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1. Background

1.1 Scope of the review

1.2 Income support in Australia

1.1 Scope of the review

The Minister for Families, Housing, Community Services and Indigenous Affairs has asked the Secretary of FaHCSIA, Dr Jeff Harmer, to complete an investigation into measures that might be adopted to strengthen the financial security of seniors, carers and people with disability, and to report by 28 February 2009 on the:

In addition, the Pension Review will inform the inquiry into Australia's Future Tax System through Dr Harmer's membership of the tax review panel. The inquiry has the broader role of reporting on 'improvements to the tax and transfer system for individuals and working families, including those for retirees'.

This discussion paper has three sections:

While the focus of the Pension Review is on Age Pension, Carer Payment and Disability Support Pension, information is provided at various points on the income support system as a whole to recognise the flow-on issues for other payments.

There are many linkages between Age Pension, Carer Payment and Disability Support Pension and the broader income support system:


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1.2 Income support in Australia

In 2006–07, Australian Government expenditure on the transfer system was $71.6 billion, or around 6.8 per cent of Gross Domestic Product (GDP). The largest program of expenditure was assistance for the aged at $26.1 billion.

Around 4.6 million Australians receive a pension or an allowance from the Australian Government as income support. Many more receive cash transfer payments for their families through the FTB, or may be eligible for concession cards or other assistance.

While for some these transfers supplement their own income from employment or savings, for others their pension or allowance is the sole source of income. Obviously, the settings and rates for income support are very important for people largely or wholly reliant on the system, particularly when they also have long durations on income support.

FaHCSIA, the Department of Education, Employment and Workplace Relations (DEEWR) and DVA are each responsible for a number of payments. These are mainly delivered through Centrelink, part of the Human Services portfolio, and DVA.

The largest payment is the Age Pension, which around two million older Australians receive, followed by the Disability Support Pension, with more than 700,000 recipients. While 3.5 million people receive payments classified as pensions, one million receive payments classified as allowances. Table 1 outlines the numbers of people receiving payments, and more information on payments is available in Section 1.2.3 and at Appendices A, B, C and D.

Table 1. Income support and other payment recipients, June 2007
Payments Male Female Total
Pensions      
Age Pension 815,900 1,136,800 1,952,700
Disability Support Pension 413,400 300,800 714,200
Parenting Payment Single 26,000 369,500 395,500
Carer Payment 38,100 78,500 116,600
Wife Pension 0 35,300 35,300
Widow B Pension 0 700 700
Bereavement Allowance 100 500 600
Service Pension 112,600 98,000 210,600
DVA Income Support Supplement 100 84,400 84,500
  1,406,200 2,104,500 3,510,700
Allowances      
Newstart Allowance 262,700 155,100 417,800
Youth Allowance—Full-time study 119,000 144,300 263,300
Youth Allowance—Other 34,600 34,100 68,700
Parenting Payment Partnered 12,700 131,700 144,400
Widow Allowance 0 40,200 40,200
Partner Allowance 4,600 41,400 46,000
Austudy 15,100 13,200 28,300
Abstudy 15,900 18,200 34,100
Exceptional Circumstances Relief Payment 23,000 5,600 28,600
Sickness Allowance 4,800 2,800 7,600
Special Benefit 3,100 3,100 6,200
Mature Age Allowance 5,000 0 5,000
Farm Family Restart 200 0 200
  500,700 589,700 1,090,400
       
Total income support 1,906,900 2,694,200 4,601,100
Other payments/supplements      
Family Tax Benefit Part A 178,500 1,590,600 1,769,100
Family Tax Benefit Part B 154,800 1,222,100 1,376,900
Baby Bonus     286,800
Carer Allowance 96,000 297,300 393,300
Mobility Allowance 29,800 24,700 54,500
Double Orphan Pension 200 1,100 1,300
Commonwealth Seniors Health Card     318,300
Low Income Health Care Card     364,200
DVA Disability Pension (a) 133,400 6,300 139,700
War Widows (a) 300 110,300 110,600
(a) Notes and sources for all tables and charts in the paper appear in Appendix I.

Around 59 per cent of income support recipients are women, with higher proportions among the pension population. Around half the income support population is aged under 63 years and around 58 per cent are paid as a single person. The characteristics and circumstances of people receiving income support are considered in more detail in Section 3. As is shown in Section 3.3.3, many people on income support rely on it for long periods. This is particularly evident for Age Pension and Disability Support Pension recipients.

1.2.1 Purpose and principles of the social security system

In essence, the social security system redistributes Government revenue collected in the tax system to individuals and families to increase the wellbeing of the Australian population. It is part of a broader social protection system that includes direct expenditure on services and infrastructure (such as health, education and community services), the superannuation system—which complements the Age Pension in Australia's retirement income system—and payments, services and investment to promote the efficient and effective functioning of the Australian economy, which underpins individual and national wellbeing.

The social security system primarily supports the broader social protection system by providing a safety net for Australians without the means to achieve a basic acceptable standard of living. However, there are other ways in which the design of the system helps Australians manage risk and change—for example, by providing security through periods of transition, such as the breakup of a relationship or a period of bereavement.

While the focus of the review is on appropriate levels of support and the frequency and structure of Age Pension, Disability Support Pension and Carer Payment, the social security system plays a key role in advancing the objectives of the broader social protection system, such as social and economic inclusion.

1.2.2 Design principles

The social security system has to balance a number of objectives, and it reflects the accumulation of past initiatives that responded to the social and economic pressures of the time. In looking across the system, it could be said there are five key principles underpinning its design.

It supports a basic acceptable standard of living, accounting for prevailing community standards. Payments are not related to past earnings and do not compensate for pain, suffering or loss of amenity.

It is equitable. It treats people in similar circumstances similarly. Those with additional costs are given greater assistance either through transfer payments or services to help them achieve a similar living standard. In some circumstances, these additional costs are recognised across a range of income levels.

It targets payments to those not able to fully support themselves. Those with their own resources and therefore the capacity to support themselves do not have the same need for transfers. Income and assets tests are used to reduce payments for people with private resources.

It promotes participation and self-provision through a combination of:

It is sustainable. The broad community accepts that those who receive social security payments are in genuine need and that the overall system is affordable across the economic cycle and in the long run, given the ageing of the population.

1.2.3 Design features of current system

Governments have given a different emphasis to these principles at different times. These principles must be balanced against each other, because there are significant tensions between them. This has created six key features of the Australian system that together define its distinctive character (as opposed, for example, to the social insurance models used in OECD countries where individuals receive benefits based on contributions and/or prior earnings):

While many of these design features also apply to payments made by DVA, such payments also have a more specific objective which is to compensate veterans and their dependents for the effects of war or defence service.

Categories of eligibility

The aim of ensuring that everybody in the community achieves a basic standard of living has to be balanced with the expectation that those with the capacity to support themselves will do so. To do this, the social security system supports people only if they meet eligibility criteria based on their ability and availability to work or if the community expects they do not have to work to support themselves.

For working age people, Newstart Allowance is paid on the basis that a person is expected to actively seek and accept suitable work, consistent with their ability and availability. However, some groups are not expected to work. This may be because they:

While not all groups are expected to work, individuals are encouraged to work, where this is appropriate to their circumstances, and payments are structured to enable them to gain financially from this participation.

The balance between providing support and the expectation that those with the capacity to support themselves do so works out differently for these different groups. Broadly, payments fall into two groups: pensions and allowances (formerly referred to as benefits). Pensions are generally paid at higher rates with more relaxed means tests. Allowances are paid at lower rates with tighter means tests.

The differences in the rates and conditions of pensions and allowances partly reflects the different rationale for allowances, which historically have been designed to provide temporary assistance, and pensions, which are for longer term assistance.

Details of social security system eligibility categories are at Appendix A. Details of expenditure and recipients of payments are at Appendix B.

Rates of payment

The rates of income support given to each individual have to balance providing a basic acceptable standard of living, promoting equity between individuals and providing incentives for people to support themselves where possible. They must also be sustainable.

The income support system pays a higher rate to single people than to each member of a couple. This recognises that a single person living alone usually does not have the economies of sharing household expenses commonly experienced by a couple. The single rate is currently 60 per cent of the combined couple rate.

Some rates of payment for younger people and students assume that, even when single, these people share accommodation or could reasonably be expected to do so.

The maximum rate of pension for 20 March to 19 September 2008 is:

The equivalent rates for allowances for the same period are:

The lower rates of allowances provide incentives to work but also make pension payments relatively attractive.

People with substantial levels of care of dependent children have access to FTB to assist with the additional costs of children. FTB payments can also constitute a significant proportion of a family's income. At June 2007, around 68,000 recipients of Age Pension, Carer Payment or Disability Support Pension were also receiving FTB for dependent children in their care.

In the current system, improvements in community living standards achieved through the productivity gains of the labour force are passed on to pension payments through benchmarking the maximum rate of single pension to 25 per cent of Male Total Average Weekly Earnings (MTAWE). MTAWE benchmarking applies to Age Pension, Carer Payment, Disability Support Pension (and other pensions) and indirectly to FTB. Other payments are indexed by the Consumer Price Index (CPI) to maintain purchasing power in line with overall price changes across the community.

Details of rates of payment are at Appendix C and supplementary payments at Appendix D. Indexation arrangements are described at Appendix E and historical trends in transfer payment are outlined in Appendix F.

Income and assets testing

Separate income and assets tests assess the personal resources available to income support recipients and calculate how much assistance is payable. Both tests aim to capture all income and assets of pensioners and allowees. However, in practice income from different sources is treated differently to encourage particular outcomes or equalise treatment between groups (for example, income from superannuation is assessed differently to income from shares). There is also a series of exemptions, the most significant being the exemption of the family home from the assets test (although higher assets test thresholds apply for recipients who do not own a home).

The primary goal of these arrangements is to target assistance to those most in need. This ensures that the system remains sustainable, both fiscally and in terms of community support. However, the arrangements also provide incentives for self-provision by rewarding workforce participation and saving. To balance these two principles, the social security system uses income and assets free areas and tapered income tests (and tapered assets tests for pensions) to attempt to ensure that those making the effort to provide for themselves are better off when they work or get more income from their savings.

Chart 1 shows how the two components of the income test operate—an initial 'free area' where private assessable income has no impact on the rate of pension or allowance, and then a taper over which the amount of payment paid is reduced as the person has higher levels of private income. The rate of the taper varies between payments, but in all payments (other than Special Benefit) it is designed so people gain an increase in total income as private income increases. This basic architecture also means the full value of increases in the maximum rate of pension, whether by indexation or ad hoc, flow to all pensioners across the income distribution and result in additional people who may have been excluded due to their level of income becoming eligible for a part pension.

Chart 1. Illustration of the operation of the income test

Chart 1. Illustration of the operation of the income test

Because the income support system's interactions with the labour market, and the retirement income system's interactions with superannuation, are important to the way Australians manage risk and change, incentives have been a focus for policy development.

In the last 14 years there have been major changes to income and assets tests. They have been relaxed to improve returns from work and incentives to save for retirement. These relaxations increased payments to those with private income and assets, and allowed others in this group to access income support for the first time.

The pension income test taper rate was lowered from 50 per cent to 40 per cent in July 2000 when the GST was introduced to improve work and savings incentives. Currently, a pensioner couple can have up to $66,000 a year in assessable income and receive some pension.

The pension assets test taper rate was halved from 20 September 2007 to increase incentives for saving for retirement and workforce participation as part of superannuation reforms. Under this change, pensions are now reduced by $1.50 per fortnight for each $1,000 in assets above the free area. The change means a homeowner couple can have up to $856,000 in assessable assets (in addition to the exempt home) and receive some pension. Prior to the change the limit was $531,000.

Under changes in 1995 and 2006, allowance income test taper rates have been lowered. They were initially reduced from 50 and 100 per cent withdrawal rates before July 1995 to a taper of between 50 and 70 per cent. In July 2006 these were further reduced to 50 and 60 per cent to improve incentives for part-time work for second earners and as a pathway to full-time employment.

While the income and assets tests reduce payments to people earning additional income, elements of the social security system support and reward participation to reinforce the benefits of self-provision. These include:

Other features of the income support system seek to ensure that different circumstances of households in providing support are accounted for. For members of a couple, for example, the partner's income and assets are taken into account on the basis that they are expected to share resources. In the case of family assistance and some young people on Youth Allowance or Abstudy, a parental income test recognises that parents are generally expected to support dependent children. Reflecting the exemption of the family home from the assets test for owner occupiers, non-homeowners have a higher assets test free area.

Details of income and assets testing are at Appendix C.

Obligations

While the income and assets tests provide incentives, obligations also play a complementary role in reinforcing the expectation that those who can support themselves do so. Obligations add integrity and sustainability to the social security system by assuring the community that assistance is provided only to those taking reasonable steps to support themselves.

There are broadly three types of obligations.

Supplementary payments

Supplementary payments provide a way of ensuring that people with additional costs achieve a similar standard of living.

Supplements recognise specific costs faced by particular groups which have not otherwise been met through direct services and which cannot reasonably be met out of the basic payment alone. For example, Rent Assistance recognises that people in the private rental market can face higher costs than people who own their own home. Apart from some payments in the DVA's system, supplements have not been used to compensate for pain and suffering or loss of amenity.

Supplements have also been used to compensate for changes in government policy (Pharmaceutical Allowance to compensate pensioners for the introduction of the co-payment for prescription medicines in the early 1990s) and to deliver assistance on a different frequency from the fortnightly pension payments and recognise specific costs, such as Utilities Allowance and Telephone Allowance.

From 20 March 2008, the Australian Government increased Utilities Allowance to $500 per annum for singles or for couples combined and increased the Seniors Concession Allowance from $218 a year to $500 a year for around 320,000 Commonwealth Seniors Health Card holders and certain Gold Card holders. While the Utilities Allowance is paid at the same rate for singles or couples—that is, $500 for singles and $250 for each member of a couple—the Seniors Concession Allowance is paid at a flat rate of $500 to both singles and each member of a couple. Also from 20 March 2008, the Government increased the rate of Telephone Allowance from $88 a year to $132 a year for around 800,000 veterans, income support recipients of Age Pension age, Commonwealth Seniors Health Card holders and recipients of Carer Payment and Disability Support Pension who have a home Internet connection.

In addition to these longer standing supplementary payments, government has, from time to time, paid bonuses to some social security recipients at the end of the financial year. Some payments are made regularly (such as the Child Disability Assistance Payment and FTB supplements) and others are ad hoc (such as the Seniors Bonus and the Carer Bonus).

In combination, these supplementary and bonus payments have increased the total amount provided to many income support recipients well above the base rate of payment. The bonuses have also significantly altered the relationship between various income support packages received by different groups, and created incentives to access particular payment types.

Chart 2 illustrates the different levels of support given to different categories of beneficiary.

Chart 2. Income support packages for selected single recipients, June 2008

Chart 2. Income support packages for selected single recipients, June 2008

Details of supplementary payments are at Appendix D. Further information on ad hoc lump sum payments is at Appendix G.

Services and concessions

The social protection system includes payments, services, concessions and subsidies. Services and concessions (through discounted fees and user charges) have an important impact on the wellbeing of income support recipients and other low-income households. Concessions and services that are directly linked with the receipt of Australian Government pensions and allowances (for example, through concession cards) can also enhance the total value of these payments. As such, the loss of support when paid work is undertaken can be greater than just the withdrawal of the primary payment. To address this, concession cards are available for a period on return to work, and alternative concession cards are available to some beyond the pension and allowance cut-outs.

Services and concessions have three main roles:

One mechanism used for accessing services and concessions are concession cards, which provide discounts to cardholders at the point of access to the good or service. These concessions include discounts on prescription pharmaceuticals (funded by the Australian Government), and public transport, rates, utilities and motor vehicle assistance (provided by state, territory and local governments). Pensioner Concession Card holders, Health Care Card holders and Seniors Concession Card holders receive different concessions, as outlined in Appendix H. Section 2.3.1 discusses how social assistance in kind is distributed. Unlike other components of support, such as payments which taper away with increasing incomes, concession cards are usually retained until the person extinguishes all entitlements. Because the loss of the card may result in a sharp drop in the overall level of assistance received while on income support, this can produce strong incentives for people to remain eligible for quite low rates of payment, only leave payment for employment for a short period, or take other actions to ensure retention of the concession card.

Because the value of concessions and subsidies is targeted to usage, discounts can contribute to the equity principle by providing the greatest benefit to those who make more use of services such as pharmaceuticals or public transport. Some private companies also use concession cards to target price discounts. However, given that the value of concessions increases with consumption, concessions can also provide a greater benefit to those with more private resources.

1. The Senior Australians Tax Offset singles threshold of $25,867 is for 2007-08 and increases to $28,867 in 2008-09 (due to the increase in the Low Income Tax Offset).

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2. Terms of reference

Introduction