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Population ageing and tax reform in a dual welfare state.


This article examines developments in retirement policy since the period of economic restructuring, which began in earnest in the 1980s. It focuses attention on how policies aimed specifically at retirement, such as compulsory superannuation, have interacted with broader policy developments. From this perspective, retirement policy has been far less egalitarian. By expanding the role of occupational welfare at a time of broader deregulation, superannuation has tended to reinforce growing labour market inequalities. Indeed, where once economic policy settings reflected social policy priorities, the reverse is now the case. This has meant that superannuation is partly used to increase national savings, while capital market deregulation has removed previous subsidies that supported widespread home ownership. Both superannuation and housing policy--two of the main elements of retirement income for most Australians--have also become subject to a new partisan dynamic, which subverts equality. Australia's emerging 'dual welfare state' sees conservative parties extend subsidies for private welfare spending alongside direct spending programs. The nature of retirement policy reform has made it particularly susceptible to this dynamic, resulting in an explosion in social support offered through the tax system, which is both inequitable and inefficient.

It is in this light that we argue that the current review of tax arrangements surrounding retirement policy should be examined. A series of recent reviews have emphasised the soundness of the basic structures of retirement policy. While there are suggestions to reduce some of the worst inequities of the current tax expenditures for superannuation and housing, the reviews support continued tax support for saving, and greater reliance on private savings for retirement. This article begins with an overview of retirement policy. It then outlines different conceptual understandings of the role of retirement policy, and how these conceptions may conflict. Using this framework, the article then explains how retirement policy has moved from a 'wage earner' framework to a 'dual welfare' framework, and finally assesses current policy proposals in this light. Our analysis suggests that current proposals will likely entrench much greater inequalities in older age and expose older Australians to greater market risk.

Public Policy and Retirement Incomes in Australia

The Commonwealth government mainly supports the income security of retirees by funding public transfers and subsidising both private superannuation and housing (see Table 1). The means-tested Age Pension is the primary public transfer for retirees, costing $25 billion in 2007-08 (AIHW 2009: 95). In the same year, the Age Pension was claimed by 78 per cent of those eligible, with 56 per cent receiving the full rate (ibid.: 82, 95). The pension provides a modest income stream; its full fortnightly rate was $562.10 for singles and $469.50 each for couples in January 2009 (ibid.: 95).

Superannuation and housing are mostly subsidised through tax expenditures, which refer to selective tax breaks for purchasing private assets or services. Although not a subsidy, the Superannuation Guarantee mandates that 9 per cent of wages be invested in private super. Tax concessions apply to all stages of the superannuation stream; a concessional 15 per cent tax applies to super contributions (up to defined limits) and super fund earnings, while super benefits are exempt from tax if claimed after turning 60. These tax concessions cost around $39 billion of revenue forgone in 2007-08 (Treasury 2011: 4). From 2012, lowincome earners will also receive a 15 per cent rebate on super contributions and a co-contribution for voluntary contributions.

Housing is the other main retirement savings vehicle subsidised by tax expenditures. The tax exemptions for capital gains earned on the primary residence and imputed rent were estimated to cost $41 billion of revenue forgone in 2007-08 (ibid.: 4). Negative gearing for investment properties cost the government an additional $5 billion (Colebatch 2010). While the Age Pension has been designed to exclude the wealthy, the tax expenditures for super and housing mostly benefit the well off.

A Brief History of Australian Retirement Incomes Policy

The contours of retirement incomes policy were established in the early twentieth century alongside the institutional arrangements collectively known as the wage earner's welfare state (Castles 1994) or the Australian Settlement (Beilharz 2008). However, the current emphasis of retirement incomes policy on subsidising private provision is novel and of more recent origin. In the last few decades, a shift to facilitate private alternatives to public provision has underpinned efforts to develop compulsory private super and extend the favourable tax treatment of housing.

The Age Pension and the Australian Settlement

The constitutive element of the wage earner's welfare state was the minimum 'living' wage. Established in 1907 through the Harvester Judgement, the minimum wage prioritised social policy goals by requiring that the basic needs of the male breadwinner's family be considered when setting wages (Castles 1994). The minimum wage was supported by tariffs protecting local industry, which compensated employers for higher wages, and migration controls that maintained the bargaining power of labour by limiting supply (ibid.). Because the wage earner model catered for the typical family's basic needs, it reduced the political pressure to build extensive welfare programs (ibid.). Castles (1994) has persuasively argued that the wage earner model acted as a functional alternative to European welfare states and explains why early Australian social provisions, such as the Age Pension, were residual.

The Deakin government's Age Pension of 1908 formed the bedrock of early Australian social provision. Means tested and funded out of general revenue, the Age Pension offered a modest income stream to those aged 65 years or older (Daniels 2011). This design meant that only a small minority were eligible for the pension, because life expectancy was 55 years for men and 59 years for women (AIHW 2009: 83). Despite further reforms in 1910 that reduced the eligibility age for women to 60 years, the pension was received by about one-third of those eligible by the 1930s (Kewley 1973: 122).

Remaining the foundational retirement incomes policy, the Age Pension's coverage extended over the next 70 years as life expectancy increased and policy was gradually liberalised. The Menzies government liberalised the means test for the Age Pension through a series of reforms between 1954 and 1963 (Daniels 2011: 34). The McMahon government increased the income exemption for the pension and proposed to abolish the means test within three years (ibid.: 31). The Whitlam government further liberalised the Age Pension's means test in 1975, abolishing it altogether for those aged 70 years or older (Bateman and Piggott 1994: 31). And, in 1976, the Fraser government removed assets from the means test (Daniels 2011: 35). Along with growing life expectancy, these reforms saw the recipients of the pension grow from 446,000 to 1.3 million between 1956 and 1980 (ibid.: 29).

Since the late 1970s, however, targeting has supplanted the trend towards universalism. In 1978, the Fraser government froze the non-means-tested component of the Age Pension for those aged over 70 years, imposing an income test for future increases (Daniels 2011: 35). The Hawke government targeted the Age Pension by reintroducing an incomes test for those over 70 years in 1983 and reinstating an assets test (that could apply instead, but not with the income test) in 1985 (ibid.: 35). The Howard government largely maintained the Age Pension as it inherited it, except for introducing the pension supplement and liberalising both the income and assets tests as part of the GST compensation package (ibid.: 9, 36). And, in 2009, the Rudd government increased the rate of the pension for singles by $60 per fortnight, but indicated that the qualifying age will be lifted to 67 years between 2017 and 2019 (ibid.: 10). As part of this package, the government reformed the means test so that it applied to half of the first $500 of wages and increased the taper rate from 40 cents to 50 cents per dollar (Australian Parliamentary Library 2009: 171). And, despite the reintroduction of the means test, the Age Pension's coverage has continued to grow in recent decades with increasing life expectancy.

The Rise of Superannuation and the Super Tax Concessions

Although introduced in the Commonwealth income tax of 1915, the current significance of the super tax concessions is a by-product of the recent rise of private superannuation as a secondary retirement savings vehicle for workers. As recently as 1974, private super was held by only 32 per cent of the workforce, with coverage concentrated among men in highly paid positions in managerial, professional, public service and financial sector positions (National Superannuation Committee of Enquiry 1976: 8). Super coverage expanded first through the union campaign in the mid 1970s to include super in industrial awards and then through the ratification of the Accord Mark II negotiated by the Hawke government and the Australian Council of Trade Unions in 1986 (Olsberg 1997: 76, 81). Labor's 1992 Superannuation Guarantee further expanded super coverage. The Superannuation Guarantee required employers to make compulsory super contributions on behalf of their employees, increasing to 9 per cent of wages by 2002 (Nielson and Harris 2009). Coverage increased from 64 to 90 per cent of the workforce between 1990 and 2007 (ibid.). Over the same period, super investments rose from $123 billion to $1.1 trillion, which is more than 100 per cent of GDP (ibid.).

The rapid growth of the super tax concessions, to the point where they now cost more than the Age Pension, is an indirect consequence of extending super to the workforce. These concessions have been the subject of minor reform since their introduction, particularly before the 1980s. The Hawke government reformed the super tax concessions in 1983 and 1988, with the main outcomes of reducing their inequity (by making higher income earners pay more tax) and bringing forward $1 billion of tax revenue (Sharp 1992: 27). Introducing the most inequitable reform, the Howard government made super benefits for those aged 60 or older exempt from tax and halved the taper rate on the Age Pension from 2007 (Warren 2008: 21-23). Yet, the super tax concessions have grown more than fourfold in real terms (controlling for inflation), from $5.6 to $38.9 billion between 1984-85 and 2007-08, despite the absence of radical reform.

Tax Concessions for Housing

With a high minimum wage and low taxation, Australia has had comparatively high levels of home ownership since before the Second World War (Castles 1998: 107). For the last 50 years, this trend has continued, with home ownership remaining at around 70 per cent (Yates 2010: 3). These high levels of home ownership reflect the favourable policy environment. Housing has been treated favourably compared to other assets as a retirement savings vehicle since the exclusion of the family home from the Age Pension's means test in 1912 (Kewley 1973: 122). Moreover, the Commonwealth subsidised mortgages through the War Services Homes scheme of 1919 for veterans, which expanded after the Second World War, and through the (formerly) state-owned Commonwealth Bank's provision of funds to private banks financed at rates 1 or 2 per cent below market rates (Castles 1998: 109). And, the Menzies government insured mortgages through the Housing Loans Insurance Corporation and set up a Home Savings Grant Scheme that provided couples aged less than 35 years a co-contribution on their savings (maximum $750) (Kewley 1973: 384).

While most of these measures have been wound back, housing still receives favourable treatment compared to other assets. The primary residence is still excluded from the means test of the Age Pension and was made exempt from the Capital Gains Tax (CGT) since its introduction in 1985 (Smith 2004: 194). Imputed rent on owner-occupier housing is not taxed in Australia (Yates 2010: 32). And, except for temporary cutbacks from 1985 to 1988, investors can negatively gear their housing assets (Smith 2004: 242).

Overlapping Priorities

The shift in retirement income policy partly reflects trends during the period of economic restructuring, in which the wage earner compromise was unwound and social provision increasingly targeted. The deregulation of labour and capital markets decompressed market incomes. However, this was partly offset by greater targeting of social assistance (Saunders 1999). Along with targeting the Age Pension, the Labor governments also reorganised and expanded family assistance and rent and other assistance to focus more directly on those with low and middle incomes. As a result, Australia now redistributes more from high-income earners to low-income earners per public dollar than any other OECD nation (Whiteford 2008). While many have been critical of reform, more recent debate has focused on Australia's relatively low levels of inequality, particularly compared to other Anglophone liberal political economies (OECD 2008). It has led some to promote the Australian model as an effective response to global market integration--allowing for competitive and lightly regulated markets alongside a small but highly redistributive state (Alexander 2010-11).

Welfare economist Nicholas Barr describes this as the 'Robin Hood' approach to social policy (2001). On this account, state intervention in the market aims to take from the rich and give to the poor. Typical of liberal political economies, this rationale affords the market the primary distributive role. However, the Australian state goes beyond the minimalist approach advocated by some free market advocates, who see redistribution solely focused on poverty alleviation (e.g., Saunders 2007), as means tests for some payments, particularly the Age Pension and family benefits, ensure that the majority of the potential recipient population receives some support (Saunders 1999). Australia's system therefore addresses broader inequalities.

This is distinct from what Barr calls the 'piggy bank' approach to social policy (2001) more typical of European countries. On this account, social policy aims to assist individuals in managing risks over the life course. This provides the rationale for contributory insurance schemes, where workers contribute during periods of high wages and receive benefits in periods of low market income (such as unemployment, sickness or retirement). Because these schemes aim to smooth an individual's income over their life course, the distributional implications are often less progressive per dollar, as those making higher contributions also received higher payments. As insurance schemes cover a large proportion of the population, the state also accounts for a larger part of total spending.

As with all analytic categories, these distinctions are not clear or absolute. As income inequalities reflect the incidence of the life course and risks to income maintenance, redistribution from rich to poor also tends to mitigate social risk. When combined with broader regulation of market incomes, Castles and Shirley (1996) argue, Australia's targeted model played a role in decommodification, especially for workers, for whom flat rate payments offered a higher rate of income replacement. Alternatively, piggy bank policies usually have some redistributive effect, partly due to political imperatives that moderate strict insurance principles (Barr 2001), and partly because by reducing the impact of risk these policies address some of the causes of ongoing disadvantage (such as unemployment or poor health). Even so, the distinction remains useful.

Australia's wage earner model also highlights the interplay of social and economic goals. The earlier settlement effectively used economic policy instruments to achieve social ends, but likewise social policy instruments can serve economic ends. Pensions account for a large component of most governments' outlays, and this has grown as the population has aged (Holzmann and Hinz 2001). Retirement policies also influence labour force participation (see Castles 1998), and, given the large sums involved, potentially national savings and investment (Edey and Gower 2000). Proponents of economic reform asserted the importance of economic goals, not only in restructuring labour and capital markets, but also in ensuring that social policy preserved market incentives and even addressed economic deficiencies, such as low savings.

From this neoclassical perspective, international organisations have raised concerns about the sustainability of European-style insurance schemes. Unlike redistributive policies, which are seen to fund payments today to those on low incomes from taxes taken today from those on high incomes, insurance policies are seen to take funds from yesterday's contributions to fund tomorrow's pensions. From a neoclassical perspective, this should have resulted in large and growing public savings from relatively youthful populations to fund growing liabilities to older populations in the future. Yet few governments (outside isolated examples, such as Norway) built up large publicly controlled funds. Influenced by public choice theory, neoclassical analysis emphasised the vulnerability of policy makers to political capture by minority interest groups (see Buchanan and Tullock 1962). (1)

The solution many economists have advocated to this situation was to individualise the insurance component of social provision. Rather than the state directly pooling resources, it promotes individual saving. This is consistent with a broader move towards economic financialisation, where economists see uncertainty as best managed through the creation and regulation of private markets, rather than through direct public provision (Keating 2004). The state's role is therefore to correct market failure, rather than to supplant the market. In the case of retirement policies, this often involves establishing appropriate markets and reinforcing market incentives to undertake savings. Indeed, in the Australian case, where politicians considered a persistent high current account deficit an important economic challenge, the ability of compulsory superannuation to raise national savings by increasing individuals' propensity to save was considered an important advantage of the policy (Kerrin 1991). Alongside this, the state continued to play a Robin Hood role, to correct for the inequalities produced by the initial market distribution.

Understood in this light, superannuation appears a 'refurbishing' of an older wage earner model. While not increasing state revenues, the state directs employers to provide for worker benefits, increasing funds available for social welfare (Castles 1994: 135-136). The approach also appears consistent with new economic conditions. Given concerns around population ageing, it minimises future calls on the budget. It is consistent with an open economic policy, as it ensures funds are held in the private sector and subject to market returns. At the same time, it addresses potential market failures associated with low individual savings, both through compulsion and via tax incentives that reward saving.

In theory, the expansion of superannuation also has parallels to more established social insurance schemes dominant in Europe. Australia's flat-rate and means-tested public pension, combined with income-related private superannuation savings, is likely to produce distributional outcomes that are potentially very

similar to social insurance models. While there are international comparisons of the distributional impact of both pension policy and public spending on aged pensions (OECD 2008, 2011), and there is some work estimating the likely impact of current superannuation policies in Australia as the scheme matures, (2) there is little or no work we are aware of that explicitly compares the distributional impact of social insurance schemes to the likely distributional impact of Australia's system once it is mature. Of course, this comparison is dependent not only on the relativities of the public pension and superannuation components (which are changing regularly), but also on market rates of return.

This highlights a key difference between Australia's combination of public and private savings and the social insurance model. The shift towards reliance on private savings exposes Australian workers to greater volatility and uncertainty in retirement incomes than is the case in Europe. The promotion of private savings presents potentially conflicting imperatives for public policy, to reinforce market incentives for saving on the one hand while minimising the inequalities of market distributions, which are larger for savings than for income, on the other. This is reinforced by broader changes in the economy, particularly the deregulation of finance and labour markets, which themselves impact on the ability of different groups to save. Finally, the expansion of private savings relative to public pensions has potentially dramatic effects on equity when combined with the historic reliance on tax instruments to supplement and encourage private savings. These conflicting policy goals thus complicate the extent to which we see superannuation refurbishing the wage earner model of social protection.

From Wage Earner State to Dual Welfare State

Australia's wage earner model placed greater emphasis on regulation rather than social spending. However, in many areas, as social regulation declined, targeted social provision increased, offsetting inequalities. Superannuation can also be seen in this light. However, the evaluation of retirement incomes policy is more complicated than in other policy domains. Here, policy has focused more on occupational welfare at a time when the regulatory controls that underpinned occupational welfare have changed. Related to this, retirement incomes are now more dependent on tax support than in other areas. Finally, the focus on private savings vehicles means that retirement incomes are more deeply shaped by changes in capital market regulation, where deregulation has been more extensive than in the labour market. These differences reinforce the policy tension between retirement policy as a mechanism for reducing social risk, and as a tool for promoting economic goals.

A useful comparison can be made here to the development of family payments. Since the 1980s, Australia has seen significant expenditure increases in family income support and public spending on child care (Stebbing and SpiesButcher 2010: 587-588). This partly reflects a trade-off embodied in the Accord between the Labor Government of the 1980s and 1990s and the Australian trade union movement (Brennan 1998: 165-167). Labour market deregulation was tied to greater income support to low- and middle-income families. The changes also encouraged female labour market participation, partly offsetting the effects of stagnant real wages (Brennan 1998; Gregory 2000). The changes in family payments shifted social policy from occupational forms to more traditional social spending. In the process, older forms of tax support for family incomes were reformed into spending programs (Sawer 2003: 245). Thus, family assistance addressed not only labour market deregulation, but also the breakdown of the nuclear family.

The different approach taken in retirement incomes has meant that superannuation has done less to address the emerging deficiencies in the wage earner model. Under the wage earner model, retirement incomes were protected by a series of regulations that ensured high wages and low-interest loans, which facilitated home purchase, as well as a targeted pension. While tax concessions for housing and superannuation were regressive, these were mitigated by their relatively minor roles. Superannuation was relatively small in scale. Housing concessions were much larger, but most workers received benefits, while those unable to purchase gained public housing. Home ownership was also focused on use, rather than resale, reducing exposure to market volatility and inequality. By the 1980s, income inequality among older Australians was low by international standards (King et al. 1999).

Unlike family payments, compulsory superannuation expanded the role of occupational and fiscal welfare. Superannuation has reinforced the decompression of labour market incomes. Those on the margins of the labour market, in casual and insecure employment, or those with significant periods of unemployment, receive much less from this policy than those in secure employment (Vidler 2004). Likewise, as the breadwinner family broke down, so the internal redistribution of income within the family became less predictable, increasing the cost of unpaid care work. This is most clearly seen in the financial insecurity experienced by single parents (Whiteford and Angenent 2001), but is more broadly experienced by those losing labour market income, and skills and experience, through periods of unpaid care work. This has reduced the mitigating effects of female participation on growing labour market inequalities, as have persistent gender wage gaps (Cassells et al. 2009: 2-3). It is therefore unsurprising that women enjoy much lower super savings than men (see Sharp and Austin 2007).

The expansion of occupational welfare was not accompanied by the retrenchment of existing forms of tax support. As we have noted, this meant a substantial increase in tax expenditures. Because all taxpayers are subject to the same rate of tax, this inverts the progressive tax system by granting the largest deductions to those on the highest marginal rates (see Stebbing and Spies-Butcher 2010: 597). In fact, for some on low incomes, the marginal rate on fund earnings remains higher than other income.

Labor's retention of tax expenditures for superannuation has other long-term implications. Since the initial period of reform, a new partisan dynamic in social policy has emerged. Labor's unprecedented period in office allowed it to entrench new social policies. Despite over a decade of Coalition government, Australia retained universal public health insurance, compulsory superannuation and a means-tested public pension, and high family support. However, the Coalition did change the nature of public support in each of these areas.

Elsewhere, we have described this as the emergence of a dual welfare state (Stebbing and Spies-Butcher 2010). This involves the use of different policy instruments to cater for different social groups in the same policy domain. Alongside direct, targeted social payments, a second layer of subsidies for private welfare spending, usually accessed through the tax system, is introduced. The dynamic of this dual welfare state is partisan. Labor has focused greater attention on expanding targeted social provision (and expanding the scope of means testing), while the Coalition has focused on extending tax subsidies for private spending or loosening means testing.

This partisan dynamic itself is shaped by past policy change. Where Labor retrenched previous tax deductions, new subsidies have tended to be less inequitable. For example, subsidies for private health insurance were reintroduced at a flat rate, rather than as a deduction based on a taxpayer's marginal rate (Smith 2001). Changes to family payments have increased support to singleincome families (Whiteford and Angenent 2001), but without the more regressive element embodied in previous tax concessions. However, with superannuation, where tax concessions were retained, the Coalition expanded these concessions, with much less equitable implications. That Labor explicitly ruled out changes to these concessions as part of its tax review demonstrates the difficulty in winding them back. (3)

The importance of both tax support and broader regulatory changes to retirement incomes is reinforced by their relationship to private savings. This has meant that retirement incomes have become more closely tied to capital and labour markets. Here, deregulation has gone further (Quiggin 1998). This has significantly affected traditional social policy provisions, eliminating subsidies for mortgages, making interest rates more volatile, and reducing indirect subsidies of housing through infrastructure provision (see Quiggin 1998: 82-84). The expansion of private savings through superannuation, along with real and ideological limits on public borrowing, has also changed the nature of investment, reducing the funds available for the provision of public infrastructure and increasing funds for private infrastructure. It should be little surprise that this has coincided with a decline in social housing investment (Jacobs et al. 2010: 21-28).

Capital market reform was associated with the elimination of indirect subsidies for home purchase, such as infrastructure provision and subsidised mortgages, and the collapse in support for direct spending (Dalton and Maher 1996: 9). But new concessions emerged as resistance from existing owners made it difficult to impose new costs. Thus, the capital gains tax excluded the family home, contributing to price inflation and decreased housing affordability (Berry 2003; Berry and Dalton 2004). The result is a shift in the nature of social support for housing, from regulatory provisions that primarily benefited younger first homebuyers, to tax provisions that primarily benefit older homeowners. It has also shifted the nature of home ownership from its use value to its exchange value, reinforcing market inequalities and uncertainties. These tax provisions have partly been justified on the grounds that they encourage savings (Costello 2006). However, by providing support that increases with the taxpayer's marginal tax rate, and is proportionate to savings, the support is grossly inequitable, and the scale of support exposes public finances to the fiscal pressures of population ageing.

Superannuation can reinforce these inequitable trends in capital markets. While tax concessions now increasingly favour owners, compulsory superannuation contributions reduce current incomes for younger workers. Thus, policy changes have increased the purchasing power of owners and investors while reducing the purchasing power of first homebuyers. This mimics the broader inequalities of capital markets. Policy debates on population ageing have emphasised the relationship between savings and the life course (e.g. Productivity Commission 2011). However, it is clear that class, expressed through occupation, income and income type, is if anything a more powerful force (BITRE 2009: 63-66). The time delay inherent in developing private savings means that these changes are yet to fully impact on current income inequality, but it suggests a significant long-term floor in the low-tax Australian model of occupational welfare.

Evaluating Proposals for Change in a Dual Welfare State

As well as highlighting these overlapping priorities, the dual welfare model also has implications for how we evaluate the economic and social impacts of reform proposals. A series of government-sponsored inquiries have drawn renewed attention to reforming retirement incomes policy in recent years. Most notable among these were the Harmer Pension Review and the Henry Tax Review, both of which were commissioned by the Labor government in 2008 and delivered in 2009. These reviews supported current retirement incomes policies and limited their proposals to reducing waste or excessive inequality. Because their proposals at once reflect and reinforce the conflated policy goals of the dual welfare model, reform to retirement incomes inspired by the Harmer and Henry Reviews has limited scope to improve the efficiency and equity over the longer term.

The Harmer Pension Review

The Harmer Pension Review was tasked with inquiring into the available reform options to enhance the adequacy of the Age Pension, Carers Payment and Disability Support Pension to provide financial security for their recipients. The review found that 'the basic structure of Australia's pension system, with its focus on poverty alleviation, indexation to community living standards and prices, and means testing, is sound' (Harmer 2009: xi). The review also rejected the policy alternatives of social insurance and universalism, citing concerns about the fiscal sustainability of these schemes, particularly in light of population ageing (ibid.: xii). In backing current policy arrangements, the review supported the Age Pension as a safety net that provides a basic income for retirees (ibid.: 8). Despite this, the review acknowledged the interdependence of housing and retirement income. It identified problems faced by growing numbers of private renters (ibid.: 52). This is likely to affect women more than men, as the review acknowledges, since women tend to have lower levels of personal assets in retirement, are responsible for the bulk of unpaid care, have longer life expectancy, and make up 72 per cent of single pensioners (ibid.: 11). These findings have longer-term implications because the review claims that the Age Pension will remain the primary retirement incomes policy in coming decades, even after the Superannuation Guarantee matures (ibid.: 9-10). However, the review's recognition of these concerns did not translate into substantive proposals to address gender inequalities in retirement.

The Harmer Review's major proposals for reforming the Age Pension involved increasing the targeting of support and removing disincentives to invest in private annuities. The review proposed targeting support at those most at risk of financial hardship, mainly by increasing the full rate of the pension for singles who live alone (ibid.: xiii). It also made two further proposals to reduce public expenditure growth over the longer term. The review advocated that the Age Pension's eligibility age be gradually increased to 67 years for both men and women because of longer life expectancy (ibid.: xxi). The review also proposed curtailing the growth in the pension's rate by benchmarking it to the net income of an employee on median full-time earnings rather than male total average weekly earnings (MTAWE) (ibid.: 75). This would slow growth in the pension's cost by effectively reducing indexation (ibid.: 75). And, to align income from private super with other investments, the review recommends that private pensions be assessed using a deemed approach for purposes of the Age Pension's income test (ibid.: 140).

Perhaps inadvertently, the review also raises questions about the sustainability of private super and super tax concessions. In claiming that the Age Pension will remain the primary retirement incomes policy, the review highlights that Treasury modelling projects that private super will only offset the pension's cost by 6 per cent in 2050 (ibid.: 9-10). Using Treasury projections from the Intergenerational Report (Treasury 2010), super is estimated to offset the annual cost of the pension by 0.2 per cent of GDP in 2050. From this estimate, the super tax concessions (which amounted to about 2 per cent of GDP in 2007-08) are likely to save the budget one-tenth of their current budgetary cost. Yet, this figure is still likely to overestimate how much the tax concessions will save the budget in the future, because Treasury modelling focused broadly on private super.

The Harmer Review identifies the results of the growing inadequacy of the dual welfare system of retirement policy, but without understanding its cause. It is unable to come to grips with the problems confronting those with limited savings and, like the Intergenerational Report, seems largely oblivious to the fiscal impacts of tax expenditures. Its primary rationale for rejecting more universal forms of provision, viz fiscal sustainability, therefore seems largely unfounded, while the scale of inequalities produced by deregulation on private savings overwhelms its modest attempts at greater targeting. The failure to engage with the history and broader politics of retirement policy leaves the report endorsing a neoclassical theory that has limited application to reality.

The Henry Tax Review

Broader in scope, the Henry Tax Review was tasked with developing reform proposals that 'will position Australia to deal with its social, economic and environmental challenges and enhance economic, social and environmental wellbeing' (Treasury 2009a: v). The review conducted a 'root and branch' review of the tax system, which took into account its wider relationships with the transfer system (ibid.: v). Nonetheless, our focus here is on what the review proposed for retirement incomes policy. The Henry Review found that the current retirement incomes system involving the Age Pension, housing and private savings is well balanced to meet the challenges of population ageing (Treasury 2009b: 95). The Henry Review mainly focused its proposals on superannuation and housing policy, noting that the increase to the Age Pension announced in the 2009-10 budget (in reply to the Harmer Review) significantly increased the incomes of many retirees (ibid.: 108).

The Henry Review's proposals for superannuation concerned the Superannuation Guarantee and the tax concessions for both super contributions and earnings. The review explicitly argued that the Superannuation Guarantee should not be increased to 12 per cent of wages, because it would lower wages growth and thus reduce the wages of low-income earners (ibid.: 109). The review also recommended that the tax concession for employer super contributions be replaced with a flat rate tax offset for up to $25,000 of contributions from any source each year (ibid.: 100). And, the review supported halving the tax concession on the earnings of super funds to 7.5 per cent (ibid.: 106). However, its terms of reference prevented it from inquiring into the tax exemption for super benefits received by those aged 60 years or over (Treasury 2009a: vii).

The Henry Review's proposal for the tax treatment of super contributions is more equitable than existing policy. As shown in Table 2, the tax concession for super contributions from wages and salaries is highly regressive, providing the largest proportional discount to those on the highest incomes who pay the top marginal tax rate. In contrast, the flat rate tax offset--considered here at 20 per cent as in the review's example--provides the same discount to super contributions from all sources (see Table 2). This proposal improves the progressivity of the tax treatment by increasing the benefits received by lower income earners while also reducing those received by higher income earners.

The review's proposal for the tax treatment of super earnings, however, is more regressive than current policy. In recommending that the tax concession for super earnings be halved to 7.5 per cent, the review argues that this reform would have similar effects on the final super benefits to raising the Superannuation Guarantee to 12 per cent, but without reducing the wages of low-income earners (Treasury 2009a: 109). While this measure increases the tax discount for those earning more than $6000, it exacerbates the current regressive structure of the tax concession as the final column of Table 2 demonstrates. Costing $22 billion in 2007-08, the redistributive effects of this policy are not incidental.

The Henry Review also made recommendations to reform the treatment of housing in the Age Pension's means test and tax system. The review noted that in addition to inadequate supply, the bias of current policy towards investment housing as a savings vehicle may contribute to recent rises in housing prices (Treasury 2009b: 414). To reduce this bias, the review advises that the tax subsidy for negative gearing be halved to 50 per cent so that it is closer to how other assets are treated by the capital gains tax (ibid.: 416). Although the tax treatment of owner-occupier housing is likely to have similar inflationary effects, the review argues against a similar reform because it acts as a 'lifetime savings vehicle that provides security in retirement' (ibid.: 416). Rather, it advocates that the primary residence should be included in the Age Pension's means test once it reaches a certain threshold to reduce the incentives to occupy housing beyond what is practical in retirement (ibid.: 540).

Both these proposals have the potential to enhance the equity and efficiency of the housing tax expenditures. By bringing investment housing closer into line with other investments, the proposal for negative gearing would reduce the benefits for those who can afford investment properties and increase the incentives to invest in potentially more productive investments. In a similar vein, as the review notes, including the primary residence in the means test (once housing reaches a certain price threshold) would prevent retirees with considerable assets tied up in housing from receiving the Age Pension and may free-up some under-utilised housing. However, owner-occupied housing would continue to receive preferential treatment were this reform adopted because the review did not propose changes that would alter its treatment by the capital gains tax.

In addition to retaining the basic structure of current policy, the Henry Review's proposals continue the trend of financialisation in retirement incomes policy. The review's proposals for super reinforce its role as a source of supplementary savings in retirement, particularly by increasing super holdings. Its proposals for owner-occupied housing are more complex--the review suggests retaining the preferential treatment of owner-occupied housing for purposes of the capital gains tax, but recommends including housing in the Age Pension's means test. This policy mix would promote investment in housing, but also encourage retirees to view the capital in their house as a financial asset. Along with similar proposals from the Productivity Commission inquiry into aged care (2011), this emphasises the exchange value of housing assets, and thus promotes financialisation. Its broader endorsement of subsidies for private savings reinforces the inequalities of the current model, even if moderating the most egregious inequities.


Like much of Australia's system of social protection, retirement income policy has been relatively unique internationally. A low, flat-rate public pension provided highly egalitarian, although often inadequate, support through direct spending. Alongside this, policies to promote home ownership created incentives to support private savings, while also potentially decommodifying retirement incomes by focusing on the use value of shelter. This system was made somewhat more adequate by increased pension rates during the 1970s contributing to low aged inequality. However, changes to retirement policy have been less suited to a period of economic deregulation. Where innovations in other policy domains have increased direct public provision to offset growing market inequalities, retirement policy has relied more heavily on occupational and fiscal welfare, reinforcing or even exaggerating market inequalities.

It is against this background that the current inquiries into the retirement income system should be evaluated. Australia has embraced a neoclassical model that prioritises economic goals and restricts social policy to the Robin Hood function of redistribution. In retirement policy, this has proven inadequate. Attempts to promote national savings conflict with equity goals. While the initial expansion of superannuation may have brought Australia closer to the distributional outcomes of European models of income-related public pensions, the expansion of superannuation alongside broader deregulation and the continued tax subsidy of savings are having potentially less equitable effects, increasing not only inequality but also exposure to market risk. This is made much worse by the dynamic of a dual welfare state, which grants large, inefficient and inequitable tax expenditures for private assets. Unlike in other policy domains, the updating of retirement incomes policy in the 1980s retained existing tax expenditures in superannuation, while resistance from a previous generation of home owners created new expenditures in housing. These have been entrenched or even expanded by the partisan dynamics of the dual welfare state.

The current inquiries acknowledge some of these issues, but not the underlying dynamic responsible for them. Our analysis suggests that these deficiencies are the result of the combination of a neoclassical desire for deregulation, the political pressures of older institutional arrangements, and the inequalities of linking retirement incomes so closely to private savings. Thus, without a broader reform of the policy framework, the individual proposals of the reviews are unlikely to be embraced. This is exactly what has been observed, with the government ruling out changes to the family home's treatment in the pension means test, and removing the tax treatment of superannuation withdrawals from the Henry Review entirely. Only by acknowledging how the model of retirement policy has changed, and more systematically dealing with the tensions between different policy objectives, can a new compromise be found that is likely to increase efficiency and equity, while also gaining broader political support.


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(1.) This reasoning rests on the assumption that it is savings that drives investment and so increased savings is needed to drive the growth necessary to fund higher total pension costs. On the problems with this approach, see Doughney and King (2008).

(2.) The Australian Treasury has undertaken modelling of the likely distributional effects of superannuation to provide estimates of future public pension liabilities (see Treasury 2010).

(3.) See Terms of Reference for Australia's Future Tax System, point 5 (Treasury 2008).

About the Authors

>> Ben Spies-Butcher is a Senior Lecturer in Economy and Society in the Department of Sociology at Macquarie University, a Fellow at the Centre for Policy Development and a member of the Centre for Research on Social Inclusion. His research focuses on the economics and politics of social and environmental policy, and political participation. He can be contacted at

>> Adam Stebbing is an Associate Lecturer in Social Science in the Department of Sociology at Macquarie University and a Fellow at the Centre for Policy Development. His research focuses on the relationship between social inequality and public policy. He can be contacted at

Ben Spies-Butcher * Adam Stebbing *

* Department of Sociology, Macquarie University
Table 1: Major policy initiatives for retirement incomes, 2007-08

Program $m

Age Pension 25,000
Superannuation tax concessions (total) 38,965
Concessional taxation of employer contributions 13,150
Concessional taxation of super entity earnings 22,050
Housing tax exemptions (total) 41,000
Capital gains tax main residence exemption 18,000
Capital gains tax main residence exemption--discount 23,000

Source: AIHW (2009); Treasury (2011).

Table 2: The distributive implications of the Henry Review's
proposals in 2009-10

 Tax discount
 from Discount Tax discount
 15 per cent from flat from the
 Marginal tax 20% tax 7.5% tax
 tax rate concession offset concession
Income range $ % % % %

0-6000 Nil 0 20 0
6001-35,000 15 0 20 7.5
35,001-80,000 30 15 20 22.5
80,001-180,000 38 18 20 30.5
180,001 + 45 30 20 37.5

Source: Calculated from Treasury (2009b, 2011).
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Author:Spies-Butcher, Ben; Stebbing, Adam
Publication:Economic and Labour Relations Review
Date:Nov 1, 2011
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