Which way forward for pension reform?

Recently Mark Davis reported in The Age (August 13, 2009) on plans canvassed by the Henry tax review to reform superannuation and aged pensions.

According to Davis, the plan suggests that: “… lower income earners retiring with low superannuation lump sums would be given the opportunity of handing the money to the government in return for guaranteed income payments indexed to the age pension.”

To clarify: “For a retiree with $100,000, the top-ups could be worth 20 per cent of the age pension and would come in addition to the means-tested entitlement to the pension.”

Finally, according to Fiona Reynolds, the chief executive officer of The Australian Institute of Superannuation Trustees: “There are not a lot of lifetime annuity products, and the ones around are pretty highly priced, especially for retirees with small amounts of savings. If someone with a lump sum of $60,000 could buy a top-up to the age pension from the government, it might provide an extra $2000 a year.”

The demand for such lifetime annuity “products” reflects what some call “longevity risk” - the prospect that retirees will live longer, and that their superannuation and savings will not last them.

Importantly though, for those profiting from private provision of “lifetime annuity” products, and even private superannuation funds, there is a motive to undermine a universal aged pension system.

While it is desirable to improve retirement incomes and national savings, there are dangers in the possible marginalisation of the aged pension and those dependant on it.

A single public “life-time annuity” product might play a potentially legitimate role in supplementing pensions for some. But aged pensioners must have the flexibility to reclaim this from the government when there is a real and immediate need. Meanwhile there are many for whom even a modest $60,000-$100,000 in lifetime savings is “out of reach”. What will become of these people with the stratification of retirement schemes and incomes?

Private self-funded retirement products, specifically superannuation, are also exposed to risk - as evident in the current financial crisis.

Retirees ought to enjoy financial security regardless of financial market trends. The element of “risk” could - and should - be “hedged” against collectively by citizens and tax payers through a public pension fund (with returns supplemented by tax as a last resort - and hence secure).

Earlier this year, in the Left Focus blog, I considered the need for sweeping reform of public pensions.

While the 2009 Australian Budget provided for a degree of distributive justice, further change is desirable. Pension reform is necessary as a matter of social justice - in addition to any public “lifetime annuity” scheme.

Already, reform has provided for a future increase of $32.49 per week to full rate single pensioners and $10.14 per week combined to couple pensioners. As of September 20, 2009 pension reform will see a new legislated benchmark for singles of 27.7 per cent of Male Total Average Weekly Earnings, up from 25 per cent”. Importantly, though, the value of such reform is undermined and (in part) “swallowed up” by the impact of a rising cost of living, including rent, food, water and energy.

Earlier this year - and as the Federal Budget approached - I noted, “Given cost-of-living pressures, it is reasonable to suppose that [the Singled Aged Pension] ought to be lifted to at least 30 per cent of Male Average Total Weekly Earnings (MATWE). … This would lift such pensions (at the full single rate) to about $17,537 a year: a significant improvement.”

Such reforms should be the absolute minimum provided by the Federal Government to be implemented at the very next opportunity; and should be provided to all receiving full single pensions (including the aged, the disabled, job-seekers, and carers). And yet there is a case for more robust reform for the most vulnerable pensioners. The Council on the Ageing (COTA) has argued for a full single pension formula of 35 per cent of Male Average Total Weekly Earnings.

Proportionate improvements to pensioner couples is also important of course.

As I noted in March this year in the Left Focus blog: “A “Cost of Living in Retirement” benchmark could translate to $750.60 a fortnight for singles, and $1125.90 a fortnight for couples. For singles, this would amount to $19,515 a year for those living purely on the pension.”

Such reform has been promoted by the Combined Pensioners’ and Superannuants’ Association with the aim of targeting those pensioners with little or no additional income.

A stronger single aged pension needs to be consolidated as part of a bulwark against the stratification in the pension system in Australia: and against the marginalisation of those dependent upon it. A public pension fund provided through progressive taxation - and spreading fairly and evenly the cost of “hedging” risk - needs to be established as a matter of top priority by the Federal Government.

Importantly, though, while means testing can play a central and progressive role, it should not be too onerous for those of relatively modest means. There must also be incentives for those on lower and middle incomes to save.

And again if there is a place for any “lifetime annuity” programs, then this should be in the form of a public and not-for-profit scheme.

Finally, the Federal Government needs to reconsider its commitment to raise the retirement age in Australia to 67. Federal Opposition frontbencher Tony Abbott has canvassed the possibility of raising that age even further - to 70. Such plans as these, from both the Federal Labor government and the Opposition, are discriminatory and unfair for a number of reasons.

To begin with, manual workers can experience strain - and sometimes disability - as a consequence of years of physical labour. Furthermore, older workers regularly face negative discrimination by employers. And the prospect of necessary and radical re-skilling late in one’s career does not seem fair or productive. That such people can be left dependant upon an inferior “Newstart” job-seekers pension under such circumstances is also plainly unjust.

The kind of society we ought to be encouraging is one where we “work to live” and not just “live to work” even where work is alienating and unrewarding. Retaining the retirement age of 65 may cost the “budget bottom line” into the future. But what younger tax payers forsake in the short term, they may reap for themselves in the long term.

We need aim for a scenario where, as Karl Marx once put it, “[rewarding] labor [becomes] not only a means of life but life's prime want”.

Whereas Marx’s aim, here, of “exploding” the division of labour is not an immediately realisable prospect, what is reasonable and immediately achieveable is the preservation of a more generous retirement age. Here, the goal is for citizens to enjoy an earlier and more sustained retirement - with freedom and opportunity to commit to family, friends, community, self-development and/or civic activism. Indeed, to provide such opportunities to all citizens there is even a reasonable argument to shorten the working week.

A decent, fair and equitable pension system is core to the goal of social justice. Labor governments are elected - for many - in the hope they might implement real social reform.

Let us hope this Federal Labor government makes the most of this opportunity entrusted to them by the people.