By Noel Whittaker, Sunday Times 19 April, 2015
Australia has one of the most generous superannuation systems on the planet.
There is just one problem – it’s unsustainable.
Under current rules, a couple can have up to $1,151,500 of assets, plus a family home of unlimited value, before losing access to at least a part pension.
The cut-off point for the income test is $74,818 a year.
At these levels the pension paid is miniscule, but the true value is the ability to get a pensioner health card, which is available to anyone who is receiving a part age pension.
Pension eligibility is under attack from all sides.
Pension increases are currently linked to average weekly earnings – about 4 per cent a year.
The Government wants, instead, to link increases to the cost of living.
The full pension for a couple is now $33,717 a year.
Under the existing arrangements, it would be $75,000 a year in 20 years.
It is not unreasonable to think that linking the age pension to the cost of living is fair, but there is already a groundswell of feeling that this is a bridge too far.
If that is so, the only viable alternative strategy will be adjusting the taper rate – the rate at which the pension reduces as assets or income rise.
Social Services Minister Scott Morrison is open to tightening the taper rate, the Greens are happy to consider it and some cross-benchers, such as Nick Xenophon, can’t wait to see it happen.
But changing the taper rate is fraught with difficulties.
If you make the taper too steep, it’s not worth earning extra income because of the effect on the pension.
If you make it too shallow, you push out eligibility so even a person earning $74,000 a year is eligible for a part pension.
Under the current income test, every additional dollar earned above the threshold causes a reduction of $0.50 in pension.
Under the assets test, the full pension is reduced by $1.50 a fortnight for each $1000 above the threshold. Pension eligibility is then assessed using the test that produces the lowest pension.
Because of the way the numbers work, almost everyone with financial assets in excess of $350,000 is assessed under the assets test.
Those pushing for a change in the taper rate are seeking a return to the Howard government years, when the asset test taper was $3 for each $1000 above the threshold.
This might be easy to toss around in the cloistered atmosphere of the Cabinet room, but it’s a very different matter in the real world.
Case Study: Mick and Mary are aged 70 and have $450,000 in financial assets and $50,000 in lifestyle assets. They own their own home and are assessed under the assets test. Their current pension is $25,390 a year. If the taper rate was changed as foreshadowed above, their pension would drop by $8327 a year or $160 a week. That’s bad enough, but now think about their neighbours who have $720,000 in assessable assets. They would lose the entire pension and the concessions that go with it. Do you really think either couple are going to give in without a battle? Any government that tries to change the system will be saddling up for the fight of their lives.