Other economics
Grattan Institute on retirement: it’s tough for renters
The Grattan Institute has written two policy papers relating to people’s wellbeing in retirement. One is on the needs of retirees who are renting in the private market – and by extension the needs of others drawing on Commonwealth Rent Assistance. The other is on the ways people can be helped to use their superannuation balance to give them the best opportunity to enjoy a self-sufficient and anxiety-free retirement.
The case for a substantial increase in rent assistance
Retirees who own their home outright, or who are close to doing so and have substantial superannuation balances, are among Australians least touched by the so-called “cost of living crisis”. About 78 percent of Australians over 65 own their home; 10 percent live in residential care; and 12 percent rent. But there is a trend for more people to find themselves renting as they reach retirement – a group that disproportionately includes single women.
The Institute’s paper Renting in retirement: why Rent Assistance needs to rise, by Brendan Coates, Matthew Bowes and Joey Moloney, is about those 12 percent who are renting, particularly those who are not in public housing. The disparity between retirees who are renters and those who are owners is shown in the graph below, constructed from the report’s data.
Rent Assistance payments have not kept pace with the cost of private rents: in this century so far the gap between average rent and rent assistance payments has widened substantially: a basic one- or two-bedroom home in a capital city now costs about $300 to $450 a week, they point out. Only 11 per cent of one-bedroom homes in capital cities are affordable for a single age pensioner.
They put a case for a substantial increase in Rent Assistance, by up to 50 percent for singles and 40 percent for couples, and argue that it should be set as a proportion of rental costs, rather than to the CPI.
Economists are always wary of demand-side subsidies in the housing market, which can have the effect of driving up prices because of housing’s low short-term supply price elasticity, but the researchers cite evidence that increase in rent assistance does not drive up prices, because it is paid as an income supplement to renters, rather than to property owners.
The researchers acknowledge the fiscal cost of increasing Rent Assistance, but they show how it could be expenditure-neutral if it’s accompanied by withdrawal of negative gearing, capital gains tax and certain superannuation tax breaks. (They argue for halving the CGT discount, rather than for restoring indexation. Halving the discount is a poor way to reform CGT, however, because it preserves the allocative distortions associated with non-indexation.)
They argue that just as Rent Assistance should be raised for retirees, it should also be raised for recipients of Youth Allowance, Parenting Payment and others.
There is a 20-minute podcast in which Coates and Bowes discuss their work with the Institute’s Kay Clay.
Managing retirement income
During their working age most Australians take a “set-and-forget” attitude to superannuation. The payments are compulsory, and once a fund is chosen (or an employer’s default is accepted), there are no more decisions to be made.
That is, until retirement, when one has a lump of money in an account, and has to decide how to manage it – how much to draw, how much to invest, how to invest, all without knowing how long it has to be spun out.
Brendan Coates, Joey Moloney and Esther Suckling have produced a paper Simpler super: keeping the stress out of retirement. They find that, in spite of mandated minimum drawdowns, many retirees go on accumulating superannuation balances, partly because they don’t know how long it has to spin out, and partly because they use superannuation as a means to accumulate an inheritance. (Which usually comes to children when they themselves are over the most financially stressful time of their lives.)
They find that most retirees find this transition difficult and confusing and don’t know where to go for unconflicted advice. Understandably many people are deeply suspicious of investment advisers, some of whom are sharks who enrich themselves on hidden fees and commissions. The authors therefore recommend that there be a free, government established and supervised advisory service for retirees, financed by a small levy on superannuation accounts.
They recommend that retirees be nudged to put a substantial proportion of their lump sum into an annuity. Recognizing that many financial institutions charge unjustifiably high fees to manage longevity risk, that it is not really possible to change annuity providers, and that people may not be enthusiastic about handing over their lump sum to a financial institution, they recommend that there be a government-owned annuity provider as an option.
They raise many issues, including the problem that for many, superannuation has morphed from a means to provide retirement income, to one to accumulate an inheritance.
There are other policy options they could consider to get people to make wiser choices more within superannuation’s “sole purpose” intention.
One reason people accumulate a high balance is to allow for health-care contingencies. Many people, knowing its high cost, have wisely avoided taking private health insurance over their lives, and even those who have taken private insurance fear that if they are diagnosed with a serious condition they can be left with high expenses. Maybe as a means to discourage unnecessary accumulation, the government could abolish support for private insurance and strengthen Medicare so that retirees can be confident that they aren’t going to be hit with a high health care bill. With such assurance they would be more relaxed about spending down their balance.
The researchers correctly identify the need for people to be able to navigate that transition to retirement more competently. Most people have little understanding of risk-return trade-offs, compound interest, the difference between nominal and real returns, and so on. These are simple skills, requiring no more than basic high-school mathematics, but there are strong vested interests prospering from people’s ignorance of these skills.
The authors see the solution in terms of making people more dependent on financial advisers, rather than helping people become more capable of handling their own affairs. But it will always be difficult to find good advisers – people who combine the capacity to give sound advice and who have the moral backbone to avoid the temptation to steal from the customer. Financial education may be a better solution than pushing people into dependence on the finance sector.
There is a 20-minute podcast in which Coates and Moloney discuss their work with the Institute’s Kay Clay.
Dutton welcomes boat people
It’s not easy to migrate to Australia, but should we allow people to come here just because they are rich?
Many countries, including tax havens such as Malta and Luxembourg, and financially struggling countries such as Greece and the UK, freely offer “golden visas” to the rich with few questions asked. We did too, until last year.
In early 2023 the Productivity Commission produced a major report on improving productivity. One volume is about improving labour productivity, in which context it has well-considered recommendations to do with immigration, arguing that there should be a better match between the skills we need and the criteria for permanent migration.
The Commission found that skilled immigrants generally make a positive contribution to our fiscal accounts, but migrants brought in under what was known as the “Business Innovation and Investment” category, which allowed easy immigration for “high net worth individuals” (people with $5 million or more to invest in Australia) had a negative fiscal impact. (See page 28 to 37 of the Commission’s report for its analysis.)
The government abolished that visa category, replacing it with a category aimed at bringing in migrants with skills likely to boost investment in business innovation. Skilled immigrants bring their human capital to Australia, but people who simply have a few million dollars don’t really bring anything of enduring value: in fact they make a net drain on our public finances, the Commission found.
Peter Dutton , in a speech to a Liberal Party fundraiser, has stated that if elected he will bring back that golden visa, reported by the Sydney Morning Herald political journalist David Crowe: “There is no case for it”: Dutton’s visa plan could cost $2.5b. Former Immigration Department Deputy Secretary Abul Rizvi, told an SBS journalist that these visas were essentially a means for people to buy retirement in Australia for a “very, very cheap price”, and he said to David Crowe ““Given the strong risk of links to crime and the difficulty of checking against this, I am surprised Dutton would want to resurrect this visa.”
Perhaps Rizvi, a former professional public servant whose ideas are guided by evidence and reason, is surprised because he doesn’t understand Dutton’s simplistic ideas of economics. It’s doubtful if Dutton understands the difference between money and wealth, or the difference between money earned through entrepreneurship, innovation and hard work, and money gained through speculation and taking advantage of tax breaks for property speculation.
To Dutton boat people are welcome, provided they arrive in a $5 million yacht.
A 75-year history of Australia’s social welfare system
Inside Story has published a review by Julian Disney of John Murphy’s book An unlikely survival: the politics of welfare in Australia since 1950.
The word “survival” in the title is a reference to Murphy’s belief that our social welfare system has held up reasonably well, in spite of the inroads of neoliberalism that have caused so much damage in other countries.
Disney’s review summarises Murphy’s work, pointing out how our social welfare system has changed as governments have changed – acknowledging that 23 years of unbroken Coalition rule has left its mark, particularly in terms of the ideological struggle between means testing and universalism. He also points out how our welfare system has had to adjust to fundamental social changes over that time, including longer life expectancies, the greater role of women in the workforce, and fundamental changes in our economic structure.
Disney sees the book as a valuable contribution, but towards the end of his review he warns that systems of distributive welfare play only a supplementary role in contributing to economic fairness. He writes:
In any event the welfare system is rarely the greatest influence on wellbeing, especially for people in greatest need. The biggest challenge for Australian welfare policy in recent decades has been to offset the unnecessary and unfair damage caused by extreme, unprincipled and incompetent economic policies.
A telling comment from someone who has been so prominent in social welfare movements.
The Coalition’s “solar blocker” – its war on renewable energy
The National Party would cut down the tree as well.
The Coalition’s hostility to renewable energy is well-known, having been on full display since the Abbott government dismantled our successful carbon pricing scheme eleven years ago.
One might reasonably believe that the Coalition has shifted its policies over the intervening years, as businesses have been pouring funds into renewable energy projects, as renewable energy has been demonstrating its cost competitiveness, and as the Coalition has lost a number of seats to independent candidates standing on climate change issues.
There are hints of change. No longer do members of Parliament bring lumps of coal into the chamber, and no longer does the Coalition leader assert that climate change is bullshit (although there are still backbenchers who hold such a view). The Coalition’s nuclear policy, although economically ridiculous, does recognize the need to reduce emissions.
But we should not be fooled, warns John Grimes of the Smart Energy Council on Radio National: Renewable energy sector calls emergency meeting. (7 minutes) He has pulled together the elements of the Coalition’s energy policies, from Dutton’s and Littleproud’s statements. They amount to a halt to any more renewable energy build, between the election of a Coalition and 2050. All investment in solar, wind, pumped hydro and batteries would be halted.
The Coalition, if elected, would legislate to stop any further expansion of renewable energy, limiting its contribution to 54 percent of the electricity supply, the level it is on track to achieve this year. In transport, the Coalition would scrap vehicle efficiency standards, and in housing it would scrap insulation standards. There would be no more rooftop solar or home batteries.
Dutton’s statements about the inability of renewable energy to power the Australian economy “are either dangerously misinformed or he is simply lying to the Australian people” says Grimes. Behind these policies he explains, is the secret deal between the Liberal and National parties.
A similar warning was provided by the Clean Energy Council when the Coalition snuck out its nuclear plans in December. Just this week the Council released its report on investment in 2024, confirming that, encouraged by government policies, there has been a surge in investment in renewable energy in 2024.
Grimes and others, observing opinion polls that reveal increasing support for the Coalition, warn that Australians should take note of their policies, lest we sleepwalk into an economic disaster – all for the sake of appeasing the National Party.