Budget 2009-10 - Pension Review Report

3. Adequacy

Overview and findings

This chapter considers the central question for the Review: At what level should the full rate of pension be set?

In line with the Review’s view that the primary purpose of the Age Pension, Disability Support Pension and Carer Payment is basic income support, the Review’s approach to this question has been to test whether current rates of pension are providing a basic acceptable standard of living, accounting for prevailing community standards.

This chapter is concerned with the appropriate level of the rate of payment of the pension to those who are wholly reliant on it, without any assumptions about access to private means. Chapter 7 examines the situation of those with private means more fully.

To address the question ‘At what level should the full rate of pension be set?’, this chapter considers the underlying purpose of pension payments, the implications of this for the rate of payment, and how the diverse needs of the pensioner population can be best addressed.

It reviews a range of different measures of adequacy and outcomes, to consider both the adequacy of pension payments per se and the relativities between pensioners, in particular those living alone and those who are members of couples. This reflects the Review’s views that no single measure or benchmark could be used to determine whether or not the pension was adequate. It also considers the need for supplementary assistance for those with high housing costs in the private rental market.

The Review has developed a number of findings in relation to whether current rates of pension are providing a basic acceptable standard of living for all pensioners. These reflect the Review’s finding that there are significant aspects of the current structure and rates of pension that need reform to address the financial pressures that different groups of pensioners are facing.

While the pension population has diverse needs, including pressures arising from health and disability costs, the Review does not believe that, for those who are retired, or not currently expected to work because of disability or caring responsibilities, there should be different rates for the Age Pension, Disability Support Pension and Carer Payment.

Finding 1: The Review finds that the Age Pension, Disability Support Pension and Carer Payment should be paid at the same basic rate.

Finding 2: The Review finds that the specific costs associated with health and disability are best responded to by targeted services rather than generalised differences in base rates of payments or financial supplements. (Section 3.4.3)

Chapter 6 examines in more detail the concessions and services that might meet these needs.

The Review’s central finding in relation to whether current rates of pension are providing a basic acceptable standard of living for all pensioners is that the relativities between single and couple rates of payment need reform. In particular, the Review’s analysis indicated that the current relativities between single pensioners and pensioner couples do not adequately take into account the costs faced by singles living alone.

A policy question which arises from this is whether the current two-tier structure of paying singles and couples different rates should continue, or whether a three-tier structure (singles living alone, singles and couples) should be used.

Finding 3: The Review finds that, on the basis of its analysis of the outcomes achieved by pensioners, evidence provided in the consultations and its analysis of relative needs, the relativity of the rate of pension for single people living by themselves to that of couples is too low.

Finding 4: The Review finds that the case for a change in the relativity of the rate of pension for single pensioners living with others is less compelling. Such pensioners most frequently live with other relatives in owner-occupied housing and have outcomes more akin to couple pensioners than to other single pensioners. This suggests existing relativities are broadly adequate for these pensioners. However, the Review recognises that adding a third level of pension rate may introduce additional complexity.

Finding 5: The Review finds that a relativity in the range of 64 to 67 per cent across the package of support would be more appropriate than the current relativity. Adopting a relativity towards the upper end of this scale would appear to be reasonable if a three-tier approach were to be adopted. Under a two-tier approach, where the same relativity would be applied to single pensioners living alone and those living with others, a relativity at the lower end of this scale would more adequately reflect the average needs across both these groups. (Section 3.4.4)

The Review’s analysis of the total package of assistance provided to couple pensioners did not identify the same level of need as for single pensioners living alone.

Finding 6: The Review finds that, taking into account the totality of the package of the current pension base rates, supplements and the value of the Seniors Bonus, the rate of pension paid to couples appears to be adequate for those pensioners living in their own homes or public rental housing, and without unusually high costs of health or disability. (Section 3.4.5)

However, the Review’s analysis did identify an additional group for whom the current rates of total assistance do not appear to be providing a basic acceptable standard of living: pensioners who do not own their own homes and rent privately.

Finding 7: The Review finds that there is strong evidence that many pensioners in private rental housing face particularly high costs and have poor outcomes. Rent Assistance and social housing have complementary roles to play in addressing the financial security of these pensioners. The Review notes that the government has proposed an increased investment in social housing and considers that reforms to Rent Assistance would complement this. (Section 3.4.6)

3.1 Terms of reference

The first term of reference for the Review requires it to report on the ‘appropriate levels of income support and allowances including the base rate of the pension, with reference to the stated purpose of the payment’ in the context of measures that will ‘strengthen the financial security of carers and seniors’.

3.1.1 The purpose of payments

The pension system, as noted in Chapter 2, is one part of a wider tax–transfer system that seeks to meet a range of goals and objectives across the community. As discussed in the Review’s Background Paper, while individual payments do not have specific stated purposes with regard to adequacy, the broad approach to adequacy of pensions is to provide ‘a basic acceptable standard of living, accounting for prevailing community standards’. This recognises the role of the pension in providing basic and ongoing income support to a group of Australians who often need to rely on this support for an extended period at vulnerable points in their lives.

As indicated in the Background Paper, adequacy should not be contingent on a person having private resources to supplement this support. Further, reflecting this basic income role, the rate of the pension does not provide support at a level related to past earnings or in lieu of forgone earnings, and neither does it provide compensation for pain, suffering or loss of amenity. Rather, it is concerned with the level of income needed to sustain an appropriate standard of living. This is the question this chapter considers.

The question of the ‘appropriate level of income support’ for those pensioners with some private means is considered in Chapter 7.

There are also, as discussed in Chapter 2, a number of important interactions between pension rates and other aspects of the tax-transfer system, particularly between the Age Pension and the broader retirement income system, including superannuation. These links concern not only the issue of adequacy but incentives to move between payments and to participate in the labour market. These issues were raised in consultations and submissions, and are also being considered by the Australia’s Future Tax System Review Panel in detail.

The Review notes that the criteria and standards it has focused on to answer the question of the adequacy of these pensions are not necessarily the same as those that may be appropriate to determine the needs of people on other payments. While the question of the adequacy of the rates of other transfer payments is outside the Review’s terms of reference, the Review notes that for these there may also be other criteria that need to take account of their closer links with the labour market and the differences in the life-cycle trajectories of recipients. The Review similarly considers that adequacy of pensions does not provide a framework for questions of adequacy of the criteria for wage setting or other forms of remuneration and other related purposes.

The Review also notes, as indicated in the approach it has adopted to adequacy, that while concepts of an acceptable standard of living does have both absolute and relative dimensions, inevitably any determination is subjective and must be taken in the context of the outcomes of others in the society.

3.1.2 Adequacy and diversity of needs and circumstances

A significant challenge in considering the rate of the pension is posed by the diversity of circumstances of Australia’s pensioner population and the outcomes they achieve. Any particular level of payment will result in different outcomes for different individuals, even if they are in like circumstances, depending on different skills, capacities, priorities and aspirations. What is adequate for one person may well not be adequate for another.

Where people’s circumstances vary, more diverse outcomes will occur. Many factors may contribute to this. A person may have high health or support needs due to illness or disability; or their costs may vary depending on whether they are a home owner or renter, or on where they live. In addition, outcomes will vary in regard to the personal resources they have access to, whether these are their own skills, abilities and aspirations, financial assets or networks of support from family, friends and the community.

Therefore, even when considering the basic level of adequacy, striking a rate based on what an average or median person may require can result in many people experiencing inadequate outcomes, and others more than adequate.

In the abstract, there are three approaches for dealing with this:

setting the pension rate well above that required for most people so as to provide a buffer
developing a more personalised approach to the pension rate which takes account of individual circumstances, needs and outcomes
addressing special needs through the provision of services, especially where people have needs associated with health and disability.

The Review considers that the third of these approaches offers, in general, the best means of achieving appropriate outcomes for individuals, dealing with diversity, minimising system complexity and focusing expenditure on those with the highest needs. In some cases, however, it is also appropriate to use tailored payments such as Rent Assistance.

Setting a pension rate well above that which is necessary to achieve appropriate outcomes for the majority of pensioners would improve outcomes for all, but it would overcompensate many and undercompensate those with the highest needs and raise questions of equity and sustainability over the long term. It would need to be tested against other expenditure priorities, including the needs of other groups in the community, and the capacity and willingness of taxpayers to support it.

More personalised payment structures could involve multiple supplementary payments and variations in rates according to the characteristics and circumstances of an individual. Conceptually, this type of approach has some appeal. Elements of this type of approach currently feature in the pension system in payments such as Rent Assistance, Telephone Allowance, Utilities Allowance and Pharmaceutical Allowance. However, as discussed in Chapter 5, with the exception of Rent Assistance which has a very clear role in responding to the significant differences in housing costs experienced by private renters, the merits of this approach are limited, particularly if some components become quasi-universal. A more tailored approach would also add considerably to the complexity of the pension system and create higher transaction costs for pensioners. Having a range of payment rates based on different characteristics could also result in pensioners in substantially similar situations being paid at different rates because marginal differences led to their being categorised differently. Applying it flexibly may introduce inappropriate levels of discretion into public expenditures.

In proposing an approach to addressing variations in need through services rather than by cash transfers, the Review notes that it is important that pensioners with high needs are able to access the services they need. This issue is considered in Chapter 6.

3.2 What the consultations told us

The adequacy of the pension was discussed extensively in the consultations and was a major focus of written submissions and focus group discussions.

3.2.1 Consultations—financial security

The majority of submissions argued that the basic rate of the pension should be increased.

Many pensioners came forward with their personal stories about their recent experiences of living on Age Pension, Disability Support Pension or Carer Payment. These accounts included many reports of individuals ‘doing it tough’ and the challenges they faced in their day-to-day lives, whether because of their financial situation, their disability or their caring and other responsibilities. The Review heard stories of pensioners who have:

had to move into cheaper accommodation due to large rent increases, or sold the family home because of the costs of council rates and maintenance
not used heating systems during winter because of high utility costs, or had these services cut off because they were unable to pay bills
sold their cars because of the cost of registration, fuel and maintenance, but then found that due to poor public transport services they had become isolated from family and friends and faced difficulties in accessing health and other services
curtailed their discretionary spending on social activities such as travelling interstate to visit relatives, attending social events such as seeing a movie or eating at a restaurant
forgone comprehensive insurance of their car or home contents, or cancelled their private health insurance due to rising premiums
found it difficult to maintain a varied and balanced diet because of increases in the cost of fresh fruit and vegetables and meat
on being widowed and moving to a single rate of pension, struggled with continuing to maintain a home
deferred medical and dental care, or faced choosing which pharmaceutical prescriptions they would fill.

3.2.2 Consultations—adequacy of pensions and priorities for change

Overwhelmingly the consultations expressed a strong view that the government should increase spending on pensions, as well as provide greater support to carers and people with disability, and for retirees in general. Forty-seven per cent of submissions from individuals and 59 per cent from organisations called for the pension to be increased.

The consultations reflected a wide range of expectations as to what government should provide through the social security system and in support of retirement incomes. These expectations were often dependent on individual experience, age, duration on payment and family circumstances, including responsibilities such as caring.

While many pensioners clearly articulated the day-to-day problems they faced in meeting basic needs, especially when experiencing high rents, high health care costs or personal misfortune, there were equally strong calls from groups such as self-funded retirees and others with more significant resources who felt that the current system was inequitable or was penalising their efforts.

Reflecting these diverse expectations, there was little consensus on what the priorities should be. Indeed, there were two strong approaches articulated, both based on the grounds of fairness and equity, but reflecting quite different interpretations of what this means.

The first was that any additional government assistance should be directed at those with the least means and highest needs. Advocates of this approach often suggested that there was a case for funding such targeted support by redirecting assistance currently provided to those with higher means from the income support system and superannuation.
The second was that people who have contributed through the tax system over their working lives, or indeed in some cases through ongoing work, were entitled to the Age Pension as a ‘return on their contribution’.²

Some participants argued for the complete removal of means testing, a substantial increase in the ‘free’ area, modification of the treatment of some classes of assets, and non-assessment of foreign pension income. The issue of means testing is considered in Chapter 7.

3.2.3 Consultations—at what level should the pension be set?

There were many suggestions as to what the pension rate should be. While some simply suggested a dollar value increase, with roughly equal proportions suggesting an increase of $25 to $30 a week, $50 to $75 and over $100 a week, others suggested setting it relative to an external benchmark. Among the benchmarks suggested were maintaining the link to Male Total Average Weekly Earnings (MTAWE) but increasing the rate, for example to 35 per cent, using the minimum wage, the Henderson Poverty Line, or the Westpac–ASFA ‘Modest’ Retirement Standard. Others proposed a new benchmark usually based on a ‘budget standard’. Section 3.4.2 considers these types of approaches.

3.2.4 Consultations—groups with poor outcomes

In the consultations and submissions, a number of particular groups of pensioners were identified as having relatively poorer outcomes on a fairly consistent basis. These included single pensioners, private renters, those with high health costs or other cost pressures, and those who live in places with relatively high costs of living.

Single pensioners

The poorer circumstances of single pensioners who were living by themselves were cited widely in the consultations. A central theme in many submissions was that the current relativity between the payment rates for couples and single pensioners is inappropriate. The poorer outcomes for single pensioners were evident in analysis of the feedback from the focus groups.

A number of suggestions were made about the rate at which the single pension should be paid relative to the couple rate. The main view in written submissions was that the rate of payment to a single pensioner living alone is set too low relative to a member of a couple. This was a view stated in about 14 per cent of submissions from individuals and 28 per cent of submissions from organisations.

Proposed relativities for the single age pension rate varied, but were mainly around 65 to 75 per cent of the couple rate.
Some submissions argued, on the grounds of ‘fairness’, that pensioners should be paid the same individual rate regardless of their relationship status (about 7 per cent of written submissions from individuals and 15 per cent of submissions from organisations). One example was a suggestion that the couple rate be abolished completely, with all pensioners instead receiving a single rate set at the greater of either a 40 per cent MTAWE benchmark, or the Westpac–AFSA ‘Comfortable Lifestyle: Single Standard Rate’.

Private renters

The cost of private rent, and the stress it places on pensioner budgets, was cited in many submissions as being a priority area. A number of individual submissions outlined household budgets. Some single pensioners in metropolitan areas were paying rents of up to $220 a week which, even after Rent Assistance, left them with just over $100 a week for all other costs such as food, utilities, insurance and medical expenses.

Other submissions reported the pressure of rent increases, indicating cases of rents being raised by up to $60 a week over a year. Many private renters spoke of their insecurity, citing concerns about the affordability of future rent increases, or fears of their homes being sold. Pensioners discussed the affordability of moving costs should they be evicted, as well as their ability to find alternative accommodation within their price range and preferred area. Some pensioners discussed having moved from capital cities to towns where more affordable housing was available to reduce their housing costs. However, this sometimes meant that they had moved away from family and social networks, in turn leading to their having to pay more for transport and services which were once performed by family members or friends (for example, lawn-mowing, meals-on-wheels and taxis).

Health costs

Limits on the capacity of pensioners to meet health costs, or the consequences of health bills for household budgets, were among the most frequently mentioned items in the consultations. The concerns voiced covered the cost of pharmaceuticals, including the cost of items that were not part of the Pharmaceutical Benefits Scheme, as well as having to pay for a large number of Pharmaceutical Benefits Scheme items in a short time period; the costs of specialist fees; the travel, and at times accommodation, costs for people in regional areas to access hospital and specialist services that were concentrated in state capitals; dental costs; and the cost of health insurance.

While many in the community view health insurance as an optional expenditure to enable access to private health care, many pensioners saw it playing a more critical role in maintaining their health, or managing ongoing health concerns, by ensuring that they could access health services quickly and avoid the impact of ‘lumpy’ health care costs.

Numerous cases of individuals failing to fill all prescriptions or delaying health care because of the costs involved were cited. The question of health services and costs is considered in Chapter 6.

Other cost pressures

Additional areas of concern raised in the consultations included home maintenance, food prices and the cost of utilities, as well as more general trends in the prices of services provided by state governments and the impact of state government taxation. Transport and petrol costs were consistently raised during public consultations. Many pensioners reported that their mobility had been impaired due to the sharp rise in the cost of running a car, or increases in the cost of using public transport.

Many home owners spoke of an increasing inability to maintain their homes, citing difficulty in finding money to pay tradespeople to fix essential items such as leaking taps, faulty electrical wiring, heating systems, roofs and guttering. Some home owners also reported on the pressures they faced as a result of sharp rises in council rates, land taxes, or body corporate fees for their properties.

Household utilities such as electricity, gas and water were also mentioned, with many pensioners reporting the impact of rising prices. A number of representative organisations noted current costs and expressed concern that pensioners’ difficulty in paying for utilities may increase with the introduction of a Carbon Pollution Reduction Scheme in the future.

Disability Support Pension recipients and submissions from major organisations frequently mentioned that disability support pensioners had not benefited from the bonus payments received by Carer Payment and Age Pension pensioners.³ This was considered by them to be unfair because, despite the costs of disability many of these pensioners faced, they actually received less financial support than other pension recipients.

Costs of living in different locations

The experience of higher costs in some locations was raised in both the consultations and submissions. In addition to the cost of accessing medical and hospital services for people outside capital cities, the two main themes were high housing costs in some locations, and the higher cost of food and other essentials in regional centres. While housing costs were mainly identified as a matter of concern in capital cities, a smaller number of submissions identified specific regional cost pressures, in particular in those communities that have seen major expansion of mining and related industries.

3.2.5 Consultations—pensions and the broader income support system

As well as addressing the rate of the pension, many submissions indicated concern with the relativity of the rates at which the pensions under review were paid to the payment rates of allowances and other elements of the income support system. These concerns were raised both on grounds of equity and in the context of incentives. Some submissions drew to the Review’s attention that increases in allowances in real terms over the last decade have been minimal in comparison to increases in pension rates, increasing the disparity within the social support system.

The difference between pension and allowance levels led some to question whether social security payments were appropriately targeted to those with greatest need. Some pointed out that making pensions and their related benefits available to people with higher income would diminish the future sustainability of the system. Others expressed concern that the differences in rates created strong incentives for people to move onto a pension payment, even when other payments might be more appropriate. The relationship between the Age Pension and superannuation was also raised. These issues, as noted above, are being considered by the Australia’s Future Tax System Review Panel.

3.3 What the evidence shows

Much of the initial research conducted by the Review on the adequacy of the pensions has been presented in the Review’s Background Paper. Since the release of the Background Paper, additional analysis has focused on examining more closely the relative needs and outcomes of different groups of pensioners and on reviewing the analysis and proposals set forth in the consultations and submissions. The Reference Group was provided with the outcomes of analysis to obtain feedback and inform the ongoing work of the group. In reviewing the evidence, this section draws on both the already published analysis and more recent work.

This section outlines the results of analysis of:

the relationship of pension rates to a range of fixed and relative benchmarks
wellbeing outcomes for pensioners
the relative needs of single and couple pensioners.

As discussed in the Background Paper, the Review considers that there is no single benchmark or indicator that can be considered as providing an authoritative reference point as to what constitutes an adequate rate of pension. There are three reasons for this:

The adequacy, and even more so the appropriateness, of a rate of payment always involves balancing different objectives and various standards. Since judgements about living standards are relative and subjective, so is any question about the level of income that is needed to achieve an adequate or appropriate living standard.
At any one level of income, different people, even those in similar circumstances, will achieve different outcomes; hence, of itself the existence of some adverse outcomes or levels of dissatisfaction is not a sufficient indicator of lack of adequacy.
It is clear that different benchmarks, even when well constructed and justified, generate different estimates of what is adequate.

For these reasons the Review has sought to address this question by considering a diverse set of measures and the wide variety of views presented to it in the consultations, and to make findings in terms of the balance of these inputs.

3.3.1 The value of the pension

In addition to the basic rate of the pension, the pension payment received by pensioners may contain a number of components. As a result, the current pension for a single person may range from $293.93 a week (base rate, Utilities Allowance and Pharmaceutical Allowance) to $351.69 a week (including the higher rate of Telephone Allowance and Rent Assistance). When account is taken of the annualised value of the Seniors Bonus, these rates increase further to $361.31.

Pensioners may also receive other supplementary payments, including Carer Allowance, Pensioner Education Supplement and Mobility Allowance. Chapter 5 discusses the detailed components of pension payments.

As shown in Table 1, a ‘typical’ single age pensioner, with no private income, would have a total annual income of $15,923.00 and a couple $26,222.40⁴ that is, a single age pensioner receives 60.7 per cent of the pension package paid to a couple. This is slightly above the 59.9 per cent ratio of the base pension. Appendixes B, C and D provide further details on the rates of payment.

Table 1 Illustrative Age Pension rates, 1 January 2009
	Annual ($)		Weekly ($)
	Single	Couple (combined)	Single	Couple (combined)
Base Pension including 'Pension Supplement'	14,614.60	24,414.00	281.05	469.50
Pharmaceutical Allowance	156.00	156.00	3.00	3.00
Telephone Allowance	138.40	138.40	2.66	2.66
Utilities Allowance	514.00	514.00	9.88	9.88
Total 'statutory’	15,423.00	25,222.40	296.60	485.05
Seniors Bonus	500.00	1,000.00	9.62	19.23
Total	15,923.00	26,222.40	306.21	504.28

Notes: Higher rate of Telephone Allowance shown, lower rate is $92.00. Seniors Bonus as provided in 2008–09 Budget, weekly value based on 52 weeks.

3.3.2 Purchasing power of pensions

The value of pensions has increased over time as a result of the indexation of components, ad hoc adjustments and the provision of additional payments.

Using the Australian Bureau of Statistics Age Pensioner Analytical Cost of Living Index (ABS 2000, 2008a) as a measure of the impact of price change on the pensioner population indicates that the real value of the pension package received by a single age pensioner—that is, its purchasing power—has increased by 28.2 per cent over the past 20 years. Over the past 10 years the increase has been 19.1 per cent, and over the past five years 12.7 per cent (Table 2).

The increase in the value of pensions for couples is slightly lower because of the effect of the introduction of the Telephone Allowance, Pharmaceutical Allowance, and in particular the Utilities Allowance, which are paid at the same rate to both single people and couples.

Table 2 Real value of Age Pension
	Single	Couple
Value of pension (2008 $)
June 1988	12,054	20,092
June 1998	12,976	21,461
June 2003	13,715	22,717
June 2008	15,456	25,492
Growth to June 2008 (2008 $)
5 year	1,741	2,775
10 year	2,480	4,032
20 year	3,401	5,400
Growth to June 2008 (%)
5 year	12.7	12.2
10 year	19.1	18.8
20 year	28.2	26.9
Annualised growth rate to June 2008 (%)
5 year	2.4	2.3
10 year	1.8	1.7
20 year	1.3	1.2

Notes: June 2008 dollar values. Deflated by age pensioner Analytical Cost of Living Index.

Source: Price index – ABS 2000, 2008a

Similar results are obtained if alternative measures of price inflation, such as the Consumer Price Index, are used.

3.3.3 Value relative to earnings

Another approach to benchmarking is to consider the income that a pensioner receives relative to the earnings of an employed person. Because an employed person pays income tax,⁵ these comparisons are best undertaken on the basis of the net, take-home, income.

Three different net earnings measures were considered by the Review: the value of the pension relative to a full-time worker on the Federal Minimum Wage; relative to the net pay of the median (middle) full-time non-managerial employee (as derived from the ABS Survey of Employee Earnings and Hours (ABS 2007b); and relative to the net income of person who received an income equal to MTAWE. These are illustrated in Chart 4, along with the value of the pension package as a proportion of gross MTAWE.

Chart 4 Value of pension relative to earnings, 1984-2009

Notes: Single age pensioner. Calculations based on pension, earnings and taxation rates as at 1 January each year. Pension includes Seniors Bonus when paid. EEH = employee earnings and hours; MTAWE = Male Total Average Weekly Earnings.

Source: Review modelling using ABS 2007b, 2008b

In the medium term, the pension has largely maintained, or depending on the measure, improved its relativity with the take-home pay of Australian workers.

A single age pensioner (including allowances and bonuses, but excluding Rent Assistance) currently receives 61.8 per cent of the take-home earnings of a single worker on the minimum wage. This compares with 57.6 per cent in 1999 and 54.6 per cent a decade earlier.
The value of the pension has fallen slightly compared to the net earnings of a full-time adult non-managerial worker on median earnings over the past decade, but over the longer term it has risen. (In 2007 it was 36.6 per cent of these earnings, compared with 37.0 per cent in 1997⁶ and 35.6 per cent in 1987.)
The single rate of pension is equal to 35.1 per cent of the net after-tax earnings of a single worker on MTAWE. This is above the 33.6 per cent recorded in 1999 and 33.2 per cent in 1989.

3.3.4 Budget standards

Budget standards, as discussed in more detail in Section 3.4.2, involve costing a theoretical household budget. The Review has updated the Low Cost Budget Standards, which were developed by the Social Policy Research Centre, for six different Age Pension households. This low-cost budget is described as one that would, with careful management, ‘allow social and economic participation consistent with community standards and enable the individual to fulfil community expectations in the workplace, at home and in the community’ (Saunders et al. 1998).

As at December 2008 pensioner couples were above the stipulated budgets for all three tenure types of households. (Including the value of the Seniors Bonus, the range of adequacy was from 106.1 per cent for a private renter to 114.8 per cent for a home owner.) In contrast, single age pensioners had incomes below the budget standard, with the exception of the single public renter whose pension, again including the bonus, was just above the value of the budget (103.1 per cent). For a private renter, even with the inclusion of Rent Assistance, the value of their pension was only 91.0 per cent of the budget, and for a home owner it was 94.7 per cent.

Chart 5 Value of Age Pension relative to budget standard, December 2008

Notes: Calculation for private renter includes Rent Assistance

Source: Review analysis based on updating of Social Policy Research Centre budget standards.

Analysis of these budget standards over time indicates an increase in the adequacy of the pension against this benchmark. When these standards were initially released in March 1997, the pension for a single aged home owner was only 82.7 per cent of the ‘low-cost budget’, compared with the 94.7 per cent reported above. For an age pensioner couple who lived in their own home the rise over this period was from 99.5 per cent to 114.8 per cent.

3.3.5 Income poverty measures

Two measures of income poverty are often used in social analysis in Australia: the Henderson Poverty Line and the ‘50 per cent median income poverty line’. While the Review cautions that it considers neither of these to be a particularly robust measure of wellbeing, Chart 6 illustrates the value of pension relative to these two measures.

Chart 6 Value of Age Pension relative to Henderson Poverty Line and 50 per cent median poverty line, June 2008

Notes: Fifty per cent of 2005–06 median household disposable equivalised income updated by Full-Time Adult Ordinary Time Earnings

Source: Review analysis using: HPL – MIAESR 2008b; 50 per cent median – ABS 2007b, 2008b

The value of the 50 per cent median line and the Henderson Poverty Line are almost identical for single people at around $308 a week. The value of the pension and allowances for a single person is only 93.5 per cent of this, although this increases to 96.6 per cent when the value of the Seniors Bonus is taken into account. When account is also taken of Rent Assistance, the value of payments to an age pensioner rises to be 14 per cent above these poverty lines.
For couples the two measures produce different poverty lines—$437 a week using the Henderson Poverty Line and $463 a week for the 50 per cent median approach. These lines are below the basic value of the pension and allowances. When account is taken of the value of the Seniors Bonus, the package of assistance to a couple is 6.1 per cent above the 50 per cent median line and 12.4 per cent above the Henderson Poverty Line. If such a pensioner couple receives Rent Assistance then the total value of income support increases to be 17.0 per cent above the 50 per cent median line and 24.0 per cent above the Henderson Poverty Line.

As well as using these poverty lines as ‘benchmarks’, population-based analysis of the incidence of poverty can also been undertaken using household surveys. Review analysis of the ABS 2005–06 survey of income (ABS 2007c), as reported in the Background Paper, revealed a complex set of results which are highly dependent on the measures used. Using the simplest 50 per cent median poverty measure, poverty rates for the population as a whole and children have fallen slightly over the past decade, while those for the aged have increased. On the other hand, if a ‘real’ rather than ‘relative’ poverty line is used, an approach which considers whether or not there have been real increases in living standards of poor households, a very strong fall in poverty is seen, with the incidence for the population as a whole reducing from 9.1 per cent in 1994–95 to 3.8 per cent in 2005–06.

These simple measures, however, deal poorly with some resources available to households, including the high level of housing assets of older households and access to subsidised rents in public housing. When this is taken into account, the aged have low poverty rates. For example, if housing is ignored, the poverty rate for single people aged over 65 years in 2005–06 is estimated at 47.4 per cent, but when housing is taken into account this falls to just 7.0 per cent.

Such a diversity of estimates is common in ‘poverty rate’ analysis, given the variety of available measures and methods. For example, Whiteford (2008) found that estimates of poverty rates for single older people in the mid-1990s varied as little as 2.3 per cent (using the ‘half median and noncash social wage’ measure) to as much as 34.8 per cent (using a Henderson weekly measure).

3.3.6 International comparisons

Comparisons between Australian pensions and those in other countries are difficult because in most studies retirement incomes are analysed in terms of earnings replacement rates, which reflect the characteristics of the contributory schemes that are the basis of most overseas pensions.

Some more simple comparisons can be made of the relative value of social assistance on the basis of adjustments for the relative costs of living in different countries.⁷ These indicate that, in 2004, the Australian pension⁸ was towards the top of the middle band of countries in the OECD. While the single rate of pension was somewhat lower than the value of pensions paid in the Scandinavian countries and Canada, it was above that of other countries such as the United Kingdom, Germany, France and the United States. Given, as discussed in Section 3.3.8, that Australia is relatively less generous to single pensioners than to couples, these data would suggest that outcomes based on a comparison of the assistance provided to couples would be somewhat better.

Such comparisons are only indicative, since they do not take full account of the many national differences, including different ways of delivering health care, housing and other services which can affect the living standards and outcomes of pensioners.

3.3.7 Wellbeing outcomes

A different approach to measuring the adequacy of pensions is the actual levels of wellbeing reported and experienced by pensioners. The Review’s research into this had two objectives: to inform decisions on the overall wellbeing of pensioners and to identify who does most poorly under the current pension system.

Wellbeing can be measured in many ways. A number of these were considered by the Review drawing on data from the ABS and from the Household, Income and Labour Dynamics in Australia (HILDA) survey.⁹ The Review found two measures to be particularly informative. The first was the way in which pensioners themselves perceived their own level of wellbeing. The second was a measure that identified the extent to which particularly poor outcomes occurred among different populations. For this, the Review derived a measure of financial stress from the HILDA survey to identify the 5 per cent of the population with the most adverse outcomes.

This section also considers the results from the focus group research that was undertaken for the Review.

Wellbeing—reliance on pension income

Although many pensioners are wholly reliant on the pension for their income, others have private resources. These additional resources are reflected in wellbeing outcomes. As shown in Chart 7, when asked about their ‘level of prosperity’, pensioners who were more than 95 per cent reliant on the pension were much more likely than other pensioners to respond that they were ‘just getting along’ or ‘poor’. However, even in this highly dependent group many reported that their financial situation was ‘reasonably comfortable’.

Analysis of these responses shows however that the difference between the groups of pensioners was one of degree, and there was in fact a large amount of overlap between the groups, despite large differences in the extent to which they rely on government transfers.

Chart 7 Pensioners, self assessed prosperity by extent of reliance on pension, 2006

Notes: Age and related pensions, Carer Payment and Disability Support Pension. Reliance on pension is proportion of household income derived from transfer payments.

Source: Review analysis of HILDA Wave 6, MIAESR 2008a

These outcomes are, of course, not just a result of differences in income. They also reflect differences in wealth, including home ownership, and access to other resources such as family support, as well as differences in expectations.

Chart 8 Pensioners, incidence of adverse outcomes by reliance on transfers, 2006

Notes: Age and related pensions, Carer Payment and Disability Support Pension. Adverse outcome is the proportion with financial stress outcomes that place them in most stressed 5 per cent of the population. Reliance on pension is proportion of household income derived from transfer payments.

Source: Review analysis of HILDA Wave 6, MIAESR 2008a

Chart 8 shows the second approach, the relative incidence of adverse outcomes. As this measure is based on identifying the 5 per cent of Australians with the worst levels of financial stress, the chart shows the proportion of particular types of pensioners who are in this population with poor outcomes. (In this chart pensioners are classified by the extent to which the household they live in relies on income support payments.) Therefore, groups with rates of incidence above 5 per cent represent those with above average poor outcomes, and rates below show a better than average outcome. As the chart shows, those pensioners who rely almost entirely on the pension are twice as likely as the population as a whole to be in the group with very adverse outcomes. Pensioners in households with a lower reliance on transfer payments had levels of incidence below the average.

Wellbeing—pension type

Age and related pensioners report markedly higher levels of perceived wellbeing than other pensioner households (Chart 9).¹⁰ While Disability Support Pension and Carer Payment recipients were concentrated around the response ‘just getting along’, age pensioners most frequently described themselves as being ‘reasonably comfortable’.

Chart 9 Lower income pensioners, self assessed prosperity by type of pension, 2006

Notes: Age and related pensions, Carer Payment and Disability Support Pension in households where more than 50 per cent of income is derived from transfer payments.

Source: Review analysis of HILDA Wave 6, MIAESR 2008a

A complementary approach to perceptions of wellbeing is asking pensioners about their degree of satisfaction with their level of income. This was done in the focus group workshops conducted for the Review, where people were asked a series of questions about their satisfaction with the level of the pension, their standard of living, and how they ranked their standard of living compared with the rest of the community.

When asked about their level of satisfaction with the rate of pension, 23 per cent of pensioners expressed total dissatisfaction. In contrast, just 5 per cent said they were wholly satisfied. Overall, 46 per cent reported a degree of dissatisfaction, 43 per cent were neutral and 11 per cent reported a degree of satisfaction.

Using a nine-point scoring scale (with a value of five representing a person who was totally neutral, and scoring total dissatisfaction as one and total satisfaction as nine), lowest average scores were reported by recipients of Disability Support Pension (score of 2.9). Carer Payment recipients reported an average of 3.7, while the average for age pensioners was 4.1.
In response to a question about satisfaction with their standard of living, a slightly less negative response was reported. Thirty-eight per cent of the pensioners reported varying degrees of dissatisfaction, 39 per cent were broadly neutral and 23 per cent indicated degrees of satisfaction. Again, the average scores by payment showed the lowest level of satisfaction for Disability Support Pension, an average of 2.9. Carer Payment recipients were middle-ranked at 3.8, and Age Pension recipients reported an average of five—just on the mid-point of the scale.
Pensioners were also asked to compare their standard of living against the community as a whole. Here the central score of five indicates a standard of living ‘no different’ to others in the community. Nineteen per cent reported that their standard of living was ‘no different’ to others in the community, 23 per cent that it was better, and the remaining 58 per cent that it was poorer. However, only 10 per cent reported it as being ‘much worse’. Again the relative positions of disability support pensioners, Carer Payment recipients and age pensioners persisted.

More detailed analysis of these results again points to many other factors influencing these responses. Home owners, members of married couples and those on part-rate pensions all tended to have more positive assessments.

Chart 10 Pensioners, incidence of adverse outcomes by pension type and extent of reliance on the pension, 2006

Notes: Adverse outcome is the proportion with financial stress outcomes that place them in most stressed 5 per cent of the population. Reliance on pension is proportion of household income derived from transfer payments.

Source: Review analysis of HILDA Wave 6, MIAESR 2008a

Chart 10 combines analysis of adverse outcomes with the type and level of reliance on pensions. This shows that age pensioners, including those who have a high level of reliance on income support, have an incidence of poor outcomes below the overall population average. The rates of poor outcomes were higher for other types of pensioners. In particular, among Disability Support Pension recipients who were more than 90 per cent reliant on transfers, the rate was five times the average. However, even when these pensioners were in households with very low reliance on pensions, they still had levels of adverse outcomes over two and a half times those of the population as a whole. Other analysis suggests that the outcomes for disability support pensioners are associated with the younger age of this group and the direct impact of some disabilities on wellbeing and on the capacity to manage.

Wellbeing—living arrangements

Pensioners live in many types of households. While, as discussed in the Background Paper, it is difficult to obtain definitive data, household surveys indicate that most pensioners either live in a couple only household with their partner (42.9 per cent) or as single people living alone (25.0 per cent). The balance live in a wide variety of circumstances.

The wellbeing outcomes of pensioners vary with living arrangements. Chart 11 illustrates this for recipients of Disability Support Pension and Age Pension¹¹ for the three most common arrangements: living as a member of a couple-only household, as a single person household, or as a single person living with others. Again, the measure of very poor outcomes is used in this comparison.

Chart 11 Age and disability support pensioners, incidence of adverse outcomes by living arrangements, 2006

Notes: Adverse outcome is the proportion with financial stress outcomes that place them in most stressed 5 per cent of the population.

Source: Source: Review analysis of HILDA Wave 6, MIAESR 2008a

Chart 11 illustrates two key features:

As seen earlier, outcomes for disability support pensioners are considerably worse than for age pensioners.
Outcomes for single pensioners who live by themselves are much worse than for those who live with others. Indeed, the outcomes for single pensioners living with others are much the same, if not slightly better, than those recorded by members of couples.

This latter point provides strong support for the case put in many of the submissions that the outcomes for single pensioners living by themselves are markedly worse than for other groups of pensioners.

Wellbeing—housing tenure

Housing tenure was identified in the Background Paper and in consultations as an important determinant of outcomes. This is considered in Chart 12, which again uses the measure of the proportion of pensioners who are in the 5 per cent of the population with the most disadvantage as measured by financial stress.¹²

Two consistent features emerge from the chart and the more detailed analysis undertaken on the data. Outcomes for home owners are considerably better than for pensioners living in other tenures; and those in private rental housing who are paying higher rents (rents that are more than 30 per cent of income including Rent Assistance) have, on average, worse outcomes than those paying lower rents. This is particularly noticeable for single pensioners who rent privately. The proportion of these in the most disadvantaged 5 per cent of the population is double that of those in this group who are paying lower rents.

Chart 12 Couple-only and single person pensioners, incidence of adverse outcomes by tenure, 2006

Source: Review analysis of HILDA Wave 6, MIAESR 2008a

Less consistent outcomes are seen for pensioners living in public and community housing. Couples living in these tenures have a lower incidence of adverse outcomes than similar pensioners living in private rental housing, although for both groups these outcomes are much poorer than those of home owners. Among single pensioners this tenure is associated with even poorer outcomes than similar pensioners in high-cost private rental housing. It is probable that this result reflects the priority entry processes for public housing and as a result the group of lone people in this sector is more likely to face significant other disadvantages.

In the consultations, a concern raised by private renters was the rate of increases in rents over recent years. Analysis of the rents paid by recipients of Rent Assistance bear this out. Between June 2001 and June 2008, rents paid by these tenants increased by 40.8 per cent.¹³ This is considerably above the overall increase in the Consumer Price Index (CPI) of 23.0 per cent and in the CPI rental component of 27.5 per cent.

Summary

Examination of the wellbeing outcomes of pensioners provided the Review with some valuable insights into the question of the adequacy of the pension:

It identifies some marked concentrations of significant disadvantage among pensioners, including single pensioners living by themselves, disability support pensioners and pensioners renting privately and paying high rents.
At the same time, it clearly shows a diverse range of outcomes, even when pensioners have similar levels of resources. This clearly suggests that low income is not the only factor influencing outcomes.

For some groups of pensioners, results were largely positive. Age pensioners living in their own homes (the largest single group of pensioners) have low levels of poor outcomes, and couples in this group have the lowest levels. Even among those age pensioners who were almost wholly reliant on government support, the frequency of adverse outcomes was lower than the community average.
As with other analysis, it identifies a strong feeling of dissatisfaction with the rate of the pension, although some 42 per cent of pensioners in the focus groups considered that their standard of living was around the same, or better, than that of others in the community.

In drawing these conclusions, the Review noted that much of the analysis is based on data for 2005–06. Since that time, while pensioners have faced increased prices, the rate of the pension has also increased as a result of indexation and benchmarking and has been supplemented by an increase in the value of Utilities Allowance and the payment of bonuses.

The relative wellbeing of pensioners has also been studied in recent research by Saunders and Wong (2008). This used a wide range of different measures. It reported that among the pensioner groups it examined, age pensioners had better outcomes than disability support pensioners and other income support recipients. It then compared age pensioners with other groups and concluded:

A clear and consistent ranking of the living standard of these groups is provided by the deprivation-based indicators, and by the other objective and subjective indicators examined. On virtually all of the indicators, the self-funded retiree group has the highest standard of living, followed by veteran’s affairs pensioners, age pensioners and low-wage workers.

3.3.8 The relative needs of single and couple pensioners

The analysis of outcomes shows the important differences in the wellbeing of pensioners in different living arrangements. These differences, and in particular the relative needs of single pensioners which were also identified in the analysis of budget standards and poverty lines, are a key area of interest to the Review.

The single rate of pension is currently 61.1 per cent of the couple rate (taking into account allowances but not bonuses). In the case of private renters receiving Rent Assistance it is 65.5 per cent, as Rent Assistance is paid at almost the same rate to couples ($51.90 a week) as to singles ($55.10 a week).¹⁴

The living costs of individuals vary with their living arrangements. In particular, when people live together there are opportunities for some items of expenditure to be shared and for economies of scale. The Review undertook extensive analysis to estimate the value of these economies.

Relative needs—single person and couple-only households

The main analysis focused on a comparison of couples living together by themselves compared to singles living alone. Together these two groups account for 68 per cent of all pensioners and 77 per cent of age pensioners. The relative position of single pensioners sharing with others is considered separately below.

The Review considered a range of different methodologies for estimating the relative needs of couples and singles. Econometric estimates were derived using three different approaches.¹⁵ All of these approaches sought to derive the level of income at which the different household types (single and couple) could be said to be in basically equal circumstances.

The first relies on a well-established statistical relationship between household spending on food, level of income and composition to identify where households of different compositions have a similar relationship between these factors.
The second matches households with different compositions on the basis of how much they spend on items that are specific to only one person (for example, the amount of money spent on women’s clothing in couple households and by single women). It then compares the levels of income of these households to establish a ratio of the relative amount they need to achieve this equal level of spending.
The third uses a similar approach, but rather than looking at spending on particular items, it matches households on the basis of an outcome such as a level of financial stress. Again, the ratio of incomes for households with different compositions but the same level of outcome provides the estimate of equivalence.

In all cases additional statistical techniques were used to avoid bias because of age and other factors that also influence outcomes, and different models were developed and tested to best estimate the relative level of resources available to households and to control for limitations in the data. In addition, the Review used the relative estimated budgets for single and couple households from its updated budget standards analysis as the basis for a further series of estimates of relative needs.

Chart 13 Estimates of the income needs of older single person households relative to older couple-only households

Notes:

‘Female clothing expenditure’—A Rothbarth type estimate based on expenditure on women’s clothing (i)
‘Financial stress’—An outcome-based estimate which utilises the rate of incidence of financial stress as the independent variable (ii).
‘Expenditure food share’ and ‘Trimmed food share’—Engel estimates using the proportion of food expenditure by older home owner households, the first using raw estimates and the second using a more restricted sample to remove outlying observations (i).
‘Budget standard—home owner’ and ‘Budget standard—SHA’—Two estimates using the basic household budget standard. The first compares singles and couples who are home owners, the second those who are renting public housing from a State Housing Authority (iii).

Sources: Review analysis using (i) ABS 2003-04; (ii) HILDA Wave 6, MIAESR 2008a; (iii) updated budget standards.

Six of these approaches are illustrated in Chart 13. While the analysis of these diverse approaches points to the existence of significant economies of scale, there is much variation in the estimates of magnitude.

Three of these estimates are considered to be particularly useful: the financial stress estimate, the expenditure food share, and the budget standard for home owners. These measures estimate the costs of a single person household relative to those of a couple household at 69.1 per cent, 63.6 per cent and 72.7 per cent respectively.

The geometric mean¹⁶ of these three estimates is 68.4 per cent. While these are considered to be the more robust estimates, it is noted that the majority of other estimates derived in the Review’s analysis tend to be lower. Taking the full range of equivalences shown in Chart 13, the geometric mean is 66.2 per cent and the median 65.4 per cent.

The Review’s analysis has also been complemented by some recent estimates of equivalence scales for age pensioners produced by the Social Policy Research Centre (Bradbury 2009b). The results of this analysis range from 62.5 per cent to 75.8 per cent; the author proposes a preferred value of 68.5 per cent.

A further perspective on the possible relative needs of single people and couples can be obtained from the rates of income support paid in other countries. The analysis of comparative equivalences in other countries’ income support systems presented in the Background Paper has also been extended to now incorporate 13 major OECD countries. Across these, the ratio of single to couple rates of assistance varies from 56 per cent in Sweden to 75 per cent in Belgium. The median rate is 65.2 per cent and the geometric mean is 64.4 per cent.

Chart 14 Payment to single pensioner relative to combined couple, selected OECD countries, early to mid 2000s

Notes: For most countries the data is for social assistance systems to the aged; the ratios in social insurance systems that also include an earnings-related component can vary significantly. Data was not available for all OECD countries.

Sources: Derived from SSA 2006a, 2006b, 2007.

Relative need—single pensioners living with others

Many pensioners who are paid at the single rate because they are not living with a partner, live with other people. This includes just over half of single rate disability support pensioners, 30 per cent of single rate age pensioners and most single rate Carer Payment recipients.

The living arrangements of these pensioners vary. For the 55.4 per cent of this group who live with just one other person, the most common arrangement for an age pensioner is living with a (usually adult) child (69.8 per cent). This is followed by 18.2 per cent who are living with a non-related person, 5.7 per cent who live with a sibling, and 4.4 per cent living in the same dwelling as their ex-spouse. Among single people on Carer Payment, 63.7 per cent are living with a parent, who in most cases is likely to be the recipient of care, and the balance is split between those living with a child and those living with an unrelated person. Sharing arrangements of those single Disability Support Pension recipients living with one other person are more diverse. Around 40 per cent are living with a parent and almost 30 per cent with a child. The balance is split mainly between those living with a sibling or with an unrelated person.

The living arrangements of the 27.4 per cent of these pensioners who are living in three-person households are largely similar. Most of the single age pensioners are sharing with their adult children (including children-in-law). Carer Payment recipients are living with their parents, or a parent and sibling, and disability support pensioners are living with their parents.

Although it can be expected that the costs of living of these pensioners are not the same as those of a member of a couple, equally they do benefit from some economies of scale from being members of a larger household that can share certain fixed costs. Hence, they do not face the full costs of a single pensioner living alone.

Because of the problems of differentiating individual costs within households, econometric analysis was not attempted to estimate the relative needs of couples and single people in more complex living arrangements.

However, it is possible to gain a general insight by using the wellbeing data discussed in the previous section. As shown in Chart 11, single pensioners who live with others have outcomes more akin to couples and better than single pensioners living by themselves. This suggests that the current single–couple relativities in the pension system, while not appropriate for singles living alone, could be close to the equivalence required to ensure that single pensioners who are living with others are able to achieve similar levels of wellbeing to couple-only pensioner households.

Relative needs—pensioners with children

Some 17.8 per cent of Carer Payment recipients, 5.9 per cent of disability support pensioners and 2.5 per cent of age pensioners receive family payments. With the exception of some submissions concerning grandparent carers, there was little put to the Review on the circumstances of these families.

The provision of support for families, including those on pensions, is primarily through the Family Tax Benefit. This payment, which has increased substantially over recent years, is outside the terms of reference of the Review.

The cost of children was considered in research undertaken for the Ministerial Taskforce on Child Support (Henman et al. 2007). This provided two estimates of the range of costs: $45 to $121 in research based on actual expenditure and $94 to $129 using theoretical budgets. These were not inconsistent with the levels of support provided to families.

The Review notes that the Australia’s Future Tax System Review Panel will be considering aspects of payments to families.

Summary of relative needs

Currently the ‘package’ of assistance paid to a single pensioner relative to a pensioner couple is 61.1 per cent for those not receiving Rent Assistance, rising to 65.5 per cent where the maximum rate of Rent Assistance is paid. Analysis drawing on a range of different approaches suggests that this rate of payment for single pensioners living alone relative to the rate for couple-only pensioner households is too low. While there is considerable variation in the estimates of the relative cost of living a range of 64 to 67 per cent appears reasonable. ¹⁷

In contrast, the current relativity to the couple rate appears to be appropriate for those single pensioners who live with others.

3.4 Reform directions

Consultations and analysis conducted by the Review indicate that there is a need for reform of the Australian pension system to enable it to provide adequate support to Australia’s 3.3 million age, disability, carer and related pensioners being considered by the Review.

The consultations highlighted a strong belief by many pensioners that they both required and deserved higher levels of support. This was a recurrent theme in many of the submissions.

The Review’s approach, as outlined in the Background Paper and presented above, has been to consider a range of measures to judge whether current pension payments are adequate. This reflects the Review’s analysis, which indicates that no one benchmark or measure can definitively settle a level of payment that provides a basic acceptable standard of living.

Analysis undertaken by the Review noted a wide diversity of outcomes. However, the net result of the analysis has been to identify particular groups who have considerably worse outcomes than others.

These issues are considered below. The discussion initially considers the wider implications of reform; specific proposals for standards-based approaches to the determination of the pension rate; and relative need and types of pension. This is followed by consideration of the relativity of the rates of payment between single pensioners and couples; the assessment of the current rate; and the adequacy of support for those who rent privately.

3.4.1 Implications of reform

Varying the rate of the pension by even one dollar a week is expensive. As discussed in Chapter 2, consideration of these costs is important to ensuring the robustness of the pension system over time and hence its capacity to deliver financial security to pensioners.

While the cost of any change in rates is dependent on how it is structured, a broad estimate of the cost of increasing the rate of payment of the pension to single pensioners by $10 a week is around $785 million a year. Increasing the rate of payment to each member of a couple by the same amount would cost an additional $855 million a year.

While the short-run costs are considerable, the ageing of the population will result in the cost growing over time. Treasury modelling indicates, in the absence of other policy changes such as increased targeting over time, that the budget cost of a given pension increase as a proportion of GDP will double by 2050. Funding these increases will require reduced spending elsewhere, increased taxes, or a combination of both. There are therefore possible opportunity costs that arise, including reduced capacity to invest in competing public goods that may otherwise benefit directly or indirectly pensioners and other sections of the population, or higher taxes.

These costs underline the need, especially in the current fiscal environment, to ensure that any increase in the pension rate is well targeted, both in the sense that any increases are directed to those in most financial need and in the sense that the increases address areas where the pension is clearly failing to achieve its purpose of providing a basic acceptable standard of living accounting for prevailing community standards.

Chapter 7 examines the question of the appropriate level of income support for pensioners with some private means. The reform directions identified in this section are focused on the adequacy of the pension for those who are wholly reliant on the pension.

3.4.2 Setting rates—budget standards and tribunal approaches

A number of submissions proposed the adoption of an existing measure, such as the Westpac–ASFA Retirement Standard or the Henderson Poverty Line, or the development of a new measure of adequacy, as a reference point for pension setting. In most cases these proposed the use of a ‘budget standard’ such as that used in Section 3.3.4. Budget standards involve the creation of a detailed household budget that itemises all goods and services a household is considered to need to achieve a particular lifestyle.

While budget standards have a strong intuitive appeal, experience in Australia and overseas is that they cannot provide an objective measure of need. The underlying budgets are normative, and make strong assumptions about detailed aspects of people’s lives. They are highly dependent on the value judgements of the people involved in establishing them and totally inflexible with regard to the diverse lifestyles of Australians and the day-to-day trade-offs people make in their lives. They are also highly sensitive to assumptions around the longevity of capital items and how they are purchased and maintained. The Review considered that this approach does not provide an effective basis for determining pension rates.¹⁸

The Review similarly considered that a range of other benchmarking approaches, such as the use of various poverty lines, all have limitations that preclude their use. These limitations include the arbitrary nature of relative income measures, their sensitivity to assumptions around equivalence scales and the treatment of housing and other non-cash benefits that are so important to outcomes.

A second approach that was suggested in submissions is to establish an independent commission to set pensions and other income support payments. Proponents of this approach cited as examples the role played by bodies such as the Commonwealth Remuneration Tribunal and the Australian Fair Pay Commission.

This approach is not favoured. The Review considers that decisions on the level of support the nation is willing to provide to those with limited or no means, including pensioners, are most appropriately made by the Australian Government and Parliament as the elected representatives of the Australian people, rather than being a function that can, or should, be delegated. In this regard the analogies with the Commonwealth Remuneration Tribunal and the Australian Fair Pay Commission are not considered to be robust. In the case of the Remuneration Tribunal, the purpose of having an independent tribunal is to remove the conflict of interest that would result from parliamentarians determining their own rates of pay and to preserve a clear division of powers in setting remuneration for judicial offices. The commission, and in future the Minimum Wages Panel of Fair Work Australia, determines a minimum wage which is primarily paid by private sector employers, in clear contrast to the use of public money and political accountability involved in setting the rate of the pension.

3.4.3 Adequacy and pension type

The Review is concerned with three main pensions: the Age Pension, the Disability Support Pension and the Carer Payment. While these are paid at the same base rate, over recent years, with the exception of the 2008 Economic Security Strategy payment, they have been treated differently with regard to the payment of bonuses. For example, in the 2008–09 Budget, while a Seniors Bonus of $500 was paid to recipients of the Age Pension, veterans pensions, Widow B Pension and a number of other related payments, and a Carer Bonus of $1,000 was paid to Carer Payment recipients, no payments were made to those on Disability Support Pension.

While some submissions argued for the recipients of particular pensions to be paid at a higher rate than others, this approach is not supported.

The case for such differentiation, while presented in many different ways, usually centred on three main arguments:

The first, in particular in the case of people in receipt of Disability Support Pension, was that of the additional costs associated with disability.
The second, in the case of Carer Payment, was that the payment should provide some compensation either for forgone income, as a premium reflecting the saving to the public purse from the non-provision of residential care to the recipient of care, or to cover the costs of care.
The third was that the Age Pension should reflect a recognition of the contribution these pensioners had made during their working lives.

Conceptually these contain two grounds of argument. The first is that particular groups of pensioners systematically and consistently face costs that others do not. The second is that some groups of pensioners should be provided with a higher rate of assistance in recognition of what they have done in the past or are currently doing.

While it is recognised that many individual pensioners face higher needs and possible costs because of disability, the Review did not consider that this was an issue that is appropriately responded to by setting the rate of any one pension on this basis. There are two reasons for this:

Such needs are distributed across pensioners on every type of pension. The research presented in the Background Paper shows, for example, that over half of all income support recipients with a core disability were on the Age Pension. Similarly, carers can be on one of a number of payments and the costs of care are in large part functions of the disability of the person being cared for.
As discussed in Section 3.1.2, these variations in need are considered best met through the provision of targeted and appropriate services. Chapter 6 explores this further.

The other grounds for differentiation are those associated with concepts of compensation or reward. This is also rejected. As discussed in Chapter 2, the Review considers the current fundamental goal of the pension system—providing income support to enable those eligible for pensions to achieve a basic but appropriate standard of living—remains sound. Paying ‘premiums’ to selected pensioners on the basis of their opportunity costs or some recognition of the public good would represent a fundamental shift in the principle of pensions as a safety net.

The Review notes that Carer Allowance is paid in recognition of the caring role, and that the consultations indicated that this payment is often used as a means of funding services associated with the needs of the person who is being cared for. Further discussion of this payment is in Chapters 5 and 6.

Finding 1: The Review finds that the Age Pension, Disability Support Pension and Carer Payment should be paid at the same basic rate.

3.4.4 Relativity of payments to single people and couples

Both the weight of submissions and the analysis undertaken by the Review suggest that the current relativities between the single and couple rates of pension do not fully take account of the costs of a single person living by themselves, relative to a couple in a similar situation.

As indicated above, the analysis undertaken by the Review shows that the relativities are higher than currently provided for in the pension rate, but does not point to a single figure at which the rate should be set. Rather, a range of relativities from 64 per cent to 67 per cent was identified. The balance of views presented in submissions and consultations tended towards the upper end of this band.

At the same time, the Review notes that a significant proportion of single pensioners were not living alone but sharing accommodation, and often other costs, with other people. The analysis undertaken by the Review indicates that wellbeing outcomes for this group are similar to those living in couples, suggesting that this group does not face the same financial pressures as single pensioners living alone.

One option would be to introduce a differential rate of payment for those single people who live by themselves to recognise the unique costs of this arrangement, and to set this at the higher rate while maintaining the current relativity for those living with others. This would result in a three-tier payment system. The other option would be to pay the higher single rate to all singles.

Both approaches have the potential to create some adverse incentives and administrative complexity:

Under a three-tier system, the higher rate of payment to a single person living alone may be seen as an inducement to those single pensioners living with others to change their housing arrangements. Concern has been expressed that this may result in negative outcomes by reducing the extent of these living arrangements and the benefits of companionship and social integration that they offer. The likelihood of this is considered to be small. The extent of the differential is such that it is unlikely to represent a significant incentive, and as most single pensioners living with others are living with members of their families, it is probable that the wider range of considerations of intra-family relationships and support would prove to be the dominant factor.
Under a two-tier system, with a higher rate for singles, there would be a considerably higher payment to a household comprising two single pensioners compared to a couple in a marriage-like relationship.¹⁹ The risk associated with this is that this difference may create an incentive for the misstatement of the type of living arrangement or for the termination of the relationship. While the financial effects of this may be ameliorated by compliance activities, these can be intrusive and add to the complexity of the system.
By setting three different rates, with the relativities set appropriately to match the differences in living costs, a structure of payment would be established that was neutral to the choices people made, creating neither incentives nor disincentives to any particular living arrangement. This approach would need to be weighed against the complexity an additional classification would introduce.

3.4.5 The base rate of pension, supplements and bonuses

As has been emphasised in the introduction and analysis presented in this chapter, a critical difficulty in determining an appropriate base level of the pension to ensure a basic acceptable standard of living, accounting for prevailing community standards, is the diversity of outcomes achieved by pensioners, even when they have an equal level of resources.

Achieving a rate of payment that balances the goal of meeting the needs of the ‘average’ pensioner with the goal of protecting those in more disadvantageous positions is the central challenge.

As was highlighted in a range of submissions, the answer is not independent of the level of support and other services available to pensioners. Indeed the evidence is that very often the costs that generate financial difficulties for some pensioners are those associated with health care and related services. Further, as noted above, the Review does not consider that any single indicator or measure provides a basis for determining the adequacy of the rate of the pension.

The base pension rate for couples

While there is a clear and consistent case for increasing the rate of assistance for single pensioners living alone relative to other pensioners, this is not the case with regard to the level of assistance to be provided to couples.

While many submissions to the Review from couples reported adverse outcomes and proposed an increase in the rate of payment, the strength of these views was weaker than those expressed with regard to single pensioners, whose concerns were generally centred around other issues such as the operation of means testing. Analysis of wellbeing outcomes tends to support this. Under some measures, the level of wellbeing reported by pensioner couples, even those reliant on transfer payments, was comparable with overall community outcomes.

Benchmarking the couple rate against budget standards and poverty lines similarly points to a base level of adequacy once account is taken of the full pension package. Analysis of trends in the real value of the pension and its value relative to the take-home pay of employed workers clearly indicates that pensioners have had an increased level of purchasing power, and, in general, have maintained, or in some cases improved, their relative level of income compared to the take-home income of employees.

In undertaking this analysis the Review noted that over recent years, as well as the impact of indexation and benchmarking of the pension and compensation for the introduction of the goods and services tax (GST), the effective rate of the pension has been enhanced by the introduction and increase in value of the Utilities Allowance and the payment, on an ad hoc basis to some, but not all, pensioners of an annual bonus. The current value of the 2008–09 Seniors Bonus and Utilities Allowance for a couple is $1,514 a year, or almost $30 a week.

On balance, it is considered that the current package of assistance, including the amount of the Seniors Bonus as provided in the 2008–09 Budget, provides couple pensioners who are living in their own homes, or accessing public housing, and who do not face disproportionate costs associated with health and disability, with a basic, acceptable standard of living.

The package of assistance to disability support pensioners has been below this rate because, with the exception of the 2008 Economic Security Strategy payment, bonuses had only previously been paid to seniors or carers. The rationale for this is weak and a common rate should be applied across payments.

The issues of the cost of health and related services are discussed in Chapter 6 and housing in Section 3.4.6 below.

3.4.6 Housing costs

It is clear from the submissions and the analysis undertaken by the Review that a key pressure faced by some pensioners is the high rent they are paying in the private rental market. While the higher costs encountered by many private renters is acknowledged through the payment of Rent Assistance, the evidence suggests that the rate of this support has been outstripped by price increases in the rental market. Moreover, as discussed further in Chapter 4, the payment has become less effectively targeted as a result of the way in which it has been indexed.

The magnitude of these impacts is significant. If Rent Assistance had been indexed by the changes in actual rents paid by Rent Assistance recipients between 2001 and 2008, rather than by the CPI, it would be some $8.00 a week higher than it currently is. Noting that the last major adjustments to Rent Assistance occurred in the context of the GST changes in 2000, this suggests that the gap over this longer period is more likely to be around $9.00 to $10.00 a week.

In addition to the cost of rent, housing security is a key issue for the financial security of pensioners. Private renters face uncertainty about their future rent costs and security of tenure. Costs of moving and establishing tenancies can be high, and moving house often brings with it disruption to networks and dislocation from familiar neighbourhoods.

Social housing, through the community sector and State Housing Authorities, provides both security of tenure for those with an ongoing need and rent setting policies that ensure affordability. Enhanced options for more affordable housing are being developed as a consequence of other Australian Government initiatives, including the Affordable Housing Strategy and the proposed $6 billion investment in social housing being undertaken as part of the government’s Nation Building and Jobs Plan.

Currently it is estimated that 6 per cent of age pensioners live in public housing and 11 per cent receive Rent Assistance. For disability support pensioners, the proportions are 18 per cent and 27 per cent and for carers 15 per cent and 21 per cent .

Within budget constraints, this is an area where a careful balance of responses is called for. While increasing Rent Assistance would have some impact in relieving the direct and immediate costs faced by some pensioners in the shorter term, the alternative of investment in social housing would provide a less immediate response but generate long-term secure housing. Chapter 5 considers targeting issues for Rent Assistance to improve its effectiveness.

Another issue raised in consultations was the cost of maintaining a home. These costs, and the adverse consequences of failing to respond to maintenance needs, were most acutely reported by older women, in particular widows living in older homes who had traditionally relied on their partners for household maintenance. There is no single solution to this. From one perspective, any additional support can be seen as simply funding the maintenance of a very valuable asset that is exempt from means testing. From another, these needs can have a considerable negative impact on the wellbeing of pensioners.

There is also a need to consider the impact of transaction costs on people seeking to move into housing that is more appropriate to their needs, where stronger community and family support can also play an important role. The means test, considered in detail in Chapter 7, has provisions that may have an impact on decisions to move out of or ‘down-shift’ an owner-occupied home.

In a number of the submissions that argued this case, reference was made to individuals having made payments into the National Welfare Fund and a belief that these were in effect a prepayment of a future entitlement to a pension. This interpretation is not correct. In a review of social security funding, Stanton and Dapré (1995, p. 28) conclude: ‘There was however no link (intended or actual) between individual’s contributions paid into the fund and any subsequent entitlements they might have to a social security payment. In other words, the National Welfare Fund and the social services contribution did not, in any way, constitute a move towards funding social security in Australia along social insurance lines’.
The consultations were conducted before the government’s Economic Security Strategy was announced in October 2008, which included bonuses for disability support pensioners for the first time.
These amounts exclude the value of the 2008 Economic Security Strategy.
While the pension is taxable income, given the structure of tax rates and rebates, a person wholly reliant on the pension is not subject to a net tax liability. The interaction between pensions, private income and taxation are considered in Chapter 7.
In contrast to the other earnings measures, median earnings are only available every second year.
These comparisons are made using ‘purchasing power parity’, which is based on the comparative cost of a basket of goods and services in different countries. Because they are based on the population overall, they may not accurately reflect the specific relative parity of particular groups, such as pensioners.
In this analysis the Age Pension is compared with ‘social assistance to the aged’. These are the payments made to those who may not be eligible for an earnings-related scheme. Data derived from OECD 2007 and SSA 2006a, 2006b, 2007.
HILDA is a longitudinal household survey conducted by the Melbourne Institute on behalf of the Department of Families, Housing, Community Services and Indigenous Affairs. Further information is available at <http://www.melbourneinstitute.com/hilda>.
Results presented here are mainly drawn from Wave 6 which was collected in late 2006. As HILDA is a sample survey results are subject to sampling error.
To reduce some of the interactions between pension type and levels of non-pension income, the data have been limited to those who are mainly reliant on transfers.
Data for recipients of Carer Payment are not included due to the small size of this group and thus the difficulty in obtaining robust estimates from household surveys.
Only single person and couple households are shown as it is difficult to determine tenure in more complex household arrangements.
This index was based on the rents paid by both pensioners and allowees who received Rent Assistance, but excluded those families who received Rent Assistance as a result of eligibility for Family Tax Benefit alone.
The only analysis of equivalences for households by tenure undertaken by the Review was based on the budget standards. This generates an equivalence for a single privately renting age pensioner of 75.2 per cent of the couple rate. This differs only slightly different from the 72.3 per cent for home owners.
The approaches used in this analysis were:
- ‘Engel’ scales, which are based on the share of household expenditure that is allocated to food
- ‘Rothbarth’ scales, which use expenditure on individual goods
- outcome equivalent measures, which consider the relative resources used by households of different compositions to achieve similar levels of wellbeing utilising measures of financial stress, hardship and satisfaction with financial circumstances.
The geometric mean is a preferred way of calculating an average to obtain a measure of central tendency.
This in effect encompasses the range from the geometric mean of the relative rates of payment in OECD countries of 64.4 per cent to the geometric mean of the main equivalences of 66.2 per cent.
Budget standards have similarly been rejected in the United Kingdom as a means to define a minimum income standard (Deeming 2005). The Department for Work and Pensions (2003) concluded that: ‘Despite a wide range of research into budget standards, there is no simple answer to the question of what level of income is adequate. Different research methods tend to make different assumptions that are essentially subjective. Even methods that purport to define the cost of a “scientifically determined diet” in effect have to make a number of subjective assumptions about needs. This can produce inconsistent answers to the same questions.’
If the relativity of the single to couple rate were set at two-thirds, a household with two single pensioners would receive 33.3 per cent more income than if the two pensioners were members of a couple within the scope of a ‘marriage-like relationship’. This is over a 50 per cent increase on the current differential of 21.4 per cent in the total package of assistance, including the Senior's Bonus.

[ top ]