Editor introduction. On many articles which discuss a change in entitlements, such as the caps on superannuation, the franking credits debate or access to the age pension, readers comment that they are ‘entitled’ to benefits after a lifetime of hard work. Here’s one from a reader, Alfredo:
“When I came to Australia 40 years ago under the Skilled Migration program, I was told that by the time I reached pension age, the government would look after me in my old age, provided I worked hard and consistently. So I did. In the meantime, I managed to save enough to buy an investment property, which I am still paying off. I sacrificed luxuries, holidays, entertainment, even health issues so I could keep the property. Today, I am about to retire and I have been told I will be lucky to access a part-pension. I feel cheated and let down by the government and the saddest thing is there is nothing I can do!!!”
Warren Bird responds.
There are people who have recently retired or are close to retirement who are disappointed to find that they’re not eligible for the full, or even a part, age pension. Sometimes these folk are heard to say that they feel disappointed because they believe the government had made a commitment to ‘look after them’ in their retirement.
My late father-in-law, who passed away in 2008 in his 90’s, used to talk often about this notion – that he’d been ‘told’ by the government that if he worked hard all his life, the government would ‘look after him’ once he retired at 65. He did receive the pension until we sold his house when he was in his mid-80’s to get him into aged care and the investment earnings resulted in him being ineligible. Indeed, for a while he paid a little bit of tax. I have to confess we never told him this – he’d have been horrified! But he was financially better off than he’d ever been.
I’m in my 60’s and started work 40 years ago but have never expected to be ‘looked after’ when I retire. I’ve never been told that this would happen. I knew there’d be a pension, but I also paid into a super fund from day 1 of work in 1979. I figured that saving for my retirement was an important long-term strategy.
But what form did this ‘promise’ take?
I suspect that it’s a popular myth that dates back to the start of the 20th century when the old age pension was first introduced. Before 1900, people were assisted by benevolent societies, with some government funding (only the States back then of course) going to those organisations. No doubt those organisations used language like ‘we’ll look after you’ because that was their purpose.
Then in 1900, NSW introduced an age pension, followed by Queensland and Victoria. Soon after Federation in 1901, the Commonwealth held inquiries into the pension, resulting in them taking it over from the States in 1908. The pension was always means tested. It was never meant to enable the better off to keep living at the same standard they’d become accustomed to, but to provide a respectable, decent level of support to those who hadn’t built their own nest eggs. Hence, from that point on it was the government that was the ‘benevolent society’ that would look after you in retirement if you didn’t have the means to do so yourself.
BTW, it’s always been a unique feature of our pension system that it’s been unfunded. In most other countries, people had to contribute a social contribution levy of some kind during their working lives to support a pension scheme. More on this later.
Unfunded scheme was more affordable
Nevertheless, in the early 20th century, this unfunded scheme was affordable because life expectancy wasn’t much longer than the retirement age of 65. Also, the working age population was much greater than the retired population because we were younger on average. So, yes, the government would ‘look after you’ because it had the taxation base to generate the funds and it didn’t have to do it for very long!
That’s where my late father-in-law got the expectation from.
There was a brief attempt to get rid of the means test, as part of the Whitlam Government’s platform in 1972. (Remember the song, ‘It’s time for old folks … ‘) This was abandoned by the Fraser Government in 1975 and hasn’t been talked about since. The economic reality of longer life expectancy and an ageing population has kicked in.
The other consequence of that life expectancy and ageing population issue is the superannuation system we have today. From the mid-1980s, the conversation hasn’t been about the government looking after people, but the government providing a tax-inducement scheme to get folk to save for their own retirement to a greater extent.
Maybe I’m only aware of this more than other people because I’ve worked for Treasury and in the financial markets for the last 40 years, but there’s no way the government has been making ‘we’ll look after you’ promises during my working life.
It’s sad if people heard that message from whatever public memory it came. Back to Alfredo’s comment above. Perhaps the bureaucrats who ran that Skilled Migrant program at the time hadn’t been briefed on the modern world and were still communicating the message from half a century earlier. However, the actions of governments since Fraser have been communicating a different message.
The purpose of super and the franking backlash
The government does promise to help us save for our retirement by taxing us less on super, and the pension is still there as a basic level of income support for retirees, but the message for a few decades now has been ‘you will need to look after yourself in retirement’.
This is why the backlash against Chris Bowen’s franking credit proposal was so strong. Folk had done what they’d been encouraged to do – to get ready to look after themselves – and then were being punished for it!
Remember how I said that Australia has always been unique in having an unfunded age pension scheme? Presumably Chris Bowen believes we should scrap that scheme completely, since he argued that the uniqueness of our imputation scheme was one reason we should scrap franking credits. ‘No one else does it’ was a common argument in that debate. However, things like our unfunded old age pension scheme that ‘no one else does’ proves that we are innovative, not strange or wrong!
Warren Bird is Executive Director of Uniting Financial Services, a division of the Uniting Church (NSW & ACT). He has 30 years’ experience in fixed income investing. He also serves as an Independent Member of the GESB Investment Committee. These are Warren’s personal views and don’t necessarily reflect those of any organisation for which he works.