Standing with his suitcase beside a cruise ship at Sydney Harbour, silver-haired Australian Chris Hamilton defends his right to draw a state pension -- even as his $400,000 private retirement fund reaps a steady income.
“We’ve been very wise and frugal,” said the 70-year-old retired chemical engineer as he prepared to board a 10-day Pacific island cruise with his wife. The trip, to be followed by a European tour later this year, “is one of the things on the bucket list,” he said, adding the government support is a welcome boost rather than a necessity.
More than two decades after Australia set up a compulsory retirement savings scheme, known as superannuation, to wean people off of state pensions, over-generous means testing has resulted in four out of five retirees still being eligible for such welfare. The nation’s A$40 billion ($30 billion) annual pension bill accounts for 10 percent of government spending and is destined to grow in a country with one of the world’s highest life expectancies.
While government pension spending in Australia as percentage of the economy is half the developed world average, the system poses challenges for Prime Minister Tony Abbott’s government as it confronts dwindling revenue and budget deficits forecast for at least the rest of the decade.
The government is backtracking from fiscal tightening in May’s budget, however, and this week put off any changes to superannuation until at least 2016. Besieged by poor opinion poll ratings that triggered a leadership challenge in February, Abbott is wary of alienating well-to-do pensioners that form a bedrock of support for his Liberal-National coalition.
“Abbott knows there’s big problems, but he also knows Australians punish politicians who seem to mess with their financial security,” said David Burchell, a political analyst at the University of Western Sydney. “The longer the problem is left, the more politically hard and financially difficult it will be to fix.”
Under superannuation, employers are required to pay 9.5 percent of a worker’s wage into a fund that usually isn’t accessed until retirement. People aged under 50 can channel A$30,000 a year into the fund, including employer contributions, rising to A$35,000 for the over 50s, with every dollar taxed at 15 percent. The concessional rate compares with income taxes that rise as high as 45 percent.
Income generated in the fund is also taxed at 15 percent and is tax free when drawn in retirement.
The top 10 percent of income earners receive more than a third of tax breaks while the bottom 10 percent gets nothing, according to the Australia Institute, a Canberra-based research center. The concessions cost the government about A$30 billion a year in lost revenue, the Canberra-based think tank says.
The system is “simply unaffordable and entirely inequitable,” said Richard Denniss, the institute’s executive director. “Rapacious” fees charged by fund managers -- estimated by the Grattan Institute at A$20 billion a year -- further undermine the system, he said.
While the nation’s A$1.93 trillion ($1.5 trillion) pool of superannuation savings is the fourth largest in the world, the system is yet to make a significant dint in the number of people drawing the state pension.
Critics says that’s down to loose means testing and because people retiring now have only been contributing to superannuation for a part of their working life.
About 59 percent of retirees receive the full-rate Age Pension -- currently A$860.20 a fortnight, with concessions for health care, rent, pharmaceuticals and transport also available. A single person can have an income stream of just under A$49,000 a year, or about A$775,000 in assets, excluding their home, and still qualify for a smaller pension.
“Eligibility rules are too loose,” said Sally Loane, chief executive of the Financial Services Council that represents fund managers. “The income and assets tests for the Age Pension should be reviewed to ensure it is not too generous for those people who can fund their own retirement, and not miserly for those who cannot.”
Australia’s aging population is compounding the problem.
The number of people aged 65 and over is expected to double by 2055. Government analysis shows the ratio of working age people to those aged over 65 will drop to about 3:1 by 2055 from 5:1.
Australia ties for the world’s highest life expectancy for men, according to the United Nations. The government expects it to rise to 95.1 years from 91.5 over the next four decades.
Treasurer Joe Hockey aims to raise the nation’s retirement age to 70, the highest in the world, by 2035 and says the number of people receiving the Age Pension will decline as superannuation balances grow. The current retirement age is 65.
On Monday, he launched a consultation on the biggest shake-up of the tax system in 60 years. The Association of Superannuation Funds of Australia was among the first to respond, calling for tax concessions to those with the biggest retirement balances to be scaled back.
The government will take any proposals to amend superannuation to the national election due in 2016. Social Services Minister Scott Morrison, who’s been negotiating potential changes to the state pension with crossbench lawmakers, said Thursday he was studying a proposal from welfare advocacy group ACOSS to tighten the asset test for receiving partial payments.
Waiting to begin his cruise in Sydney, homeowner Hamilton said he and fellow retirees weren’t to blame for the strains on the nation’s finances.
“I’m a strong believer in balancing the federal budget, but the pension is just one of the issues,” he said. “What about all the other largess that’s going on?”