Interactive: How Australia's pension system works

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Age pensions are a hot topic one week out from the Federal Budget, but how does the system work and how does it compare internationally? SBS World News takes a closer look at what Australia’s elderly are receiving.

 

The Age Pension, introduced in 1909 with an annual rate of $52, is designed to provide income support to older Australians who meet age and income requirements.

The system is funded by Australian taxpayers and accounts for the largest single item of social security spending.

Close to 80 per cent of people over the age 65 are receiving some form of payment from the government, which spent 2.7 per cent of its GDP on aged-related pensions in 2010.

The Abbott Government tried to freeze the indexation rate of pensions in its first budget, but the measures were blocked by the Senate before being dropped by the government over the weekend.

Social Services Minister Scott Morrison has since all but confirmed that tighter rules on how much assets senior Australians can own and still qualify for a part pension will be announced in next week's budget. His department is also reportedly looking to offer higher payments to more than 120,000 seniors.

How does the Age Pension system work?

According to Professor Peter Whiteford from the Crawford School of Public Policy at ANU, the Australian age pension system is different from the majority of those in place worldwide, which see workers contribute to their fund.

“Usually what they get when they reach pension age is a percentage of their income,” he said.

“Our pensions are not related to previous earnings, they’re flat rate amounts and in Australia we income test it.”

A total of 2,385,727 people received an age pension as of March 2014, but the government payments did not form the primary source of income for all recipients.

The following chart shows some of the main income sources for retirees nominated during an Australian Bureau of Statistics survey last year.

Of the more than 3 million questioned, approximately 1.5 million people listed government pensions as their primary source of income in retirement.

More than 550,000 listed superannuation as their main source of income, while approximately 141,100 people recorded dividends or interest.

Almost 16,000 retirees refused to nominate their primary income source.

Professor Whiteford said close to 80 per cent of people over the age 65 are receiving some form of payment from the government.

How has the Age Pension system changed?

The Age Pension payments have been increased significantly several times since the introduction of the pension system, most recently in the 1970s, 1990s and during Kevin Rudd’s time as Prime Minister.

“Household incomes in Australia grew very rapidly between 2000 and 2008 and there was a feeling that pensioners had fallen behind,” Professor Whiteford said.

“In 2009, the Rudd Government increased pensions very significantly… It was the largest real increase in the single age pension since pensions were introduced in 1909.”

The chart below outlines annual payments since 1994.

How are Age Pension payments affected by wealth?

The Age Pension system includes an income test, meaning that earnings made by renting a second home or from investments can impact on payments.

A single pensioner can earn up to $156 a fortnight before their pension begins to be reduced and up to $1940 before they lose their pension completely.

Professor Whiteford said the system also includes an assets test, but the family home is not included.

In Australia, we have the highest median wealth in the world and a lot of that’s in houses.

“The debate in Australia is really about how to take account of assets because the asset test doesn’t include the family home,” he said.

“When you compare Australia with other countries, our spending is relatively low and the average incomes of people over pension age relative to the working age population are among the lowest in the rich world. But the wealth that people have is one of the highest.”

A single penioner who owns their home can have up to $196,750 in assets before their pension begins to be reduced and up to $672,750 before they lose their pension completely.

Different rates apply for renters.

Professor Whiteford said there was no significant evidence backing concerns that increasing house prices may impact on pensioners in the future, but noted that there were some issues being faced by elderly renters in New Zealand.

“I wouldn’t count out the possibility that home ownership won’t work so well in the future, but there’s not a lot of strong evidence yet,” he said.

How does the Age Pension system compare internationally?

Unlike Australia’s flat rate, pensions are contributory in most developed countries, meaning people usually get a percentage of their income when they reach pension age.

The following interactive graph shows pension rates from OECD countries, displayed as a percentage of the usual working wage that retirees will receive as a pension. Please note, Australian data relates to the system’s flat rate.

Professor Whiteford said OCED data seemed to portray Australia as having one of the highest poverty rates among seniors, but said that wealth had to be taken into account in addition to pension incomes.

“In Australia, we have the highest median wealth in the world and a lot of that’s in houses,” he said.

“If you just look at income, people look as though they’re quite badly off. But if you take a more comprehensive measure, what happens is that we in fact become like most other places.”

Data on the percentage of the usual median working wage that retirees will receive as a pension can be found in this map.

 

Professor Whiteford says there are concerns for the future of pension spending, which is the largest single item of social security spending.

“As the population ages over the next 30 or 40 years, the growth in spending in age pensions is likely to have a significant impact on future spending requirements,” he said.

“The Commission of Audit and the government in its current budget have announced that from 2017-18, the indexation of pensions will go back to be in line with prices rather than wages.”

The graph below shows expenditure on aged benefits as a percentage of GDP, with Australia showing little growth since 1990.

 

Treasury projections released in 2010 showed that as a proportion of GDP, spending on age-related pensions is projected to rise from 2.7 per cent to 3.9 per cent in 2049–50. 

Spending on aged care is also predicted to increase from 0.8 per cent to 1.8 per cent over the same period.

Further comments by former Treasurer Wayne Swan on the projections can be found here.  

How does superannuation impact on the Age Pension?

Professor Whiteford said there was a “potential gap in the system” when it comes to claiming both superannuation and the pension.

He says Australians who spend all their super in the period between claiming it and becoming eligible for an aged pension may be entitled to a higher age pension than they would have otherwise get.

“People say that it happens all the time, but there’s not a lot of evidence that it’s a substantial issue,“ he said.

“Mostly what seems to happen is people pay off their houses and they may buy a new car.

“It’s a potential gap in the system.“

He said the take up of superannuation would continue to grow over the next few decades, lessening the pressure on pensions spending by the government.

“The impact of that is projected that it won’t overall reduce the proportion of people who get some pension, but it will make more people get a part pension,” he said.

“Close to 80 per cent of people over the age 65 are receiving some form of payment from the government. The projection is that when the system is fully mature, it will still be 80 per cent… Spending will still go up on the pension system, but it won’t go up as much as it would have if we didn’t have the superannuation system.”

Source SBS

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