The land where entitlement runs riot? Hardly
Posted 47 minutes ago
Perhaps the reason Joe Hockey gets so excited about the age of entitlement whenever he travels overseas is because he needs to leave Australia to find an example of it, writes Greg Jericho.
Since the election, Joe Hockey has been talking big about the need for the government to cut expenditure. Unfortunately his sales pitch rests on the fallacious view that Australia needs to end its age of entitlement.
At a glance
- Australia has one of the smallest welfare budgets in the OECD
- The level spent on benefits in Australia now is slightly below where it was in 2003
- Reducing welfare spending tends to hurt low-income earners
- Tax concessions for superannuation see the government foregoing around $27.6bn in revenue
He also seems determined to force Tony Abbott to break his election promise told to SBS News the night before the election that there would be “no cuts to education, no cuts to health, no change to pensions, no change to the GST and no cuts to the ABC or SBS”.
On Sunday, news was leaked that the government was likely to cut funding for the ABC, and then Joe Hockey, speaking from Washington DC, made it clear that changing the pensions was very much on the table – from raising the eligibility age to 70, to changing the indexation and the asset test.
You can see why he might consider changing the indexation of the pension from average male weekly earnings to either the inflation rate or the pensioners cost of living index:
Over the past 10 years, average male earnings have increased by nearly 22 per cent more than the inflation rate and 18 per cent more than the ABS’s cost of living index for pensioners. So such a change would certainly temper increases in the government’s pension bill.
However, this would also exacerbate inequality – as has occurred for those attempting to exist on Newstart, which is indexed to CPI.
But behind all the talk about galloping government expenditure is the view that Australia is somehow now a land where entitlement runs riot.
This view is complete bollocks.
Talk of out of control welfare entitlement might sound true when said in a press conference where the vibe can seem more real than actual facts. But the reality is Australia does not have, nor ever has had a large sense of entitlement.
After first attacking the disability-support pension, which, as I noted last month, involved the government ignoring a fair bit of reality, now the talk has shifted to the aged pension.
The reason the pension is a concern is pretty much down to demographics. There are fewer people in the prime earning (and tax revenue paying) age of 25-54, and also fewer young people coming along to replace those retiring:
So yes, it’s an issue – one the previous government took steps to deal with when it changed the pension age to 67 for anyone born from 1957 onwards – around three quarters of the population.
And there is a case for suggesting we could work a bit longer.
Among OECD nations, Australian men retire later than the average and women retire pretty much on average. The reason women retire earlier is mostly because until this year they could. But from now on the retirement ages for men and women are the same.
So we’re not shirkers when it comes to work, but because our life expectancy is among the longest in the world, Australians spend more years retired than most nations.
But before we get too carried away by the problem of paying for our retirees, let’s put Joe Hockey’s words in some context. Hockey loves to talk about our huge welfare bill, and yet you rarely hear him talk up the fact that Australia has one of the smallest welfare budgets in the OECD:
Only Korea, Mexico, Chile and Iceland spend less than Australia does on welfare. And as for it growing out of control, the level spent on benefits in Australia now is slightly below where it was in 2003.
While it has increased since 2007 (as it has for almost all nations due to an increase in unemployment benefits), our increase was well below the average observed by other OECD nations. Part of the reason is that we have one of the best welfare systems in the world.
No bugger it, we have the best welfare system in the world.
As ANU economist Peter Whiteford noted, the OECD has recently published its latest edition of social indicators. It found that Australia directs more of its cash benefits to the poorest 30 per cent and less to the richest 30 per cent than any other nation:
Perhaps one of the reasons why Joe Hockey seems to get so excited about the age of entitlement whenever he travels overseas is because he needs to leave Australia to find an example of it.
But as the OECD notes, when you have a very targeted welfare system like Australia’s, reducing welfare spending tends to hurt low-income earners unless you are very careful.
Even on pensions Australia is not just kicking goals; we are winning the World Cup (to use Tony Abbott’s tortuous analogy). Using the most recent comparable figures, Australia spends the fourth least on pensions as a percentage of our GDP:
Little wonder that German insurance company Allianz named Australia as having “the most sustainable pension system in the world”. It cited the fact that our “two-tiered system of lean public and highly developed funded pensions – seems to be most sustainable in the long run”.
Oddly, no one in the government has been bragging about this report.
But our two-tiered system also provides two ways to approach growing expenditure and declining revenue. For while Australia’s cash benefits system is tightly means tested, our tax system is less so – particularly with regards to superannuation exemptions.
Even now the age that you can access your superannuation (the preservation age) is well below the pension age. Those born after 1964 will be able to access their superannuation at 60 years old – seven years before they will become eligible for the pension. And of course those who can afford to retire only on their superannuation are inherently wealthier than those who need the pension.
But rather than raise the preservation age to that of the pension age, the current system attempts to keep those people in the workforce by providing significant tax benefits for those over the age of 60.
All up, tax concessions for superannuation see the government foregoing around $27.6bn in revenue. To put that in context, the government spent $54.8bn on the aged pension this financial year.
Yes, there is a case for tightening some pension eligibility rules for those with low income but high wealth, but changes to the pension indexation and increasing the age eligibility will save money by mostly hitting the poorest.
Hockey has been talking big about everyone sharing the burden. But he also only talks of expenditure cuts, not revenue increases. He says he wants a discussion about the pension; he also needs to talk about superannuation. He talks about expenditure; he also needs to talk about revenue.
And while he’s at it he might also talk about why he thinks Australia is in an age of entitlement, when it plainly is not.