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Ross Gittins
March 18, 2009

Remember the ageing of the population? With the recession and climate change it has become quite an unfashionable thing to worry about. But it hasn’t gone away. Indeed, it draws closer. And if Kevin Rudd doesn’t take sufficient account of it in framing this year’s budget, we’ll live to rue the day.

The Howard government sponsored the production of no fewer than three major government reports on ageing. They all came to much the same conclusion: with a low fertility rate, people living longer and the baby boomers starting to hit 65 from next year, the aged dependency rate will rise sharply.

At present we have five people of working age for each person 65 or older. Within 10 years it will be less than four, and within 20 years it will be three.

This means the economy will grow more slowly and the pressures on federal and state budgets will increase.

This suggests three obvious policy responses: encourage people to delay their retirement and stay working, even if only part-time; do all you can to encourage people of working age to actually have paid employment; be cautious about making government benefits to the aged too generous.

Unfortunately, John Howard really only acted on the first response. He did little to make it easier for mothers, our most underutilised source of labour, to juggle work and family, and he was always lavishing benefits on the aged.

Apart from regular cash handouts, he didn’t do much for people on the full age pension, but he was particularly generous to people judged too well-off to receive the age pension. He cut the pension withdrawal rate, so part-pensioners got more and so more people got part-pensions.

He introduced a special tax rebate for the laughably named self-funded retirees and made it easier for them to get health cards, access to cheap pharmaceuticals and private-sector discounts.

And then, in 2007, Peter Costello introduced amazing changes to superannuation, which made super even more heavily biased in favour of high income-earners that it already was. For people 60 or older, he made all payouts and private pensions tax-free. He sanctified salary sacrifice as a tax-avoidance device and introduced a rort called “transition to retirement” under which workers 55 or older could start drawing on their super while salary-sacrificing most of their income into super.

With the aged dependency rate set to rise, we must be careful to avoid doing things that add to tensions between the generations, creating a situation where workers with young families feel they’re paying more tax than the comfortably off elderly.

Yet that is just what happened under Howard. It used to be that how much income tax you paid depended on the size of your income. Now it also depends on how old you are. We seem to have introduced a rule that, provided you are at least 60 and retired, you pay little or no income tax no matter how well-off you are.

As someone who is going to be exactly that in a few years time, let me express my thanks. But is it fair? Hardly. Is it economically and politically sustainable? I doubt it.

But it won’t be easy to correct. The aged are probably the largest, most vocal and most politically powerful interest group we have. They have an unshakable sense of entitlement: “I paid taxes all my life, therefore any handout I demand is reasonable.”

It was the strength of grey power that kept the Howard government regularly propitiating it. And now the share of the voting population accounted for by the over-55s is set to grow rapidly.

So every year Rudd delays restoring a fairer and more sustainable balance between the working and the elderly will make it harder to achieve – until, that is, the working young reach the point of revolt.

We are about to see a telling demonstration of grey power in this year’s budget. In the run-up to last year’s budget the Government was quickly forced to reverse its intention not to continue the Howard government’s practice of giving ad hoc cash grants to the aged. But no sooner had the budget been delivered than the anguished cry went up, what about the age pension? Don’t you realise how inadequate it has become?

There was an immediate chorus of sympathetic agreement from pollies and public alike. Thus it is that the single most expensive measure to be announced in this year’s budget – one whose cost will continue and grow year after year – is almost certain to be an increase of up to $35 a week in the single age pension, with a proportionate increase in the age pension for couples.

Last year’s episode was another demonstration of the power of the elderly. While everyone was feeling sorry for the poor old people eking out a living on such a paltry sum, no one thought to mention that a single on the dole was getting $56 a week less than a pensioner.

So great will be the cost of the pension increase that the Government will be tempted to limit the increase to the age pension and not flow it on to people on the sole parent benefit or the unemployment benefit.

If it does it will be digging us in deeper, reinforcing the notion that the elderly are subject to different rules from the rest of us.

If you’re too old to work you’re deserving, but if you can’t work because you’ve got young kids and no partner, or you can’t find a job, you’re undeserving.

And so great is the cost of the pension increase that there is talk of the Government abandoning its intention to introduce paid maternity leave.

So something that would go a long way towards increasing mothers’ participation in the paid workforce – and thus helping the nation bear the growing burden of an ageing population – would give way to something that will widen the gap between the retired and those of working age.

Kevin Rudd can, with justice, accuse his predecessor of being quite short-sighted during our boom years. But the real question is whether he will display the foresight and political courage to make the imbalance he has inherited better rather than worse.

Ross Gittins is the Herald’s economics editor.

http://business.smh.com.au/business/time-to-stop-favouring-the-grey-20090317-90×1.html?page=-1

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