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Budget 2009-10 - Pension Review Report

1. Introduction

1.1 Scope of review

On 15 May 2008 the Minister for Families, Housing, Community Services and Indigenous Affairs, the Hon. Jenny Macklin MP, announced that the Secretary of her department, Dr Jeff Harmer, would lead a review into measures to strengthen the financial security of seniors, carers and people with disability. The investigation was to include a review of the Age Pension, Carer Payment and Disability Support Pension.

1.1.1 Terms of reference

The Minister asked Dr Harmer to report to the government on the outcomes of the Pension Review by 28 February 2009. The terms of reference directed the Review to consider:

The Pension Review has been undertaken in the context of the wider inquiry into Australia’s Future Tax System, which is considering the tax structure needed to position Australia to deal with the social, economic and environmental challenges of the 21st century. The terms of reference for the inquiry into Australia’s Future Tax System require it to consider ‘improvements to the tax and transfer payment system for individuals and working families, including those for retirees’. While the Panel overseeing the tax system review is due to report by the end of 2009, the government asked the Chair of the Review, Dr Ken Henry AC, to bring forward his report on the retirement income system to March 2009, to allow that report to be considered in conjunction with the Pension Review report.

1.1.2 The Pension Review’s scope

The payments that are a focus of the Pension Review (the Age Pension, Carer Payment and Disability Support Pension and, as discussed in more detail in Section 5.1.1, certain Department of Veterans’ Affairs (DVA) payments and a number of smaller and closed Families, Housing, Community Services and Indigenous Affairs payments,1 are part of the broader income support and family assistance systems. Many of the issues considered in this report are also relevant to the wider system of pensions and allowances. However, the Age Pension, Carer Payment and Disability Support Pension are different in that the capacity of people on these payments to undertake full-time employment to support themselves is significantly curtailed. In addition, the community generally does not expect that people receiving these payments should be required to seek work to support themselves, because they:

In recognition of the different capacities and expectations around workforce participation, the means test for pensions is more relaxed than that for allowances, where work is required. The pension means test is designed to provide incentives for some workforce participation for those who have the desire, capacity and opportunity to do so, but is not so concerned with the implicit effects of higher rates of payment and longer tapers, which allow people to combine part-rate pensions with income from part-time or casual work, but may reduce incentives for full-time employment. In addition, the structure and rate of the pension take into account the very long durations on payment of many pension recipients and the more limited opportunities some seniors and those with significant disability or ongoing caring responsibilities have for entering or re-entering the workforce.

One important difference between the pensions considered here is that, while eligibility for the Age Pension is based simply on age (and other criteria such as residency and means), eligibility for Carer Payment and Disability Support Pension is tested, on an ongoing basis, against the capacity of individuals to support themselves in the labour market. That is, the Disability Support Pension and Carer Payment are not paid on the basis of a person having a disability or caring responsibility per se, but rather because of the extent to which their disability or caring significantly inhibits their capacity for employment.

The Pension Review, reflecting both the terms of reference and the interrelationship between program components, took a comprehensive approach to the support available to people receiving the Age Pension, Carer Payment and Disability Support Pension. This support includes pension payments, supplementary payments and allowances, and concessions and services. The Review also considered targeting mechanisms, such as the ‘income test free’ areas and means test taper rates. All of these program components are intended to operate together to provide financial security and an appropriate level of income.

In its work it was clear to the Review that many features of the pension system have developed on an ad hoc basis or as pragmatic solutions to immediate problems. In this report, the Review has sought to identify underlying principles to guide its own considerations and future pension policy.

1.2 Program of work

The Pension Review provides the first opportunity since the Social Security Review (1986–88) for a comprehensive examination of pension payments. To support the development of this report, the Review has drawn extensively on internal and external analysis, including technical research, and has undertaken a wide ranging consultation process.

The Pension Review has progressed during a period of profound economic change. Consultations commenced in August 2008 following a period of rising inflation and strong economic growth. As the impact of the global financial crisis emerged in late September and early October, the public forums and submission process were winding up and the first round of focus groups was commencing. In October 2008, while the first round of focus groups was running, the Australian Government announced a $10.4 billion Economic Security Strategy to strengthen the Australian economy, which included a $4.8 billion down payment on long-term pension reform. In December 2008, the Australian Government announced additional support to pensioners to fully meet the expected overall increase in costs flowing from the Carbon Pollution Reduction Scheme. In February 2009, the Australian Government announced its $42 billion Nation Building and Jobs Plan, which included a major investment in social housing.

Chapter 2 of the report provides further details about the impact of the global financial crisis on pensioners and the pension system.

1.2.1 Background Paper

On 11 August 2008, the Pension Review Background Paper (the ‘Background Paper’) was released to inform the public debate about issues surrounding the pension system. The Background Paper included a detailed discussion about the key issues of consideration under each of the Review’s terms of reference. It also provided information on the economic and social context within which the pension system operates and detailed information about the current income support system, including the number of people on payments, payment rates and historical trends.

The Background Paper contained a significant amount of the initial research and analysis undertaken by the Review and should be seen as a companion to this report.

1.2.2 Consultation

The Review engaged in an extensive consultation process, involving a series of public forums, meetings with state and territory government officials, a call for written submissions and a series of small focus groups. The Review draws on material resulting from the consultation process throughout the report.

Public forums

Public forums were held during August and September 2008 to ensure that seniors, carers and people with disability, and the organisations that represent them, had the opportunity to provide direct input to the Review. A total of 485 people attended the forums, which were held in all capital cities as well as Newcastle, Rockhampton and Wangaratta. Forums were held in a town hall format. Participants also had the opportunity to provide written input through feedback forms.

Consultations with state and territory governments and others

Representatives from the Review met with officials from all state and territory governments to discuss the interactions between the Review and policy responsibilities of state and territory governments. These discussions focused on the Review’s third term of reference—the structure and payment of concessions and other entitlements—since state and territory governments are responsible for delivering a wide range of concessions and services to seniors, carers and people with disability.

Representatives from the Review also met with the National People with Disabilities and Carers Council; the Disability Investment Group; the House of Representatives Standing Committee on Family, Community, Housing and Youth; and the House of Representatives Standing Committee on Petitions.

Written submissions

Over 1,800 written submissions were received by the Review. The majority of submissions were from individuals, although some 130 submissions were received from organisations.

The Review has paid considerable attention to the issues raised in the submissions and the breadth of the concerns expressed. It has also analysed the frequency with which issues have been raised.

An important aspect of the analysis of the submissions is that it provided a more systematic insight into issues of concern for particular subgroups, such as people receiving different pension and related payments, singles and couples, and those living in different locations.

Focus groups

The Review commissioned Centrelink to run nine focus groups in October 2008 and three focus groups in January 2009, to further explore issues raised during the public consultation process. Issues covered in the focus groups included financial disadvantage, work incentives, concessions and services, and supplementary payments. Participants were randomly selected Age Pension, Carer Payment and Disability Support Pension recipients. The focus groups involved a mixture of group discussion, data collection and written responses.

The focus groups were also a useful mechanism to explore some of the specific issues raised in submissions.

1.2.3 Reference Group

In her statement of 15 May 2008, Minister Macklin advised that Dr Harmer would convene a Reference Group to ensure that the Pension Review reflected the views and aspirations of those most likely to be affected by any reforms. The Reference Group, which met for the first time on 29 July 2008, included representatives from seniors, carers, disability and general welfare groups, as well as members of academia. The Reference Group met six times between July 2008 and February 2009.

The Reference Group advised on the range of issues facing seniors, carers and people with disability, and on priorities for reform. The Reference Group also considered and provided feedback on much of the research and analysis undertaken by the Review.

1.2.4 Research and analysis

To inform the Review and support the development of the report, the Review engaged in a program of research and analysis. Much of this work fed into the Background Paper, which was released prior to the consultations. The Background Paper should be seen as a complementary volume to this report.

Much of the analysis for the Review was undertaken using existing research and analysis, such as Organisation for Economic Co-operation and Development (OECD) reports and the Australian Treasury’s Intergenerational Report 2007, and through analysis of existing administrative and survey data. In particular, the Review was informed by analysis of equivalence scales, financial hardship and indexation approaches; analysis of health expenditure data; and modelling of Superannuation Guarantee outcomes. The Review’s analysis also benefited from sharing of information and data from other Australian government departments, and from state and territory governments, and by drawing on material from the public consultations.

1.3 Report outline

Apart from Chapter 2, which considers the broad context of the Review, the chapters of the report are presented in a standard manner:

1.3.1 Context and challenges

While the terms of reference focus on the Age Pension, Carer Payment and Disability Support Pension, it was not possible for the Review to develop considered views on the operation of these payments under the terms of reference without considering their role in Australia’s broader social protection system.

Chapter 2 (Context and challenges) therefore provides an overview of Australia’s pension system and how it fits within the broader social protection system. The chapter also discusses demographic change and the ageing of the population, because these long-term trends will have a major impact on the Age Pension, Disability Support Pension and Carer Payment, and are therefore a crucial part of the context of the Review.

Chapter 2 then identifies five major challenges for the pension system that were central in providing a framework for the Review’s consideration of its terms of reference: the global financial crisis, sustainability, the management of risk in retirement, workforce participation and interactions with the broader tax-transfer system, and complexity.

1.3.2 Term of reference 1: Appropriate levels of income support

Chapter 3 (Adequacy) examines the central question of the level at which the full rate of pension should be set and identifies the priorities for reform of the Australian pension system. It considers the purpose of payments and the concept of adequacy given the diversity of individual needs and circumstances. It reviews a range of different measures of adequacy and outcomes, to consider both the adequacy of pension payments and the relativities between pensioners. It also considers the need for supplementary assistance for housing costs. The question of the appropriate level of income support for those pensioners with some private means is considered in Chapter 7 (Sustainability and targeting).

The maintenance of adequacy over time in light of changes in the cost of living and in community living standards is considered in Chapter 4 (Indexation). This chapter considers the way in which adjustments are made to the rate of the pension and other parameters of the pension system. It outlines the current indexation arrangements; discusses the merits of different approaches to price adjustment, including the Consumer Price Index and the Analytical Living Cost Indexes; and considers issues around indexation and sustainability. It also outlines the current benchmarking arrangements and discusses the relative merits of different benchmarking measures.

1.3.3 Term of reference 2: Frequency of payments

Chapter 5 (Payment design and administration) considers whether the way that assistance is delivered and administered contributes to the financial security and wellbeing of pensioners. The chapter examines the current components of the total assistance that is provided to Age Pension, Carer Payment and Disability Support Pension recipients. Its focus is the balance between regular and one-off lump-sum and supplementary payments, and arrangements to improve flexibility and financial security for pensioners. It also considers ways in which the delivery of assistance could be simplified to reduce complexity for pension recipients.

1.3.4 Term of reference 3: Concessions and other entitlements

The third term of reference is discussed in Chapters 5 (Payment design and administration) and 6 (Concessions and services). Chapter 5 considers supplementary payments and Chapter 6 focuses on the role that concessions and services play in providing targeted and cost-effective support for those with high needs as a result of illness or disability.

Chapter 6 discusses concessions and services separately, reflecting the fact that they are different policy levers. In relation to concessions, it discusses issues around health care concessions, and the targeting and sustainability of the existing system of concession cards. In relation to services, it discusses the service delivery reform agenda being developed under the auspices of the Council of Australian Governments, and long-term funding and sustainability issues. It also discusses implications for informal care.

1.3.5 Sustainability and targeting

The Review found that it could not address its terms of reference adequately without considering the sustainability of the reform directions it has identified. Chapter 7 (Sustainability and targeting) discusses the longer-term sustainability of the reform directions identified for pensions. It examines the impact of the income and assets tests on adequacy for part-rate pensioners, issues around targeting, and incentives for people to save and participate in the labour market. Chapter 7 also considers eligibility rules for pensions, including the Age Pension age. In particular, it looks at the impact of changes in the Age Pension age on sustainability and retirement outcomes, and the interaction of the Age Pension with other elements of the retirement income system.

  1. These include the DVA Age Service Pension, Invalidity Service Pension and Income Support Supplement for war widows; as well as two closed FaHCSIA payments, Wife Pension and Widow B Pension; and Bereavement Allowance, which is a short-term pension payment.

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