Australia's Demographic Challenges
Paid work provides us with many benefits. It provides us with the opportunity to satisfy our basic needs. It gives us the opportunity to develop personally, live independently, and interact socially. Paid work also is important in giving us the opportunity to increase our savings for retirement.
Most of us make the decision to join the workforce. However, that decision is influenced by tax arrangements, provision of income support and retirement incomes policies, all of which have an impact on whether we work and how long we work. It is important that government policies do not discourage people from working.
Incentives to work are affected by various elements of the income support system such as the maximum rates of payments, income and assets test structures, eligibility criteria attached to payments and obligations (such as requirements to look for work). Ensuring that the income support system provides an adequate safety net for those in need without providing disincentives to work requires careful balance.
It is equally important that the retirement incomes system does not encourage people to prematurely leave the workforce. For those who leave the workforce prematurely, it can be difficult to find another job. Rules about how and when people can access superannuation can significantly affect retirement decisions.
The issues about work and income support are wide ranging. If people receiving income support must satisfy more participation requirements, they will need additional avenues to help them get a job. How should we involve industry in assisting people off welfare and into work?
While people are in work, what actions can they take to achieve their retirement goals? Is it fair to allow those with some superannuation assets to retire early and then later call on the pension to fund the major part of their retirement?
Our income support system provides people with assistance during times when they are finding it hard to support themselves. It was set up at a time when full-time work was the norm for men but many groups, such as women and people with disabilities, were not expected to have a job. Today, opportunities and expectations are different. Part-time and casual work is more common. Most women now work before and after having children. Others who worked full-time for most of their lives (such as older men) can have problems getting back into work if they lose their jobs when they are around 45 or 50. And there is a strong trend for skilled males to retire early, well before age pension age.
For most Australians, paid work provides money to live on and raise children during their working years and enjoy a higher standard of living in retirement. It also provides self-esteem and a connection to the community. At certain periods in their lives people may not be able to take up available opportunities and have to temporarily rely on income support. Others may never be fully self-reliant because of significant disability. Nevertheless, few people in the community are unable to take up paid work at some point in their lives. The income support system needs to encourage paid work, and promote and support people to participate in paid work to the extent they are able.
Around 2.7 million working-age Australians are on income support — over 20 per cent, or one in five of all adults of working age (Chart 3). This has grown by over 17 per cent from 2.3 million in 1996.
Over 80 per cent of all lone parents receive income support. Many remain on income support for long periods of time. Lone parents who claim social security spend an average of 12 years on one working-age payment or another. Nearly 30 per cent of 50 to 64 year olds receive income support. Very few who claim income support after the age of 50 will ever go off benefits. We have one of the highest rates of growth in the number of disability pensioners among developed countries (650 000 disability pensioners or around 66 per cent more than a decade ago) and one of the lowest rates of employment for disability pensioners and lone parents.
Very few working age people on income support are required to look for work — only around one in six of all working age recipients and one in ten parents in jobless families are required to look for work as a condition for receiving their income support payment. There are now many more people receiving payments with few if any participation requirements, such as Parenting Payment and Disability Support Pension, than are receiving Newstart Allowance (which does have participation requirements). Such a system works against the goal of helping people to join in paid work. In order to maximise the participation of people with diverse capacities and availability for work, a balance of incentives, assistance and requirements is needed.
The Government has already taken steps to improve participation outcomes for people on income support. The New Tax System simplified family assistance and improved work incentives for families and individuals. The Australians Working Together package announced in the 2001-02 Budget, but only passed by the Senate in 2003, expands and improves employment and other services to help parents, mature aged people and people with a disability get into work. This includes broadening the availability and accessibility of child care assistance for jobless parents who wish to improve their employment prospects.
Changes announced in the 2003-04 Budget for disability employment service providers will improve employment outcomes and conditions for people with disabilities. The Government also remains committed to changes to the Disability Support Pension announced in the 2002-03 Budget that aim to make sure that the Disability Support Pension remains the appropriate income support payment only for those with little or no capacity for paid work.
As well, enhancements to Job Network arrangements from July 2003 mean job seekers will receive assistance better tailored to their individual needs, capacities and circumstances, and Job Network providers will be better placed to help parents and people with disabilities find paid work.
Most people today leave unemployment via part-time work. This can lead, over time, to more substantial employment. However, our income support system can be improved to provide better incentives for people to take up part-time work or increase their hours of work. For example, the Australians Working Together package included the provision of a working credit which encourages people on income support to take up employment by allowing them to keep more of their income support when they work. All elements of the system, including levels of payments, means tests, participation requirements, labour market assistance and the relationship with the tax and wages systems need to promote, in a balanced way, people’s efforts to increase their participation in paid work to the extent possible.
Chart 3: Growth in Unemployment, DSP and Parenting Payment (single) Recipients
Unemployment benefit recipients
Disability support pension recipients
Parenting payment (single) recipients
The Government recognises that the income support system needs to be modernised to help achieve the goal of increased participation. Feedback on its consultation paper Building a Simpler System to Help Jobless Families and Individuals indicated broad support for reform. The challenge is how to make sure we have an optimal balance between incentives, assistance and obligations that will encourage labour force participation and assist each person to achieve their potential.
Forty years ago, the labour force was dominated by men who started work when they turned 15 or 16 and worked till they retired at 65 on the age pension. Many spent 50 years in the workforce. Superannuation was a benefit provided to a small number of people, mainly managers in medium to large companies and public servants. The introduction of the Superannuation Guarantee has meant that 91 per cent of employees now have some form of superannuation.
Today most students complete high school and a sizeable proportion go onto further study. With people able to access their superannuation at 55 years, many of today’s workforce no longer work through to a retirement age of 65. Some full time workers spend as little as 30 years in the workforce, yet life expectancy is increasing rapidly. Women in particular tend to spend less time overall than men in the workforce — primarily due to their caring responsibilities — but generally live longer. As a result, Australians are spending a greater amount of time in retirement — much of it financed either directly through the tax system (Age Pension) or indirectly through taxation concessions (superannuation).
There is a direct link between the time a person spends in the workforce and their income in retirement. Workforce participation builds Superannuation Guarantee savings and also increases income and with it the ability to make voluntary savings for retirement. A person can also improve their standard of living in retirement by deferring their retirement from the workforce. This increases their superannuation savings and delays the need to drawdown on retirement savings early. The earlier retirees access their superannuation, the lower their ultimate retirement income.
That is why retirement income policies must be effective in improving retirement incomes, have community acceptance and not operate as a disincentive to remaining in the workforce. The ageing of the population also highlights the need for retirement income policy to be fiscally sustainable into the future.
Current retirement income arrangements consist of the publicly funded Age Pension, compulsory employer superannuation contributions, and voluntary superannuation and other private savings supported by tax concessions. This year, taxpayers will provide almost $19 billion to fund Age Pensions and a further $11 billion for superannuation through tax concessions. An additional $6 billion will be spent on income support payments to people aged 55 to 64. Combined, these arrangements provide Australians with higher levels of retirement incomes than before.
Over the next 40 years, Age Pension costs are projected to rise by a manageable 1.7 per cent of GDP. Many other countries are not so lucky (Chart 4).
Countries facing spiralling pension costs have needed to make some important and difficult decisions. Some, including the US and Swiss governments, have increased or are considering increasing the age pension age. The Australian Government is not considering any such change. However, the experience of other countries serves as a reminder of the budget impacts of not securing affordability before it is too late.
The combination of Age Pension, superannuation and associated tax concessions provides a firm base for most people’s retirement incomes. Workers with superannuation are projected to have an average potential spending replacement rate of 66 per cent by 20421, that is, spending power in retirement that is 66 per cent of that before retirement.
Chart 4: International comparisons of project increases in spending on age pensions 2000 to 2050
For a person who earns the median wage2 for 40 years, compulsory superannuation and the age pension would provide a spending replacement rate of 85 per cent — 65 per cent more spending power than is available from the age pension alone. While this would provide a lower income than when a person was working, retirees’ day-to-day spending needs typically would be lower. For example, fully retired people do not face work-related expenses such as clothing and transport costs, while the major costs of raising children and paying off the mortgage generally would be in the past. Therefore, a replacement rate of 84 per cent is in the range independent experts consider to be appropriate.
Although old age is inevitable, many people don’t think about it until it arrives. Yet a longer lifespan means more time as an older person and more time as a retiree. That is why people need to think about their retirement income goals in advance and determine whether the combination of the Age Pension, compulsory superannuation and other savings will satisfy these goals. Those who want a more comfortable retirement have opportunities to save, including through additional concessionally-taxed superannuation contributions or through postponing retirement.
Increasingly important is the superannuation preservation age. Superannuation receives generous taxation concessions as the preferred retirement savings vehicle. The preservation age aims to ensure that these concessional superannuation benefits cannot be withdrawn before retirement. At the moment, superannuation benefits can be accessed from 55 years — ten years before Age Pension age. This might encourage people to see the preservation age as the appropriate age for retirement. For these reasons it was decided in 1997 that the preservation age will increase to 60 years by 2024.
Preservation rules that allow access to superannuation as a lump sum before Age Pension age also can encourage people to prematurely retire, run down their savings and rely on the Age Pension for their retirement.
Many people over Age Pension age have skills and experience to make them valuable employees. The Government offers incentives for people over Age Pension age to continue working, including the reduction in the Age Pension income test taper rate (introduced as part of the new tax system), Senior Australians Tax Offset and the Pension Bonus Scheme. These policies increase the rewards to people over Age Pension age who wish to keep working and have the capacity to do so.
The challenge is to achieve a balance between continuing provision of a safety net for those in need while maintaining appropriate emphasis on the value of being part of the workforce and incentives for each of us to make sufficient provision for our own retirement.
1 This includes retirement income from the age pension, compulsory superannuation and additional voluntary savings.
2 The median wage is the point where half the wage earners earn more than the amount and half less. It is currently approximately $35,000.
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