Social Services minister, Kevin Andrews, has reportedly signaled that the Government is preparing to overhaul the welfare system, arguing that too many Australians are reliant on the Government for income support:
“More than five million people now are in receipt of one form of welfare or another,” Mr Andrews told ABC radio on Tuesday…
The Social Services Minister said the Abbott government believed in a “safety net” for people who “can’t care for themselves”.
“But at the same time we need to ensure that over time, in the long term, the welfare system remains sustainable,” Mr Andrews said.
“Our view is that the best form of welfare is work. If people are capable of work and if work’s available then we want to encourage as many Australians as possible to work.”
The Abbott government was already working towards that goal, through incentives to encourage people to work, Mr Andrews said…
The former chief executive of Mission Australia, Patrick McClure, has been appointed to lead Mr Andrews’ review of Australia’s welfare system and he is expected to report back in February.
Parenting payments and the disability support pension were two areas of welfare that “would be sensible to review again”, Mr Andrews told the ABC.
For such a review to be credible, it must include the retirement and pension system, which is one of the biggest and fastest growing areas of Budget expenditure (see next chart). To only focus on the working aged population, whilst ignoring the swathes of wealthy retirees receiving government support, would be inequitable and inconsistent, and will place the Budget in a precarious position as the population ages.
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On the topic of aged welfare, the Curtin University’s Alan Tapper, Alan Fenna and John Phillimore last year released an eye-opening research paper examining the extent to which welfare policies across the period 1984 to 2010 have favoured the elderly at the expense of the young. Their three main findings were that:
there has been a substantial shift over this period in favour of the elderly;
this trend accelerated rapidly in recent years under both the Howard and Rudd Governments; and
as a result of this accelerated trend, elderly households today are on average well off by comparison with younger households.
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What stands out is the recent surge in net benefits, which took place mostly under Coalition government. Critics might argue that in this period the long Australian tradition of relative restraint on expenditure on the elderly, under both Labor and Coalition, was here abandoned…
Perhaps most alarmingly, the study found that the bulk of assistance provided to the elderly is not based on need, but purely aged-based, with elderly Australians tending to be quite well-off when compared against younger Australians:
We might suppose that increasing support for the elderly is an expression of increased recognition of need. To test this claim we need to be able to rank ‘neediness’. This can be partly done in terms of ‘equivalent final incomes’… Table 6 shows the equivalent final incomes of the elderly and all households. Note that this table exaggerates the increase in EFI between the two surveys, because here the EFI for 2003–04 has not been adjusted by the CPI. The point of the comparison is not the relative change between 2003–04 and 2009–10 within each group, but the gains and losses of the different groups relative to each other in this period.
…the most interesting comparison is that with all households. Rapid gains to the elderly in this period have brought them close to the EFI for all households. The gap in 2003–04 stood at about 21 per cent (based on an estimate that the EFI for all elderly households was about 505). In 2009–10 it had fallen to only about five or six per cent (estimating that the elderly EFI was about 960)…
As Table 7 shows, wealthier households are older households. Net worth peaks at around age 60. A sharper picture is obtained if we take household size into account using equivalence scales. Here we have used the square root of household size (a method that approximates quite closely to the ‘OECD modified’ scale used by the ABS to calculate equivalent final incomes). The resulting ‘equivalent net worth’ indicates that even households aged 75 and over are one-third better off than the mean for all households, while households in the 65–74 age group are 60 per cent better off than the mean…
Given that equivalent final incomes for the elderly are now close to the average for all households, and that the net-worth distribution is skewed in favour of older households, we can reasonably infer that an integrated measure would show that households headed by persons 65 and over are better off than the average for all households under that age.
If all this is right, the Australian system of social transfers to the elderly is much more than a safety net. Viewed in ‘lifecycle’ terms, it shifts resources from the income-rich but asset-poor stages of life to the asset-rich but income-poor stage. Viewed in terms of the ‘vertical’ dimension, it is a system of upwards redistribution from the less well off to the better off…
As noted previously, in addition to overhauling Australia’s superannuation system so that tax concessions are more evenly spread and balances are not exhausted too quickly, means testing of the aged pension must be tightened to ensure that it only goes to those retirees most in need. Why, for example, should an individual living in a $2 million home but with little in the way of financial assets be entitled to the full pension, despite being “wealthy” and capable of looking after themselves? The situation is both unsustainable and inequitable, requiring the owner-occupied home to be included in means testing of the pension.
Given the Coalition has already ruled-out raising the retirement age – a relatively simple reform – we can assume that it would be even more averse to tackling ballooning aged entitlements. This leaves the working-aged population to bear the brunt of Budget expenditure cuts at the same time as it incurs the cost of supporting its relatively well-off parents.
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness.
Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.
