Contribution to the OECD Meeting of Social Policy Ministers – Paying for the past, providing for the future

Session Three – Paying for the Past, Providing for the Future

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Like many nations in the OECD, Australia faces the demographic challenge of an ageing population. We also know that an adequate pension is vital to ensuring our seniors do not spend a retirement in poverty.

Within two years of coming to office in 2007, the Australian Labor Government introduced the most significant reform to the pension system in a century.

The Secure and Sustainable Pension Reform followed a wide-ranging and long overdue review of our pension system.

The pivotal goals were adequacy and sustainability.

Adequacy, because the Government is determined that our seniors should be able to live with the security and dignity they deserve.

Sustainability, so we can ensure the reforms are affordable well into the future.

Seventy per cent of Australia’s pension aged population receive Age Pension, a further eight per cent receive a Department of Veteran’s Affairs service payment or other income support and another nine per cent receive a Commonwealth Seniors Health Card.

Critical to the reform package was to introduce changes to address the adequacy of the Age Pension for single Australians.

The Pension Review found that the relativities between singles and couples needed to be adjusted because single pensioners don’t usually share household costs.

To address this, we set the single rate of the pension at two-thirds of the combined couple rate, while also raising the rate of pension for couples.

At the same time we introduced a new higher benchmark to average wages to maintain the improved adequacy of the pension in to the future.

The benchmark for single pensioners increased from 25 to 27.7 per cent of male total average weekly earnings. The benchmark for couples is 41.76 per cent of male total average weekly earnings.

And, importantly, we have introduced new indexation arrangements so that payments better reflect changes in the cost of living faced by pensioners.

A new Pensioner and Beneficiary Living Cost Index has been developed by the Australian Bureau of Statistics to better reflect the spending patterns of pensioner and other households who rely on income support.

This ground-breaking index provides another layer of protection for pensioners to help their income keep pace with increases in the prices of goods and services.

The base pension rate is adjusted twice each year in March and September according to which has increased more – the Consumer Price Index or the new Pensioner and Beneficiary Living Cost Index. The indexed rate is then compared to the wages benchmark and is increased further, if necessary to achieve the wages benchmark.

Pension adequacy and sustainability go hand in hand.

To help pay for the pension increases we took hard decisions with savings measures to make the pension system sustainable over the long term, including:

• Measures to better target pension payments to those most in need including tightening income test rules to ensure the largest pension increases go to those with the lowest incomes;
• Better targeting of superannuation tax concessions; and
• Raising the age at which Australians qualify for the Age Pension.

A quarter of the Australian population will be over 65 by 2047. This is almost double the current proportion of 13 per cent.

The Government took the difficult decision to progressively increase the Age Pension qualifying age to 67 in response to the long term cost of this demographic change and to reflect improvements in life expectancy.

The change will be phased in from 2017 and will reach 67 by 2023.

A work bonus has been introduced to allow pensioners to keep more of their pension when they work and legislation is currently before Parliament to further increase the generosity of the work bonus.

Pension Reform has also addressed pensioners’ financial security by improving flexibility and simplifying how payments are made. Additional payments for utilities, pharmaceuticals, and telephone and internet communication were combined into an on-going flexible pension supplement which can be taken fortnightly or quarterly.

Australia’s retirement income system consists of three pillars:

First, the Age Pension which is the foundation of our targeted means tested and non-contributory social security system, received by over 2.1 million people;

Second, compulsory superannuation through which working Australians have employer-funded private savings in retirement; and

Third, voluntary private savings supported and encouraged with generous tax concessions and other incentives.

Policy is being directed at improving retirement incomes from all three pillars. Policy changes which support the building of private superannuation will complement our pension reforms.

The Superannuation Guarantee is Australia’s compulsory superannuation system. The contribution rate is currently nine percent and we plan to raise the rate to 12 per cent.

In contrast to many OECD countries which fund a defined benefit retirement income system, the Superannuation Guarantee is based on defined contributions made by employers on behalf of their employees.

We are also extending our Superannuation Guarantee age limit for older workers. Workers aged 70 to 74 will be eligible to have Superannuation Guarantee contributions made on their behalf for the first time.

With the Superannuation Guarantee fully in place a higher proportion of seniors will use the Age Pension as a supplement to significant private retirement income rather than as a their primary source of retirement income. Currently 60 per cent of Age Pensioners receive a maximum rate of pension.

We have a suite of other measures in place to boost voluntary superannuation savings, including rebates for low income earners and concessional tax treatment for additional contributions.

Reforms to both the public pension and the superannuation systems are designed to encourage mature age workforce participation and increase privately funded retirement.

Our Secure and Sustainable Pension reform will deliver a stronger and fairer pension system to provide adequacy and sustainability into the future.

This is the most significant reform to the pension since it was introduced 100 years ago and is a vital investment in preparing Australia for the future.