The gentle art of kite flying and pension reform

Intense pre-Budget kite-flying has increased the policy air traffic over Canberra in the past few weeks, creating a few crossed wires, some mid-air political collisions and one or two aborted take-offs. Expect more kites aloft this week as media opinion on controversial changes is tested and as we count down to the formal Budget announcement on May 13.

This is the first Abbott/Hockey Coalition Budget. Its imminent arrival has sparked a solid month of pre-emptive politicking and media attention related to the reported $40 billion national account deficit.  The usual array of conjecture and lobbying has accompanied the various mooted policy proposals to fix the deficit. Each policy idea is of course floated to test the political fallout, but essentially to also float ideas that cut costs and boost government revenue.

While the politics of the mooted ideas is interesting (for example a Conservative government creating a $10 billion ‘deficit tax’ on wealthier Australians), there has been plenty of attention drawn to bigger issues concerning our national savings and retirement system.

For Australia’s superannuation and wealth management sector, issues like taxation levels, superannuation access age and the pension system, including pension eligibility criteria, are almost certainly under review. It would be surprising if the retirement incomes sector escapes Budget attention on May 13. However, importantly, we cannot look at retirement incomes without also considering the Age Pension. The Age Pension is a lifetime annuity indexed to wages with a government guarantee.

Thanks to several boosts by the Labor government in recent years, this benefit now matches the ‘Moderate’ target for retirement income as indicated by ASFA data.  It is guaranteed to be no less than 25% of male full time wages, but has crept up to nearly 28%. It is interesting to note by how far NewStart (the unemployment benefit) has fallen behind the Age Pension – they were at parity in 1996.

What can we expect in next week’s Budget? Rice Warner expects some tightening of the means-test to reduce the cost of this benefit – and possible changes to indexation of the benefit.

A change to CPI indexing would lead to a significant reduction in value for the Age Pension. This may not be a big issue for those already retired, as their income will tend to keep up with their expenditure. But it will have a significant effect on new retirees in the future who will be faced with a pension significantly lower than their earnings prior to retirement.

Predictions surrounding policy decision-making is always a risky business.  So readers are reminded to ‘watch this space’ as the detail of the Budget unfolds, and any implications for our sector are revealed.

Michael Rice is attending the federal Budget lockup in conjunction with the Actuaries Institute. Michael will compile a rundown of Budget policy impacts for clients of Rice Warner.

Many of the issues discussed over the last month were canvassed in our comprehensive newsletter of August 2012 – Reforming the Age Pension.