Welfare economics: should Australia abolish the Age Pension?

Welfare economics: should Australia abolish the Age Pension?

My fellow friends, this year our ‘glorious’ government delivered one of the most unpopular budget outcomes in Australian history. Sweeping cuts have been made across all welfare programs, and tougher rules have been enforced, especially in regard to Age Pension claims. The minimum pension age will rise to 70 in 2035. The message is clear: the Australian government is finding it harder and harder to fund the program down the track. If this is the case, should our government actively plan to abolish the Age Pension in the future?

Clearly, this issue is closely linked with the heart and the head. Any government that will abolish the Age Pension effectively signs its own demise. As Australians, we believe that everyone should have a ‘fair go’, and it’s only just that our seniors receive a pension when they retire. However, the costs to run the Age Pension are huge, to the tune of $40b a year. If that isn’t big enough, the National Commission of Audit estimates that this figure can balloon up to $72b in 10 years’ time, and it is clear that this sort of spending is unsustainable. At the risk of alienating just about everyone reading this piece, I will explain why the move to abolish the Age Pension is a rational decision that can improve the collective welfare of all Australians.

Currently, the Age Pension supports two million seniors, and this number is growing by day. Now, why did these seniors not save enough for their own retirement? How did the situation get out of hand? The theory of moral hazard comes into mind when discussing this issue. Moral hazard describes a situation where one party takes an increased risk, because the cost of taking that risk will not be felt by that party. Therefore the party taking the risk acts less carefully, and should anything happen, other parties will be partly or fully responsible for the consequences of those actions.

It can be argued that the existence of the Age Pension is a moral hazard to the population. Australian households may choose to save less of their disposable income as they believe that the government will provide a safety net in form of age pensions and other benefits. In short, Australians may have the notion that the government will come to aid them financially in old age, and thus proceed to save less in their working life. This sense of ‘entitlement’ is exactly what our treasurer Joe Hockey tried to eliminate when he delivered the budget speech this year. The fact is, as Australians we do not save enough regularly. A recent report on household savings by the Melbourne Institute found that only 44.6% of all Australians are saving money, which is not good enough. Now, a move to abolish the Age Pension can change the attitude of Australians on savings, via signalling theory. If the government states that they will stop handing out the Age Pension, Australians will be more inclined to save money towards their retirement.

Another key reason to abolish the Age Pension is the changing landscape of Australian demographics. The affordability of the Age Pension in the future is intrinsically linked to Australia’s ageing population, and it’s increasingly clear that we cannot afford it. The World Factbook’s Age Pyramid shows that 15% of our population are already 65 years and older, and this figure is expected to rise to 25% by 2042. Recent ABS reports have predicted massive growth in the next few decades, due to low mortality rates and the influx of immigrants to Australia. Depending on conditions, the ABS predicts that our population will grow from 23.5 million in 2014 to anywhere between 37 to 50 million by 2061. In essence, there will be fewer and fewer people of working age to support the burgeoning number of retirees in the years to come. It is sensible for the government to lessen the burden of the working population by abolishing the Age Pension.

Now, some of you may still be unconvinced with my idea, so let me discuss this issue in reference to future tax payments. As you know, the government generates much of their revenue by taxing the working population. If the Age Pension is to continue several decades in the future, the government will have to devote more of their revenue to run this program. To do so, the government may reduce spending in other areas, or they could impose higher tax rates. Now, who will pay those taxes? That’s right; it would be you, me and everyone else who is working. I can’t talk for others, but I wouldn’t want to pay higher taxes for this program to run. After all, why would you give money to people who didn’t save enough for their own retirement?

The Age Pension scheme has served Australia and its people well for so long. However, the cost of the program will outweigh the benefits in the years to come. Of course, a suitable solution must be found should the government decide to end the program. With the abolishment of the pension, Australians will have to foster a money saving mindset, so that they will not pressure future generations of working Australians to come. In addition, the money saved by the government through the abolishment of the Age Pension can be used to fund other welfare programs, such as building extra infrastructure in anticipation of future population increases. Ultimately, a move to abolish the Age Pension can and should improve the long term welfare of Australia. It is as Treasurer Joe Hockey says: “the age of entitlement is over.”