Summary

A secure retirement rests on three foundations: adequate income, affordable housing, and decent affordable health and aged care. Income alone is not enough. There is a serious imbalance in the Federal Government’s support for retirement, with an estimated $30 billion ‘spent’ each year on inefficient tax breaks for superannuation while health funding is being cut and funding for affordable housing programs has also been reduced.

As the population ages, Australia faces tough choices:

Do we continue to tinker on the edges with key parts of our retirement income system without clarity of purpose or long term outcomes? Or do we invest in major structural reforms to set us up for a system which will stand the test of time in delivering an adequate income for everyone in later life?

Do we give priority to investing in universal access to affordable health and aged care funded through shared revenue raising, or do we rely increasingly on individual user pays, increasing the divide between privatised higher quality services for people who can afford it, and an increasingly residual public system for those who cannot?

Do we allow more retired people to live in poverty as home ownership declines? Or, do we choose the alternative: investing in a coherent strategy to deliver more housing affordability and security, to reverse the trend of a widening divide between home owners and others?

Do we strengthen public revenue so that governments can properly support people of all ages at risk of poverty and ill health?

With much of the pressure on the federal Budget stemming from declining revenue, we need to grapple seriously with the challenge of comprehensive tax reform in Australia.

In our earlier submission to the Tax Discussion Paper, ACOSS set out a range of recommendations to progress tax reform in Australia.

In this submission, ACOSS sets out a range of recommendations for tax and related reform that specifically relate to the retirement income system, which is the focus of this stage of submissions to the Tax Discussion Process. In addition, ACOSS sets out proposals regarding health and aged care services, and housing systems, both key foundations to ensuring that everyone to live with dignity in later life.

Retirement income system

The focus of this stage of the Federal Government’s Tax Reform process is on the retirement income system. Australia’s retirement income system is built on three components, the Age Pension, compulsory superannuation and voluntary superannuation savings.

With the recent tightening of the pension assets test, the Age Pension is better targeted for people with additional assets, while retaining adequacy for people fully reliant on the pension alone. However, the longer term structure of the Age Pension, including the rate, income and assets tests, and the interaction with other income support payments, will need to be carefully considered as part of a more comprehensive review of the retirement income system, advocated by many for some time.

In the short term, the main flaw in the social security system for older people who are struggling to maintain paid work in later life is the adequacy of the unemployment payment. At just $37 a day for a single person, the Newstart Allowance (which 1 in 7 social security recipients aged 45-65 now relies on), is clearly far too low. The $64 a week private Rent Assistance is also well below housing costs for the 1 in 10 Age Pension recipients who rent privately.

The adequacy of Newstart needs to be urgently increased to address the gap with the Age Pension, certainly before any further consideration could be given to ideas such as lifting the eligibility age of the Age Pension, a proposal in the 2014-15 federal Budget that was resoundingly rejected by experts and the public

Compulsory superannuation will remain an important part of ensuring adequacy of income for people in later life. However, compulsory superannuation policy settings, together with associated tax concessions, are in need of major structural reform. There has been too much tinkering at the margins of superannuation, for example by adjusting tax rates for those at the top and bottom of the income range, without clarity about the outcomes to be achieved.

At the present time, there is no clear goal or any benchmarks regarding the level of income in later life that the compulsory superannuation system is designed to secure. Some superannuation providers advocate that public support, including tax concessions, should secure a ‘comfortable’ living standard. It is estimated that this would equate to almost $60,000 annually for a couple who own their own home and who are in good health. The costs for this level of comfort in retirement often include discretionary items such as trips overseas and weekly restaurant meals. In the current debate about budgetary pressures, which will continue to grow, is this an appropriate goal?

It is essential that we secure consensus and deliver clarity about what level of income our retirement income system should deliver - a level that is commensurate with the community standards, placing the highest priority on protecting people from poverty. This also requires retirement income policy to give higher priority to the impacts of health and aged care policy, both key factors impacting on income adequacy. We should not give priority to supporting a living standard in retirement higher than that enjoyed by many throughout their working life.

In the immediate future, reforms to social security, compulsory and voluntary superannuation and associated tax concessions, should pursue the following goals:

1. Protecting people from poverty.
2. Maximising the number of people who can achieve a minimum acceptable retirement income (through pensions and superannuation together or separately) that is substantially above poverty levels but not above the living standard of the majority of households.
3. Ensuring the system requires people to contribute fairly to the collection of general public revenue over their lifetime.
4. Appropriately supporting people in later life to participate in paid work.

To achieve these goals, we need changes to the tax system to improve the efficiency and equity of personal income tax contributions throughout the life course. The government should address the depletion of the personal income tax base for older people, as less than one in five people over 64 currently pays income tax. The tax threshold for an older couple is $58,000 and super fund earnings and benefits are tax free on top of that. This is not sustainable if governments are to fund health and aged care over the next 20 years.

In the retirement phase, superannuation has become a tax avoidance or estate planning system for wealthier people, instead of a retirement income system. High income earners can ‘churn’ their income and assets through their super accounts to reduce their tax rate to 15% or zero. Tightening up the tax treatment of super fund earnings in retirement would restore the principle that people should pay tax to fund essential services according to their ability to pay.

We recommend that the tax treatment of superannuation in the retirement phase should be reformed to refocus it on adequate and secure retirement incomes and ensure people with the capacity to do so are paying their fair share of tax.

The current tax concessions for superannuation are inequitable and inefficient and are not targeted to people who really need them. Overly-generous tax breaks for contributions extend to people who can afford to fund their own retirement while those on the lowest incomes receive little or no benefit. Those in the highest 10% income group receive one-third of the value of over $30 billion in annual superannuation tax breaks and the highest 20% receives more than half. This is not only due to their higher contributions. The flat 15% taxes on superannuation mean that people on the highest tax rate usually receive five times the benefit as people on the lowest tax rate, per dollar contributed by employers. Women, who typically have lower earnings, are especially disadvantaged by these arrangements. The tax treatment of superannuation is entrenching inequality in retirement.

We recommend that the tax arrangements for both compulsory and voluntary contributions should be fully reset, in a revenue-neutral way, based on the proposals in the Henry Tax Review. Existing tax concessions for contributions would be simplified by replacing them with a two-tier rebate capped at a level which is adequate to enable a typical person to achieve an agreed level of income adequacy in later life. Reform of superannuation tax concessions should be a key element of a comprehensive Retirement Incomes Review.

Universal health and aged care, and affordable housing

There is a growing imbalance in government support for a secure retirement. Public resources are being poured into superannuation for people who can afford to support themselves, while basic health and aged care and housing supports are withdrawn. Governments have devoted much effort to boosting retirement incomes, while their commitment to retirement services has faltered.

Governments are retreating from historical commitments to universal, affordable health and aged care. The Commonwealth Government announced in last year’s Budget that it would cut indexation of health funding for the States and Territories – effectively reducing health grants by $10 billion a year in a decade’s time. Older people now have to use equity in their homes to secure a place in a nursing home.

On the housing front, Rent Assistance for the one in eight older people who rent privately is a maximum of $64 a week, well below typical private rents. Waiting lists for social housing are large and growing.

Australia needs a new consensus on how to fund and deliver universal health and aged care services, and to deal with the chronic rise of people struggling to afford housing over their lifetime.

We recommend that, together with State and Territory and local governments, we need to strengthen guarantees about access to health and aged care. We also need a National Housing Strategy to drive the structural changes needed to address our growing housing crisis, including to deliver new affordable housing stock at scale.

[1] ACOSS (2015) Budget Priorities Statement (7).

[2] For more detail on our affordable housing proposals, see http://www.acoss.org.au/wp-content/uploads/2015/06/Joint_housing_paper_March_2015_final.pdf (43)