Without such determination, and with Europe in a mess, it is difficult to be confident about the prospects for robust growth in the global economy.

carling-robert-lowRobert Carling is a Senior Fellow at The Centre for Independent Studies.

 

The Grey Army of early Newstart retirees

21 November 2014

ideas-image-141121-02 The Abbott government chalked up a modest win this week with the first of its social services budget measures passed by the Senate with the help of Labor and Senators Day, Leyonhjelm and Muir. One budget measure yet to pass the Senate is the government's proposal to tighten Newstart eligibility for those 55 and over.
 
According to the Department of Employment these reforms are needed because current policy settings allow "55-59-year-old jobseekers to effectively retire on Newstart while undertaking a bit of voluntary or part-time work,'' at the taxpayer's expense despite having many productive years ahead of them.
 
With 152,838 Newstart recipients aged 50 and over as of June 2012, two thirds of whom had been on payment for more than 12 months, it is understandable that policy makers are focused on moving older Newstart recipients into work.
 
Currently those on Newstart who are aged 55 and over need not look for work. These recipients can meet their activity tests through volunteer work for just 15 hours a week. Most other Newstart recipients are required to look for work or, where employed, work for at least 35 hours a week to avoid job search requirements.
 
While it is inequitable that some Newstart recipients get to choose volunteer work while others face the hard slog of job search, if there is a 'grey army' descending on Centrelink offices seeking early retirement then they are intending to do so on a tightly means tested, and relatively modest, (maximum) annual payment of $13,406 for singles or $12,103 for a member of a couple.
 
Moreover, unlike the age pension, the Newstart assets test shifts single homeowners off payment at $202,000 and non-homeowners at $348,500. Newstart recipients with these assets, who are able to secure a return of 6%, are only earning $12,120 and $20,910 a year, respectively, which would reduce their payment.
 
Newstart recipients with assets approaching these amounts would most likely choose job search over volunteer work unless they had significant superannuation balances.
 
Assuming a 6% return on just under $433,000 of combined assets, a member of a non-homeowner couple might be able to retire on a household income of $55,062, $5,318 of which would be Newstart. However, this assumes a significant amount of assets (excluding partner's super) and every dollar of partner income over $23,764 would reduce this payment by 60 cents.
 
Regardless of whether early Newstart retirement is a major issue, the Senate should pass the over-55s reforms. Funding age pension payments, which are set to increase to $72.3 billion by 2023-24, is going to take tax receipts from gainfully employed Australians, not Newstart subsidised volunteer work.

taylor-matthew-lowMatthew Taylor is a Research Fellow at the Centre for Independent Studies.

 

The third retirement pillar - home equity and pension inequity

21 November 2014

ideas-image-141121-03 The system for supporting retired Australians is said to rest on three pillars: the age pension, superannuation and the family home.
 
The pension, particularly its adequacy and eligibility age, has long been a topic of discussion. More recently a lot has been said about problems with superannuation, such as the supposedly poorly targeted tax concessions, and inadequate balances for low income groups.
 
In comparison to both these subjects, very little is ever said about the underutilisation of the family home in supporting the needs of retirees.
 
According to ABS data on housing occupancy and costs from 2011-12, more than 80% of households over 65 and 85% of households over 75 own their own home. pproximately 90% of those households who own their own home do not have a mortgage.
 
The average value of the equity in the family home for couples over 65 in 2012 was $551,000, while for singles it was $452,000 and growing rapidly. In the 15 years prior to 2012 median house prices more than doubled in real terms and more than tripled in nominal terms.
 
In the twelve months to September 2014, Housing Industry of Australia economic data found that house prices in Sydney and Melbourne grew 14.3% and 8.1% respectively, though they were slower elsewhere in the country.
 
Meanwhile the annual full pension (including supplements) for couples is $33,488, while for singles it is $22,211.80.
 
While the family home is exempt from the pension assets test, the difference between the assets means test for homeowners and non-homeowners is just $146,500, less than a third of the average home equity people of pension age actually have.
 
This suggests that non-homeowners are substantially disadvantaged by the current settings. Exacerbating this problem is the higher costs that non-homeowners who are renting face, and while rent assistance may alleviate some of this concern it may not cover the increased costs faced by some who rent in capital cities.
 
A significant concern is the relative difference in wealth and living standards between pensioners who have substantial reserves bound up in property and those who either do not own their home or live in rural and remote areas where median house prices are substantially lower than capital cities.
 
The differences in pension entitlements between these groups does not reflect the differences in their means.
 
There may be good policy reasons for exempting the family home, but we should not be blind to the equity implications of these policy choices.

cowan-simon-lowSimon Cowan is a Research Fellow at The Centre for Independent Studies.