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What Politicians Won’t Tell you about Superannuation black hole

Someone has to pay for the escalating costs of aged health care, writes Brian Toohey, and thanks to tax breaks, those most able to pay are the aged themselves.

Imagine it is 2025 and you plan to spend part of you superannuation holidaying at the Mirage resort in Hawaii. You barely take any notice when Peter Costello announces he is stepping down as Prime Minister but feels he still has something to contribute as a back bencher.

Suddenly, you forget all about Hawaii as Costello announces that his last act as Prime Minister will be to tackle the crippling cost of aged care. From now on, the aged will have to pay their way. The price of your blood pressure tablets will increase by more than 1,000 per cent. You’ll have to pay the same tax as someone who has to work for a living. With a home worth five times then national average, your Seniors Card will no longer entitle you to a cut in council rates, or a discount on phone and utility bills and public transport

At last, Costello is forced to admit he was wrong when he told the Sydney Institute in July 2001 that everything was under control - that the GST would fund increased spending on social services.

The new Labor Leader, Kim Beazley Jnr, also acknowledges his father was wrong in 2001 to promise to roll back the GST.

If the latest OECD figures are anywhere near correct, the most pressing budgetary issue facing Australia is how to fund the escalating costs of an ageing population. Unless the aged are to be denied modern medical treatment, somebody has to pay. Thanks to the tax breaks on super, those in the best position to pay are the aged themselves. according to the OECD Economic Outlook published in June, spending by Governments in Australia on the aged will grow from 10.7 per cent of GDP in 2000 to 18.7 per cent  of GDP in 2050. There is no way the GST will come within cooee of covering these costs, even though the OECD projects spending on education and family payments will fall 6.1 per cent of GDP to 3.8 per cent. The fall reflects the proportional decline in the number of children in the population, but does not allow per-capita increases in spending envisaged in policies such as Labor’s Knowledge Nation.

In the current financial year, GST revenue will amount to only 3.9 per cent of the GDP. And that’s about where it will stay for the next 50 years.  The consulting firm Access Economics notes in a report tabled in parliament on Monday that the GST revenue base may actually shrink slightly because the tax does not apply to some fast-growing areas of consumption such as health.

The gap between GST revenues and age costs will continue to expand. Even more ominously, the projected increase in aged costs to 18.7 per cent of GDP is so large that it would completely dominate the federal Budget, whose revenue base for next financial year is only 22.1 per cent of GDP.
This revenue figure excludes any tax cuts promised in the forthcoming campaign. If income taxes were cut, this would only add to pressures to increase the GST rate or extend it to more goods and services. If the GST were rolled back, this would only increase pressure to boost income taxes.

Access Economics director Chris Richardson says the rising costs of the aged could mean the GST rate has to be doubled or trebled. But, he says, something will give before this happens.

One option is to charge the aged more for the services provided by governments. However the May budget went in the opposite direction. A retired couple on $80,000 a year can now buy a prescription drug for $3.50 compared with $21.90 for someone in the workforce on a much lower income. The budget also allowed couples with an annuity to pay no tax on $52,800 a year.

In contrast, the tax-free threshold for a couple in the workforce is $12,000, leaving them with a total tax bill of $9,456 if each earns $26,400.  A single employee with a taxable income of $52,800 is ever worse off - paying $13,416 in tax. Given that the workforce is shrinking as a population, hard-pressed employees are likely to punish politicians who insist they should shoulder an ever-increasing burden of looking after the aged.

The big issue is health. According to the OECD projections, government spending in Australia on health and long-term care of the aged will rise 13 per cent in 2050. The cost of the age pension will rise from 3.0 per cent of GDP to a roughly manageable 4.6 per cent. According to a 1998 Treasury study, the absence of compulsory super would only have added 0.28 percentage points to age pension costs.

The increased pension costs may be partially offset if changing demographic patterns lead to reduced spending on the young. But Access Economics stresses this still leaves the problem of health-care costs for the aged.  According to an earlier access report, released by the Government in March, the main difficulty is that health costs are rising much faster than other consumer prices.  As a result, Access says that OECD estimates probably understate the rise in health costs.

The report’s grim conclusion is that the “total fiscal hill to be climbed in the next three decades could be $45.5 billion a year in 2000 dollars”.

Given that total Federal Government revenue came to only $161 billion in 2000-01 climbing this hill would require a 28 per cent increase in current dollars. In this context, any tax cuts would be hard to sustain.

One alternative is to get serious about applying the user pays principle to the aged.  Another is to contain these costs by somehow slowing the relentless rise in the price of medical services.  Encouraging people to work until an older age should improve their health - although this presumes the necessary jobs are available.  Another option would be to stop keeping people alive, regardless of the cost of medical treatment.

Even if the projected increases in health costs can be eased a little, the fiscal hill still looks much too steep for working taxpayers to confront alone. Fortunately, compulsory super will increasingly ensure that many retirees will be in a better position to pay for themselves.

According to a Treasury paper delivered to a conference in Brisbane last month, 40 years of compulsory super contributions will generate retirement income equal to 74 per cent of the pre-retirement expenditure of someone on average weekly earnings. For someone with 30 years of contributions, the equivalent figure is 65 per cent.  Either way, this is much higher than the benchmark for the age pension of 25 per cent of average earnings is enough for an aged pensioner.  On this basis, the current levels of super contributions should generate a more than adequate level of retirement income.

The Labor Leader, Kim Beasley, apparently thinks otherwise, recently announcing that he would like to see contribution rates eventually lifted from 9 per cent of salary to 12 per cent, even 15 per cent. Because wage increases have to be traded for increased super contributions, clearly Labor believes people should be COMPELLED TO HAVE A LOWER STANDARD OF LIVING  DURING THEIR WORKING LIFE IN ORDER TO FUND A HIGHER STANDARD OF LIVING IN RETIREMENT.

Covering normal living costs is not a huge problem for someone with a retirement income of two or three times the age pension - let alone the multiples Labor has in mind for those on better-than-average weekly earnings. But the picture could rapidly change if the aged are expected to pay a lot more for their health care on top of normal living costs.

One option is to boost medical insurance premiums for the aged. Another is to introduce a deferred payments system for nursing homes and other costs, roughly similar to the HECS payments applying to university fees. In the case of the aged, the payments could be deferred and recovered from deceased estates. A vigorous campaign is under way to increase the tax concession applying to super contributions. 

There are also calls to cut the tax on super earnings (which is now about 8-10 per cent after dividend imputation). Reducing taxes on super should increase retirement incomes - and the capacity to pay more for health care in retirement.

Governments no longer publish figures on the extent which the tax concessions effectively subsidise the retirement subsidies well in excess of the cost of the aged pension. One 1992 graph showed that the tax concessions amounted to a $550 a week subsidy towards the super pension of someone retiring on pre-retirement income of four times average weekly earnings. At that time, the single age pension was only $150 per week.

These figures are highly sensitive to the underlying assumptions. The size of the subsidy will also be lower following the introduction of the super surcharge. But the general picture is unlikely to have changed much - the tax concessions mean higher-income earners receive far bigger government subsidies in their retirement than low income earners receive via direct payment of the age pension.couple_on_beach

In these circumstances a more robust application of the user pays principle to better-off retirees would improve targeting of welfare spending. But neither the Coalition nor Labor shows any inclination to explain how it can climb the $45.5 billion “fiscal Hill” that Access Economics says is looming on the horizon.


Article from The Australian Financial Review (11-12 August 2001)


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