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Entitlement Reform
Dr Patrick Nolan
Lauren Thorpe
Kimberley Trewhitt
November 2012
Entitlement Reform
The authors
Dr Patrick Nolan is Reform’s Chief Economist
Lauren Thorpe is the Research and Corporate Partnership Director at Reform
Kimberley Trewhitt is a Researcher at Reform
1

Reform
Reform is an independent, non-party think tank whose mission is to set out a better way to deliver public
services and economic prosperity. Reform is a registered charity, the Reform Research Trust, charity no.
1103739. This publication is the property of the Reform Research Trust.
We believe that by reforming the public sector, increasing investment and extending choice, high quality
services can be made available for everyone.
Our vision is of a Britain with 21st Century healthcare, high standards in schools, a modern and efficient
transport system, safe streets, and a free, dynamic and competitive economy.
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Entitlement Reform
Dr Patrick Nolan
Lauren Thorpe
Kimberley Trewhitt
November 2012
3
Contents
1Name
1. Executive summary
page
5
2. The countries
10
3. Pensioner incomes
16
4. Demographic changes and fiscal headroom
23
5. The benefits of early action
28
6. Entitlement reform
35
References43
Annex 1: Short overview of the countries’ welfare states
46
Annex 2: Key age-related features of the countries’ welfare states
49
Entitlement Reform
1
Executive summary
The seventieth anniversary of William Beveridge’s famous report (Social Insurance and Allied Services)
provides an opportunity for debate on the future direction for the welfare state. Clearly the world is now a
very different place to that of 70 years ago. But just as the Beveridge report encouraged a radical departure
from the past in response to major challenges (the “five giants” of want, ignorance, disease, squalor and
idleness),1 structural changes (including population ageing) mean modern welfare states require reform. To
illustrate, this report considers the prospects for the welfare states in Australia, New Zealand and the
United Kingdom. These countries provide an interesting comparison given their similar social policy
traditions and similarities and differences in their approaches to reform. There are also important lessons
– on what to do and on what not to do – that the countries can learn from each other.
Old and broke
Population ageing
No-one should be surprised that, as shown in table 1, populations are getting older. This topic has been
filling academic journals for years. In schools demographic charts are standard fare. Some politicians have
even written books on the matter. Population ageing is taking place as not only are the baby boomers
(people born between 1946 and 1964) starting to retire in large numbers but fertility rates are falling and
people are living longer. As a result “dependency ratios,” the number of workers per dependent member of
the population, will worsen in years to come.
Table 1: Old – projected population ageing in Australia, New Zealand and the United Kingdom
Sources: see page 24 of the main report
Australia
New Zealand
United Kingdom
Population 65+ (2010 to
2050)
From 13.7% to 22.2%
From 13.1% to 23.6%
From 16.6% to 24.2%
Working aged population
(2010 to 2050)
From 67.3% to 61.2%
From 66.4% to 59.9%
From 66.0% to 59.4%
Note: Given the long time frames involved, population and fiscal projections are heavily influenced by
assumptions (including on migration, fertility and the productivity of public (especially health) services). This
uncertainty may be amplified in cross-country comparisons (given differences in governments’ accounting
practices). These comparisons should thus be seen as indicative only.
Fiscal costs
There should also be little surprise that population ageing will present fiscal challenges. As shown in table 2,
spending in areas like health, pensions and long-term care is accelerating as the share of the population of
working age (who fund this spending) is falling. These changes will impact on governments’ spending plans,
tax bases and fiscal headroom; limit the degree to which future fiscal policy could respond to major shocks;
force reform of the funding of the welfare state (both transfers and services); and force changes to the
delivery of public services (e.g., with health systems needing to focus more on long-term conditions).
1Timmins (1996), The five giants: A biography of the welfare state, Fontana Press, London.
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Entitlement Reform
Executive summary
Table 2: Broke – projected fiscal costs in Australia, New Zealand and the United Kingdom
Sources: see page 26 of the main report
Australia
Projected overall
government expenditure
New Zealand
From 26.1 per cent of GDP From 34.5 per cent of GDP
in 2009-10 (22.4 per cent in 2009 to 36.6 per cent of
at its projected 2015-16
GDP in 2050
low point) to 27.1 per cent
of GDP in 2049-50
United Kingdom
Fall from 42.6 per cent of
GDP in 2011-12 to 35.6
per cent of GDP in 201617, but rise again to 39.4
per cent in 2051-52
Projected health spending From 4.0 per cent of GDP From 6.9 per cent of GDP
in 2009-10 to 7.1 per
to 10.7 per cent between
cent of GDP in 2049-50;
2009 and 2050
spending on aged care
projected to grow from 0.8
per cent of GDP to 1.8 per
cent
From 8.1 per cent of
GDP in 2011-12 to 8.7
per cent of GDP in 205152; Spending on care
projected to increase from
1.3 per cent to 1.9 per
cent of GDP during this
period
Projected pension
spending
From 5.7 per cent of GDP
in 2011-12 (5.6 per cent of
GDP in 2016-17) to 7.3 per
cent of GDP in 2051-52
(the State Pension and the
Second State Pension,
pension credit and winter
fuel allowance)
From 2009-10 to 2049-50
spending on age-related
pensions (the Age Pension
and similar payments to
veterans and war widows)
is projected to increase
from 2.7 per cent of GDP
to 3.9 per cent
From 4.3 per cent of GDP
in 2009 to 8.0 per cent of
GDP in 2050 under the
historic trends scenario
The private pillar
A complete picture of the likely effects of demographic change also requires looking at the range of sources
pensioners receive income from, not just government ones. The importance of private sources of incomes
was highlighted by Beveridge in his 1942 report when he wrote: “The State in organising security should not
stifle incentive, opportunity, responsibility; in establishing a national minimum, it should leave room and
encouragement for voluntary action by each individual to provide more than that minimum for himself and
his family.”2
As table 3 shows, this is a key area of difference between the three countries. Australia has done the most to
encourage a nation of savers and private contributions to services like healthcare. In the United Kingdom
and New Zealand pensioners rely to a greater degree on the government for their incomes, although the
situation has changed in New Zealand in recent years. A similar bias is present in their health systems, with
both countries having relatively low levels of private health funding.
This is significant as the best welfare states have strong private pillars (discussed in greater detail in chapter
3) as well as a public one. Mixed model systems provide a number of benefits. By reducing pressure on the
public system they can mean programmes are more affordable for governments in the long-run (although
this may be undermined by policies like poorly designed tax-breaks). Increasing private saving, for
example, can mean more pensioners are able to provide for themselves in retirement and so public
programmes can be targeted to more clearly focus on supporting pensioners in need. From a nationaleconomy perspective a stronger private pillar can also make the welfare state more efficient by increasing
the range of tools available for smoothing income and spreading risk. A mixed model also has important
political effects, with a stronger private pillar helping to build consensus that funding the welfare state is
not just the job of the government. As a result of population ageing, countries with small private pillars will
face pressure to further expand their welfare states, while the broader funding base in other countries will
mean greater flexibility to introduce pro-growth policies, such as more competitive tax systems.
2Beveridge (1942), Social Insurance and Allied Services, HM Stationery Office.
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Entitlement Reform
Executive summary
Table 3: Role of the private pillar
Sources: see pages 10, 17 and 22 of the main report
Australia
New Zealand
United Kingdom
Total spending on health
(2010), % of GDP;
Government share (2009),
% of total
Total spending on health,
9.1; government share,
69.0
Total spending on health,
10.1; government share,
83.0
Total spending on health,
9.6; government share,
83.2
Sources of pensioner
incomes (mid-2000s),
% of total
Public transfers, 44.6;
work, 19.4; capital, 35.9
Public transfers, 64.4;
work, 15.1; capital, 20.5
Public transfers, 49.8;
work, 11.9; capital, 38.3
Average effective age of
retirement
Men, 65.2; women, 62.9
Men, 65.9; women, 65.7
Men, 63.6; women, 62.3
Note: The source of pensioner income shown for New Zealand is prior to the introduction of KiwiSaver, which will
have significantly expanded the role of capital as an income source in that country.
Time for an honest conversation
Political denial
While there is growing recognition of the challenges that population ageing presents, developing workable
solutions and identifying the role that government should play in these solutions has proven much harder.
As shown in table 4 policymakers in the three countries still need to get a grip on key areas of age-related
spending.
Table 4: Key examples of policymakers’ denial
Sources: see Chapter 4 of the main report
Australia
New Zealand
United Kingdom
As the Centre for Independent
Studies argues, while the build-up
of private superannuation schemes
has meant that spending on the
public age pension has remained
relatively lean, and while the
retirement age is scheduled to
increase, not enough has been done
in the way of pre-emptive policy to
close projected fiscal gaps. Recent
policies are also likely to have
widened not narrowed these gaps.
These policies include the National
Disability Insurance Scheme, the
National Injury Insurance Scheme
and a reform package for aged
care.2
Insufficient effort to bend the
cost curve in health downwards.
Although some prefunding of New
Zealand Superannuation was
introduced (now suspended), little
recent effort has been made to
reduce the cost of these pensions
and Prime Minister John Key
has ruled out an increase in the
retirement age. Indeed, in recent
years the overall system of support
for retirement incomes has been
made more expensive with the
introduction of subsidies for
retirement savings (the KiwiSaver
subsidies).
The cost of indexing the state
pension in line with the triple lock
has offset savings from bringing
forward the increase in the
retirement age. Health spending will
further accelerate in the absence
of reform. The challenge of funding
long-term care remains elusive and
poor value for money spending –
such as the Winter Fuel Allowance,
free bus passes and TV licences
– remains off limits at least for this
Parliament.
Costs of delay
Reform should no longer be put off. The political challenges of reform are high (powerful vested interests)
and many members of the public are anxious about change. Yet undertaking reform quickly would provide
real benefits. Even just in fiscal terms putting the welfare state on a more affordable footing sooner rather
than later would be beneficial. As a quick illustration, the Office for National Statistics has estimated that in
the United Kingdom net government debt will increase from 74.3 per cent of GDP to 89.0 per cent between
2016 and 2061. If the government is assumed to have a target for debt to be no higher than 80 per cent of
GDP in 2061, achieving this through reform in 2016 would cost 1.5 per cent of GDP, or £23 billion, less than
if reform was put off until 2061 (ceteris paribus).
Yet the argument for early reform is much more than a fiscal one. The temptation for governments will be to
put off dealing with these challenges but this will limit future governments’ options. This is not just a
3
Carling (2012), Australia’s future fiscal shock, Issue Analysis, No 134, Centre for Independent Studies.
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Entitlement Reform
Executive summary
challenge for the distant future but will be felt as political parties in all three countries start to develop
manifestos for their next general elections (baby boomers are retiring now). Looking forward this is going
to intensify, so that by 2050 the share of the voting population over 65 in the United Kingdom, for example,
will have increased from 1 in 4 now to 1 in 3.
Table 5: Costs of delay
Sources: see Chapter 5 of the main report
Australia
New Zealand
United Kingdom
Share of voting population For every elector over 65
above 65
in 2010 there were 4.0
electors who were younger
than this, but by 2050 this
will fall to around 2.3
For every elector over 65
in 2010 there were 4.5
voters who were younger
than this, but by 2050 this
will fall to around 2.3
For every elector over 65
in 2010 there were 3.0
electors who were younger
than this, but by 2050 this
will fall to around 1.9
Share of population in key 2010, 11.5%; 2015,
transitional group (aged 55 11.7%; 2020, 11.8%;
to 65)
from 2.5 million to
3.0 million people
2010, 11.1%; 2015,
11.5%; 2020, 12.4%;
from 0.48 million to
0.59 million people
2010, 11.8%; 2015,
11.3%; 2020, 12.2%;
from 7.3 million to
8.2 million people
Note: Given important institutional differences (e.g., the degree to which voting or enrolment are compulsory) in
the three countries, comparisons between them should be seen as indicative only
There is also a potential personal cost to delaying change. In any change there will be a group of people who
are likely to “lose out” or be relatively disadvantaged by the transition from one system to another.
Governments are likely to want to protect current recipients and younger people should have sufficient time
to change their plans to adjust for any loss of government support. But there is a group of people closer to
retirement who will face losing their support and who may not have enough time to, say, significantly build
up their private savings. Over the next 10 years this group of people is going to make up an increasing share
of the population, and so the potential disruption from reform (and the costs of the transition) will rise.
Getting a grip
Principles for reform
Reform must be free from political whim. This requires an open process of consultation and robust scrutiny
of policies. The more uncertain the decision-making environment, the harder it will be for families to make
the decisions that are in their longer term interests and for private providers to complement State
programmes. Yet this need for consultation should not be seen as an excuse for delay. Indeed, given the
need for long lead times (to allow people to adjust their plans) certainty over the direction of reform must
be provided as soon as possible.
Reform should also be based on a clear set of principles. These principles could include the following:
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Reforms must start quickly. Early action reduces the overall costs of change and minimises
disruption. Minimising disruption is important for building confidence in reform. Early action would
also mean that key changes are made before political barriers increase (given the increasing power of
the elderly voting lobby).
Changes must not only restrict the long-run growth of the size of the State but also reform what the
State does (e.g., redraw the line between health and social care spending).
No area of government should go untouched. Nothing should be off limits and one change (e.g.,
increasing the retirement age or auto-enrolment for defined contribution pensions) cannot do all the
heavy lifting. Failing to make all appropriate changes weakens the principles for reform and leads to
burdens falling disproportionately. Spending on services must be managed as well as spending on
transfers.
People must put aside more money for their own needs and contribute more to public services,
including health and care.
Market based solutions are required to support greater individual contributions, e.g., through
income smoothing and risk pooling (e.g., private insurance) and releasing the equity built up in
assets (e.g., equity release).
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Entitlement Reform
Executive summary
Key directions for reform
These principles translate into the key directions for reform below. The discussion below emphasises
structural reform not salami slicing budgets. Salami slicing would mean that the costs of change would be
likely to reflect political influence and the principles (case) for reform would be seriously weakened. The
discussion below also emphasises the need for entitlement reform, as the scale of the fiscal challenge means
revenue changes cannot realistically be seen as the sole answer. There is a limit to which tax burdens could
rise without damaging international competitiveness and leading to an erosion of living standards
(particularly as shrinking working age populations mean that to even just hold revenue constant (as a
proportion of GDP) average tax rates on workers could have to rise or tax bases expand in any case).
The state pension system should focus on poverty reduction. This means that the ways in which the pension
automatically increases (indexation) over time requires review, particularly in the United Kingdom. This
also means that supplementary pension benefits should be restricted to cases where there is a clear policy
rationale for them. Again, this is particularly an issue for the United Kingdom, with programmes like the
Winter Fuel Allowance, free bus passes and free TV Licences being particularly poor value for money. As a
simplification measure, entitlement in the United Kingdom should also be based on residence rules not
contribution histories.
A more focussed state pension system means that many people will need to make a greater contribution to
their own living standards during retirement through accumulating greater assets during their working
lives and more effectively converting these assets to income at or during retirement (decumulation). This
means that governments will be under pressure to:
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Improve value for money for support for accumulation. There is a need to reform poorly designed
subsidies and tax breaks for savings and insurance.4 It is important to emphasise that given the
long-term nature of savings decisions any changes must be based on clear principles and an open
process. In contrast to tax breaks and subsidies, accumulation should be encouraged through
improving the interaction between the public and private pillars (largely by simplifying the public
pillar) and providing greater policy certainty.
Strengthen the decumulation phase. As baby boomers begin to retire in larger numbers the products
that could help them convert financial and housing assets into income streams will become more
important. There will need to be a clearer recognition of the need for families to consider options like
drawing down the equity built up in their homes. Families should also be encouraged to shop around
and not simply accept default rates offered when buying annuities.
Reflecting both policy changes (such as the increase in statutory retirement ages) and the demise of yield
there is a longer term trend for people to work for longer. This trend for working later is likely to continue,
particularly given the impact of the global financial crisis on superannuation balances and wealth, and
raises a number of policy challenges. As working lives increase the state pension age should also increase.
Australia and the United Kingdom have already introduced plans to increase their ages to 67 by 2013 and
68 by 2046, respectively. There are no plans to increase the age from 65 in New Zealand, which is a major
omission.
Although an increase in the state pension age is often a major plank of reform, it is necessary to be realistic
about the benefit that such an increase can provide in isolation. An older work force creates challenges for
employers and for labour market policies, as shown by the difficulty that the unemployed elderly already
experience in finding work. It is necessary to have a realistic view on the ability of people to work longer and
how this may require re-skilling in the labour force. Governments may also need to reduce restrictions over
(thereby increasing the flexibility for) hiring and firing older people.
None of the options above are easy and they may be resisted by powerful vested interests. Families are likely
to be anxious about changes of this nature. Yet delaying reform will increase the costs of change and mean
future reforms must be more disruptive. There is a need for an honest conversation over the real costs of
population ageing and how to address them, no matter how difficult this may be.
4In the United Kingdom this means reforming the system of pension tax relief. While avoiding double taxation is important, the current
system is complicated (as generally registered fund earnings are exempt and contributions and drawdown (share taken as a lump sum)
receive partial relief), expensive (equivalent to 2 per cent of GDP) and likely to be poor value for money.
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Entitlement Reform
2
The countries
A comparison of the welfare states in Australia, New Zealand and the United Kingdom is of interest given
the similar social policy traditions in the three countries and similarities and differences in the approaches
taken to reform. There are also important lessons – on what to do and on what not to do – that the countries
can learn from each other.
A helicopter view
Table 6 gives a “helicopter view” of the three countries and their welfare states. This shows that although
the countries have similar social policy traditions, their welfare states operate in quite different ways.
Australia has the highest GDP per capita and the United Kingdom is much larger than the other two
countries, both in terms of population and size of the economy. Further, while life expectancies are similar
in the three countries, the United Kingdom is on average older than the other two (with a higher proportion
of the population over 65 and higher elderly dependency rate). Net migration is highest in Australia.
Table 6: A helicopter view of the three countries
Sources: OECD iLibrary; CIA World Factbook; IMF World Economic Outlook, October 2012
Year
Australia
New
Zealand
United
Kingdom
Gross Domestic Product (GDP) in US$ PPP (billions)
2011
915,100
123,700
2,287,900
GDP in national currency (billions)
2011
1,440,500
200,800
1,516,200
GDP per capita in US$ PPP
2011
40,800
28,000
36,500
Population (millions)
2011
22.4
4.4
62.6
Life Expectancy at birth (years)
2011
82
81
80
Population over 65 (%)
2011
14.0
13.5
16.7
Elderly dependency rate (%)
2008
19.6
18.9
24.3
Net migration rate (per 1,000 inhabitants)
2012
5.9
2.3
2.6
Unemployment rate (%)
2011
5.1
6.5
8.0
Government revenue (% of GDP)
2011
32
29
37
Government expenditure (% of GDP)
2011
36
35
45
Government deficit (% of GDP)
2011
4.4
5.4
8.5
Government gross financial liabilities (% of GDP)
2011
24
38
82
Total spending on health (% of GDP)
2010
9.1
10.1
9.6
Government spending on health (% of total)
2009
69.0
83.0
83.2
Individual (at point of use) spending on health (% of
total)
2009
19.4
10.6
9.6
Private insurance spending on health (% of total)
2009
8.2
5.0
3.3
Non-profit institutions serving households (% of total)
2009
0.4
1.4
3.9
Corporations (not health insurance) (% of total)
2009
3.1
0.0
0.0
Note: The figures for aggregate government revenue and expenditure in this table are drawn from the IMF’s World
Economic Outlook (October 2012). Due to accounting differences they differ from similar figures reported by the
OECD. For example, the OECD report New Zealand government revenue of 40 per cent of GDP and expenditure
of 42 per cent of GDP. Reform has used data from a single source for consistency but readers are advised to
check primary sources before relying on these figures in their own research.
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Entitlement Reform
The countries
Australia
The Australian economy has proven to be remarkably resilient (last experiencing a recession in 1991). There
are, however, concerns over the price of housing and the cost of living.5 The Australian government spends
less than the United Kingdom, at 36 per cent of GDP in 2011. In this year government revenue was lower, at
32 per cent of GDP. The annual budget deficit of 4.4 per cent is approximately AU$40 million. Around 63
per cent of government spending took place at the federal level and around 37 per cent at the state level.6
The lower level of government spending does not mean that total spending on welfare and social services is
less in Australia than in the other two countries, as the level of private contributions to the welfare state is
higher and actively encouraged by federal government policy.7 Indeed, as table 6 illustrates, in 2009, 31 per
cent of health spending in Australia comes from non-government sources. This compares to 17.0 per cent in
New Zealand and 16.8 per cent in the United Kingdom.
New Zealand
New Zealand’s economy has performed less well than Australia’s and faced major economic shocks with the
Christchurch earthquakes in 2010 and 2011. Like Australia, there are concerns over the price of housing
and the cost of living. Government spending rose to 35 per cent of GDP in 2011. Earthquake associated costs
had a major impact on the Government’s accounts and (partly reflecting this) the current budget deficit is
expected to fall from 5.4 per cent of GDP in 2011 to 4.3 per cent in 2012 and then to 2.7 per cent in 2013.
Looking at the period before the earthquakes the increase in spending had been much more moderate than
the United Kingdom, with the New Zealand Treasury estimating that spending increased from 31 per cent
to 34 per cent of GDP between the turn of the century and 2010.
There was, however, concern over public service productivity and that the inflationary impact of increases
in spending in New Zealand contributed to the country entering recession prior to the global financial crisis.
Efforts had been made to smooth the cost of pensions over the next 40 years, yet public spending on health
increased quickly (in 2009-10 there was a 3.4 per cent increase in real health spending, meaning New
Zealand had the fifth equal highest spending on health as a proportion of GDP in the OECD). A high rate of
migration of labour, especially to Australia, was also of concern.
The United Kingdom
Public spending (as a share of GDP) in the United Kingdom is higher than in Australia and New Zealand
(excluding earthquake costs). This partly reflects the United Kingdom’s larger exposure to the global
financial crisis (due to both the size of the financial sector and failures in the United Kingdom’s approach to
financial regulation), but it also reflects a large increase in spending before this. Between 2001 and 2007
(prior to the financial crisis) public spending in the United Kingdom rose from 37 per cent to 40 per cent of
GDP (and reached 47 per cent of GDP in 2009).
Like New Zealand, government spending in the United Kingdom provides over 83 per cent of total spending
on health. The health budget doubled in real terms between 1999 and 2010. The failure to combine this
increase in spending with adequate supply-side reform meant that much of the increase was absorbed in
increased costs of delivering services rather than improved outcomes.8 The welfare budget also doubled
between 1990 and 2010 and, rather than reflecting economic conditions, this growth reflected an expansion
of welfare to middle and higher income families.
The level of taxation, as a share of GDP, is significantly lower in the United Kingdom than the level of
spending. This reflects, as Reform has argued, the link between the revenue and spending sides of the
government budget being broken since 1997.9 The United Kingdom’s tax system is also relatively complex
and operates with very narrow bases. For example, the zero-rating and reduced-rating of VAT on products
ranging from children’s clothing to contraceptives results in substantial lost revenue. The consequence is
that the United Kingdom’s “C-efficiency” rate, which measures the efficiency of consumption tax systems, is
one of the lowest (worst) in the OECD.10
5Hartwich and Gill (2011), Price Drivers: Five Case Studies in How Government is Making Australia Unaffordable, Centre for Independent
Studies, Policy Monograph 125.
6OECD (2011), “6. Expenditures structure by levels of government”, Government at a glance 2011, Paris.
7Malpass (2011), The Decade-Long Binge: How Government Squandered Ten Years of Economic Prosperity, Centre for Independent
Studies, Canberra.
8Haldenby et al. (2009). The Front Line, Reform.
9Bassett et al. (2010), Reality Check: Fixing the UK’s Tax System, Reform.
10Bassett et al. (2010), Reality Check: Fixing the UK’s Tax System, Reform.
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Entitlement Reform
The countries
Spending on the welfare state
The focus of this report is on the features of the welfare state most directly related to population ageing. For
this reason spending on some parts of the welfare state, such as education, are not directly addressed. The
focus is instead on social security transfers and health and care related spending. In all three countries
these are the largest areas of government spending. To illustrate these governments report:11
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I n Australia, the 2012-13 Commonwealth Budget showed spending on “social security and welfare” of
AU$131.7 billion. This includes support to the aged, families with children, the sick and disabled,
veterans, carers and income support payments. This was equivalent to around 35.0 per cent of total
expenses. Health was the second largest area of spending at AU$61.0 billion. Welfare spending was
2.2 times larger than spending on health and 4.5 times larger than spending on education.12
In New Zealand, the 2012-13 Budget showed core crown expenditure on “social security and welfare”
of NZ$23.2 billion. This includes New Zealand Superannuation, family tax credits, unemployment
benefits and KiwiSaver subsidies. This was equivalent to around 31.5 per cent of total Core Crown
Expenses. Health spending was estimated as NZ$14.7 billion. Welfare spending was 1.6 times larger
than spending on health and 1.9 times larger than spending on education.13
In the United Kingdom, the 2012-13 Budget showed spending on “social protection” of £207 billion.
This includes social security benefits and refundable tax credits. This was equivalent to around 30.3
per cent of Total Managed Expenditure. Spending on health and personal social services were
estimated at £130 billion and £33 billion, respectively. Welfare spending was 1.3 times larger than
spending on health and personal social services and 2.3 times larger than spending on education.14
The countries have seen large increases in spending on their welfare states over recent years. Some
spending varies with economic conditions, with increasing unemployment, for example, leading to greater
expenditure on assistance to support people back into work (the automatic stabilisers). Yet in all three
countries this spending increased even when the economy was growing. Although there are challenges in
comparing Budget figures over time, the scale of the increase in spending can be indicated by Budget data in
the three countries, which show:
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In Australia, the outturn spending for social security and welfare was estimated at AU$57.1 billion in
1999-2000. This was of total expenses of AU$160.4 billion.15 This gives an average annual increase in
welfare spending of 6.6 per cent by 2012-13, which is just below an average annual increase in total
spending of 6.8 per cent. This compares with nominal GDP growth between 1999 and 2012 of 6.7 per
cent.16
In New Zealand, the 1999 Budget Economic and Fiscal Update estimated spending on social security
and welfare at NZ$13.7 billion in 1999-2000. This was of total unadjusted expenses of NZ$36.4
billion.17 This gives an annual increase in welfare spending of 4.1 per cent by 2012-13, which
compares with an average annual increase in total spending of 5.6 per cent and nominal GDP growth
between 1999 and 2012 of 5.1 per cent.
In the United Kingdom, Budget 1999 estimated that £102 billion was spent on social security in
1999-2000. This was of total expenditure of £349 billion.18 The annual increase in welfare spending
by 2012-13 was 5.6 per cent, which compares with the average annual increase in total spending of
5.3 per cent and nominal GDP growth between 1999 and 2012 of 4.0 per cent.
11Care is needed in cross country comparisons of Budgets as different countries may define expenditures in a variety of ways in their
systems of financial management and reporting. The treatment of expenditures may also change over time. The data, nonetheless,
illustrate the importance of welfare and health spending in the three countries.
12Swan (2012), Budget Overview, Appendix G.
13English (2012), Budget 2012, Key facts for taxpayers.
14Osborne (2012), Budget 2012, Chart 1: Government spending 2012-13.
15Costello (1999), Budget 1999-2000, Appendix B: Expenses by function and sub-function.
16Nominal GDP growth is estimated for 2011-2012 and all figures are drawn from the IMF’s World Economic Outlook Database for October
2012.
17Birch (1999), Budget Economic and Fiscal Update, Annex B: Expense table, 20 May.
18Brown (1999), Budget 99, Chart 1.2.
12
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The countries
There have been several drivers of these increases in welfare spending in the three countries.19 These have
included:
>>
>>
Spending on programmes designed to make work pay, such as the Family Tax Benefit Part A in
Australia, Working for Families tax credits in New Zealand and the Working and Child Tax Credits in
the United Kingdom. It was hoped that by encouraging work these programmes would reduce child
poverty and the overall costs of welfare. These programmes improved the incentives to work for sole
earners, but also meant that incentives for second earners in households to work were reduced.20
Spending on middle-class welfare (spending on middle-income and higher-income families). In New
Zealand this included the extension to the Working for Families programme after 2005 and the
introduction of an Independent Earner Tax Credit after 2008. The extension of middle-class welfare
in the United Kingdom since 1997 has been more extensive with Labour introducing 13 new benefits
between 1997 and 2010. Many of these benefits lacked any real rationale beyond simply attracting
votes.21
Age-related benefits
Age-related benefits are a major driver of welfare spending. As shown in table 7, OECD data show that in
2007 old age benefits were second only to health related spending in contributing to total government
spending on social protection (a significant proportion of this health spending is also related to old age).
Table 7: Government spending on social protection (2007 and 2012)
Sources: OECD iLibrary SOCX
Australia
New Zealand
United
Kingdom
2012E Government spending on social protection (% of GDP)
16.1
21.8
22.9
2007 Government spending on social protection (% of GDP)
16.0
18.4
20.5
27
23
28
Share on survivors, %
1
1
1
Share on incapacity, %
14
13
12
Share on health, %
36
39
33
Share on family, %
15
17
16
Share on active labour market programmes, %
2
2
2
Share on unemployment, %
3
1
1
Share on housing, %
2
4
7
Share on other, %
1
1
1
2007 private spending on social protection (% of GDP)
0.5
0.0
0.8
2007 voluntary spending on social protection (% of GDP)
3.3
0.4
5.0
Of which:
Share on old age, %
To illustrate the potential effect of age-related benefits on total social protection in New Zealand the 2012
Budget Economic and Fiscal Update forecast changes for cumulative growth in Core Crown Expenses and
in New Zealand Superannuation costs.22 These data illustrated that between 2012 and 2016 the increased
spending on New Zealand Superannuation would account for just over half (NZ$3.5 billion of NZ$6.8
billion) of the increase in Core Crown Expenses. Indeed, the share of social assistance expenses for which
New Zealand Superannuation accounts is expected to grow from 42.8 per cent to 51.1 per cent.
19These drivers may be translated into both volume (e.g., extending the scope of coverage) and price (e.g., the generosity of assistance)
changes.
20Nolan (2006), “Tax relief for breadwinners or caregivers? The designs of earned and child tax credits in five Anglo-American countries”,
Journal of Comparative Policy Analysis, Volume 8, Number 2, June 2006 , pp. 167-183(17).
21Cawston et al. (2009), The end of entitlement, Reform.
22English (2012), Budget Economic and Fiscal Update, New Zealand Treasury.
13
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Entitlement Reform
The countries
A similar pattern is apparent in the United Kingdom, with 54 per cent (around £100 billion) of welfare
expenditure being spent on the elderly.23
Key features of age-related spending in the three countries are discussed below in more detail. Australia
employs a mixture of public funding, compulsion and “nudges” and “incentives.” The use of compulsion is
most clearly shown in the Australian Superannuation Guarantee. Since 1992 employers have been required
to make mandatory pension contributions for employees. The rate is currently 9 per cent.
The Australian Government also provides basic universal health insurance (Medicare). While most
taxpayers pay a 1.5 per cent Medicare Levy, an additional 1 per cent Medicare Levy Surcharge is payable by
taxpayers who earn more than AU$84,000 (the threshold for single taxpayers) and do not have private
health insurance. If a person has not taken out private hospital cover by 1 July after their 31st birthday, then
when (and if) they do so after this time their premiums must include a loading of 2 per cent per annum. The
loading continues for 10 years and applies only to premiums for hospital cover.
New Zealand places a greater degree of emphasis than Australia on public funding, although the use of
nudges and incentives has increased in recent years. The cornerstone of New Zealand’s system of support
for the elderly is the universal pension (New Zealand Superannuation) available to men and women at the
age of 65. All people eligible for New Zealand Superannuation receive SuperGold Cards, which entitle
holders to government concessions, such as free off peak travel and discounted services from local
government. A start has been made with managing the costs of pensions in New Zealand, with
contributions (currently suspended) being made to prefund the costs of New Zealand Superannuation and
the introduction of (subsidised) personal retirement accounts. However, a reluctance to increase the
retirement age, the cost of the KiwiSaver subsidies and the need to manage the long-term costs of health
and long-term care require further debate.
In the United Kingdom, while the debate on long-term care has been prolonged (there is still political
reluctance to commit to a funding framework) there is a need for further debate on managing the cost of
pension commitments. Indeed, although some changes in the treatment of public sector pensions have
been made – contributions to individual retirement accounts are now being encouraged through autoenrolment (along with the establishment of a public pension provider (National Employment Savings Trust
(NEST)), and a proposed increase in the retirement age has been brought forward – the Government
remains largely in denial about the need to reduce the longer term cost of state pensions and has increased
these costs through changing the basis for indexation. The National Health Service provides a
comprehensive range of health services, most of which are free at the point of use to residents of the United
Kingdom. Recent NHS reforms have not addressed the need to lower the long-term cost of the system.
23Department for Work and Pensions (2010), Benefit Expenditure Tables: Medium Term Forecast.
14
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Entitlement Reform
The countries
Table 8: Key features of the three countries’ welfare states
Source: Reform
Australia
The state pension age for men is 65. The age for women is being equalised with the male
age. Both ages are scheduled to move to 67 by 2030. The State Pension is means-tested
and funded through general taxation. This means-test includes both income and asset
tests. The State Pension is indexed to the highest of the CPI, Male Total Average Weekly
Earnings and Pensioner and Beneficiary Cost Index. Supplementary pension benefits
include the Pension Supplement, Carer Payment and Disability Support pension. Employers
are required to make compulsory superannuation contributions of 9 per cent. These
contributions are scheduled to increase to 12 per cent by 2019. Health services are funded
publicly and through compulsory Medicare levies and nudges and incentives are used to
encourage private insurance. Around 70 per cent of the cost of residential care is covered by
government subsidy. Care is subject to a means-test and families may use accommodation
bonds.
New Zealand
The state pension age for men and women is 65. There are no plans to increase the age. The
state pension is flat-rate, universal and non-contributory. The New Zealand Superannuation
Fund was introduced to help smooth the future public cost of these pensions (currently
suspended). Reflecting the universal nature of the state pension the private pillar in New
Zealand has been small. In 2007, a subsidised system of auto-enrolment into defined
contribution pensions was introduced (KiwiSaver). KiwiSaver includes member contributions,
employer contributions and government subsidies. Long-term care is means-tested and,
although there are some user charges, healthcare is largely publicly funded.
United Kingdom
The State Pension Age for men is 65. The age for women is being equalised with the male
age. Both ages are scheduled to move to 68 by 2046. A commitment has been made to link
future increases to changes in longevity. Rates of the Basic State Pension reflect National
Insurance contribution histories. An additional State Pension may be paid and contracting
out from this pension is possible. Take-up of the State Pension can be deferred. The
indexation of the State Pension has been made more generous through the introduction
of a triple lock. Health services are largely taxpayer funded and provided “free at point of
care.” Auto-enrolment in defined contribution pensions began in October 2012. Significant
resources are spent on non-means-tested pensioner benefits, which have limited policy
rationales (such as free TV licences, free bus passes and a winter fuel allowance).
15
Entitlement Reform
3
Pensioner incomes
Pensioners receive income from a range of sources, not just the government. Quite often, however, analysis
of the long-term fiscal outlook for the welfare state fails to consider recent and likely future trends for the
full range of incomes sources. This is a mistake. These trends are discussed below in relation to four key
areas (the four pillars).
Sources of pensioner incomes
The Geneva Association has argued that pension systems should have four pillars:
>>
>>
A state pension to meet basic needs in old age and prevent people from falling into poverty (pillar I).24
A private occupational pillar funded by employers and employees that “tops up” the first to keep
living standards at a higher level (pillar II).
>>
A voluntary individual savings pillar that contributes additional income and risk diversity (pillar III).
>>
A fourth pillar based on part-time post retirement work (pillar IV).25
Concerns have been expressed that the private pillars (especially pillars II and III) are currently too small in
the three countries and that individuals are not doing enough to protect themselves. This is not a universal
view, however, and so to help throw light on these issues table 9 shows OECD data on the sources of
pensioner incomes, relative pensioner incomes and pensioner poverty rates.26
Prior to the introduction of KiwiSaver, New Zealand had a very narrow base for funding pensioner incomes.
As table 9 shows, government transfers (pillar I) accounted for a much higher share of pensioner income in
this country in the mid-2000s (64.4 per cent of income for the over 65s) than in Australia (44.6 per cent)
and the United Kingdom (49.8 per cent). The situation in New Zealand has improved since the introduction
of KiwiSaver on 1 July 2007, with around 2.0 million people, close to 45 per cent of the country’s
population, having joined the scheme. Nevertheless, concern has been expressed that even with KiwiSaver
not enough is being done to broaden the funding base for pensioner incomes, particularly given the
interaction between the New Zealand and Australian labour markets.27
24Drawing a specific poverty line can be a contentious exercise. Key debates include the merits of relative and absolute measures and how
family (if that is the relevant measurement unit) is adjusted (equivalised) to take into account differences in circumstances (Nolan (2011),
The fairness test, Reform).
25Liedtke and Schanz (2012), “Editorial and Executive Summary”, in Liedtke and Schanz (eds) (2012), Addressing the Challenge of Global
Ageing: Funding Issues and Insurance Solutions, The Geneva Association, p. 3.
26Nonetheless, as a joint report by the United Kingdom government and the insurance industry (the Insurance Industry Working Group)
noted, estimates are that the overall protection gap in the United Kingdom could be as high as £2.4 trillion. The Insurance Industry
Working Group went on to argue that there were opportunities “for the industry to act in partnership with the Government to increase
savings and protection provision, where appropriate, and help consumers manage financial distress caused by accidents, ill-health or
old age” (Insurance Industry Working Group (2009), Vision for the insurance industry in 2020, HM Treasury, p. 9).
27Financial Services Council (2012), Pensions for the Twenty First Century: Retirement Income Security for Younger New Zealanders, p. 26.
16
3
Entitlement Reform
Pensioner incomes
Table 9: Sources of pensioner incomes, relative pensioner incomes and pensioner poverty rates
Source: OECD (2011), Pensions at a Glance 2011: Retirement Incomes in OECD and G20
Countries, OECD, Paris
Australia
New Zealand
United Kingdom
OECD 30
Sources of pensioner Public transfers, 44.6 Public transfers, 64.4 Public transfers, 49.8 Public transfers,
incomes (mid-2000s),
59.6
Work, 19.4
Work, 15.1
Work, 11.9
% of total
Work, 21.4
Capital, 35.9
Capital, 20.5
Capital, 38.3
Capital, 19.1
Incomes of people
over 65, % of
population incomes
Incomes of all
people over 65, % of
population incomes
All over 65, 69.7
All over 65, 68.0
All over 65, 72.9
All over 65, 82.4
66 to 75, 71.9
66 to 75, 69.7
66 to 75, 76.7
66 to 75, 85.9
Over 75, 66.4
Over 75, 64.5
Over 75, 68.2
Over 75, 77.9
Mid-2000s, 69.7
Mid-2000s, 68.0
Mid-2000s, 72.9
OECD 25
Mid-1980s, 66.7
Mid-1980s, 80.5
Mid-1980s, 66.3
Mid-2000s, 82.6
Mid-1980s, 82.4
Percentage of
pensioners below
50% median
household
disposable income
All 65+, 26.9
All 65+, 1.5
All 65+,10.3
All 65+, 13.5
66 to 75, 26.1
66 to 75, 1.6
66 to 75, 8.5
66 to 75, 11.7
75+, 28.3
75+, 1.4
75+, 12.6
75+, 16.1
Men, 24.6
Men, 2.1
Men, 7.4
Men, 11.1
Women, 28.9
Women, 0.9
Women, 12.6
Women, 15.2
Single, 49.9
Single, 3.2
Single, 17.5
Single, 25.0
Couple, 17.7
Couple, 1.1
Couple, 6.7
Couple, 9.5
12.4
10.8
8.3
10.6
Public expenditure on 1990, 3.0
old-age and survivors
1995, 3.6
benefits, % of GDP
2000, 3.8
1990, 7.4
1990, 4.8
OECD 34
1995, 5.7
1995, 5.4
1990, 6.1
2000, 5.0
2000, 5.3
1995, 6.7
2005, 3.3
2005, 4.3
2005, 5.6
2000, 6.9
2007, 3.4
2007,4.3
2007, 5.4
2005, 7.1
Share of whole
population below
50% median
household
disposable income
2007, 7.0
In the United Kingdom the base for funding pensioner incomes is broader, especially given the coverage of
private sector pension funds. Active membership of private sector pension funds rose from 1.6 million in
1936 to 3.1 million in 1953, reaching a peak of 8.1 million active members in 1967. However, this trend has
now reversed, and since the 1970s there has been an underlying downward trend. As the 2004 Pensions
Commission noted, “active membership of private sector occupational schemes declined slightly from
1979-2000, while [defined benefit] membership in particular fell significantly.”28
Generally this long-term trend has accelerated in the last 10 years and is significant as defined contribution
schemes have lower contribution rates than defined benefit ones. These changes in occupational pensions
interact with the United Kingdom’s mandatory earnings-related tier. This tier requires workers to make
contributions to a Second State Pension (S2P) from incomes between lower and upper earnings limits. This
tier is funded on a Pay As You Go Basis. The consequence is that pensioners will increasingly rely on state
funding for both their core and for their second pension, and thus government transfers will play a larger
role in supporting pensioner incomes.
28Turner, Drake and Hills (2004), Pensions: Challenges and Choices – The First Report of the Pensions Commission, The Stationery Office,
p. 80.
17
3
Entitlement Reform
Pensioner incomes
In Australia employer superannuation contributions (the Australian Superannuation Guarantee) have been
mandatory since 1992 and have risen from 3 per cent to 9 per cent. Employers are required to make these
contributions even if employees make no contributions of their own. Employee contributions are voluntary
and are paid out of after-tax income. Evidence on the role of the Australian Superannuation Guarantee is
mixed. Commentators often point to the build-up in Australian superannuation fund assets as an indication
that Australian national savings have increased as a result of this programme, but using this build-up of
funds as a proxy for saving rates overlooks evidence that the net impact of this scheme on saving is likely
less than the growth in superannuation assets, as a proportion of the income directed to the superannuation
funds has been diverted from other saving and the costs associated with tax concessions lead to a potential
opportunity cost of reduced government savings.
Policy objectives and trade-offs in public support
What is clear from the discussion above is that, as the first report of the United Kingdom’s 2004 Pension
Commission noted, state pension systems pursue a range of different objectives. Two prominent (but not
uncontroversial) objectives are to prevent poverty and to replace incomes from working lives.29 This must
take place within fiscal constraints. Different countries will strike a different balance between these
objectives and this can be illustrated by data relating to replacement rates and poverty (summarised in table
9). These data show:
>>
>>
>>
>>
>>
Of the three countries the degree to which the state pension replaces income from work is lowest in
New Zealand. The United Kingdom provides the highest replacement rate. Replacement rates in all
three countries are, however, below the average levels of replacement rates in the OECD.
Between the mid-1980s and mid-2000s, replacement rates improved in Australia and the United
Kingdom, while they fell by 11.5 percentage points in New Zealand.
Relative poverty rates (based on 50 per cent of the median household disposable income) are
relatively high in Australia (only below South Korea, Ireland and Mexico among OECD countries),
which may reflect the high median income in that country. Poverty rates in the United Kingdom are
below the OECD average, while poverty rates in New Zealand are very low (the lowest in the OECD).
In Australia and the United Kingdom the pensioner poverty rate is higher for female pensioners than
male, and this gap is higher in the United Kingdom. The opposite is the case in New Zealand,
although the poverty rates for both men and women are very low. Single pensioners are more likely to
be in poverty than partnered pensioners. The overall pensioner poverty rate is higher than the
poverty rate for the population as a whole in Australia and the United Kingdom.
Public expenditure on survivor and old aged benefits has fallen significantly in New Zealand since
1990. Public expenditure on these benefits in Australia is currently the lowest of the three countries,
although they are all well below the OECD average for this spending.
These data illustrate some of the trade-offs involved in the provision of public support to address agerelated costs. They show that if schemes are to achieve poverty reduction goals and also keep costs down,
then replacement rates for average workers must often be lower.30 This also, however, depends on the
coverage (degree of targeting) and take-up of the pension. The universal New Zealand Superannuation
programme is a good example of these trade-offs, as the universal nature of this programme means that a
very small increase in generosity has a large fiscal cost and so fiscal constraints mean the programme must
focus more on poverty reduction than on smoothing incomes for average workers. This also highlights that,
more generally, pillar I programmes that act as a safety net should focus on poverty reduction goals while
programmes in pillars II and III, which are more able to provide a level of income that varies with family
circumstances (such as previous contributions), can more effectively pursue income smoothing goals.
29Turner, Drake and Hills (2004), Pensions: Challenges and Choices – The First Report of the Pensions Commission, The Stationery Office,
p. 60.
30Systems can pursue poverty reduction and income replacement goals within fiscal constraints through increased targeting efficiency,
although greater targeting may create additional problems (such as concerns around take-up).
18
3
Entitlement Reform
Pensioner incomes
The role of private pillars
The four pillars have been put under particular pressure from cyclical (e.g., related to current economic
conditions) and structural factors (which will persist even when economies return to full health):
>>
>>
>>
>>
The fiscal positions of governments have deteriorated, which leaves less scope for coping with the
increasing cost of pensions and healthcare (pillar I). Part of this deterioration is a consequence of the
Global Financial Crisis and could be reversed as economic growth improves, if governments act in a
fiscally responsible manner. Government finances are also facing structural challenges, however,
particularly given population ageing and increasing dependency ratios.
Pension funds and insurers face low returns on investments as governments have changed
macroeconomic settings to stimulate economies (e.g., through low interest rates and nonconventional monetary policy (Quantitative Easing)).31 This weakens their ability to contribute to
pillars II and III. However, this could be temporary since monetary policy should reverse as the
economies return to full health. Low interest rates also reduce the value of annuities taken out by
retirees during the recession. The impact of these macroeconomic factors can be amplified by
financial regulation that restricts the flexibility of funds’ asset allocation.
The recent slowdown in growth has put employers’ profitability under pressure, which encourages an
accelerated withdrawal from the provision of benefit packages (pillar II). This pillar had already been
under pressure due to globalisation and the increasing longevity of current and past recipients.
Global competition and increasing longevity are not short-term phenomena.
There has been a shift towards longer working lives, with more people working beyond the state
retirement age. This trend for working later to is likely to continue, particularly given the impact of
the global financial crisis on superannuation balances and wealth, and raises a number of policy
challenges.
Consequently, as Liedtke and Schanz noted: “the balance between the various pillars is set to change: state
pensions are being reined back and occupational schemes are getting not only less generous but also less
predictable. In order to offset the accelerating erosion of pillars I and II, the two remaining pillars, i.e.
private savings and insurance solutions as well as working beyond formal retirement ages, will need to be
strengthened markedly.”32 Yet extending the role of these private solutions raises three key issues:
>>
Drawing down wealth (decumulation).
>>
Transferring risk and the demise of yields.
>>
Work in retirement.
Drawing down wealth (decumulation)
Saving can be seen in two ways: income less expenditure (the flow approach) or as change in wealth
between two consecutive points in time (the stock approach). Flow figures tend to pale in comparison with
stock measures, which illustrate how people may save for retirement through holding a range of forms of
wealth, especially housing assets. This wealth can play an important role in supporting retirement incomes.
Releasing equity tied up in housing stock can, for example, lift living standards of income poor but asset
rich retired households, extend the time families can comfortably live in their own homes and fund care.
31Saga (2012), The impact of recent fiscal and monetary policy decisions on pensioner households, Saga.
32Liedtke and Schanz (2012), “Editorial and Executive Summary”, in Liedtke and Schanz (eds) (2012), Addressing the Challenge of Global
Ageing: Funding Issues and Insurance Solutions, The Geneva Association, pp. 3-4.
19
3
Entitlement Reform
Pensioner incomes
Table 10: Home ownership by age group
Sources: Department for Communities and Local Government (2011), English Housing Survey
2009-10 Household Report; Australian Bureau of Statistics (2011), Housing Occupancy and
Costs, 2009-10; Statistics New Zealand (2006), 2006 Census of Population and Dwellings
Australia
Home
ownership (%
total)
New Zealand (1)
Of which
Home
owned ownership (%
outright (%)
total)
United Kingdom
Of which
Home
owned ownership (%
outright (%)
total)
Of which
owned
outright (%)
15–24
4
1
1
1
10
25–34
14
3
10
10
5
35–44
18
9
22
20
10
45–54
19
24
24
21
25
55–64
17
50
20
19
63
65 or over
28
78
22
65
29
93
Note (1): Most recent data available for New Zealand is taken from 2006 Census
In the United Kingdom, people aged over 65 hold 29 per cent of owner occupied homes, 93 per cent of
which are owned outright without a mortgage.33 As the Pensions Policy Institute has noted the value of
housing wealth owned by people over the State Pension Age is already £907 billion and will be likely to
increase to £1,274 billion by 2030 (in 2009 earnings terms).34 There is a similar picture in Australia where
28 per cent of homes are owned by the over 65s, almost 80 per cent of which with no mortgage. In New
Zealand, 22 per cent of people who own their own home are aged 65 or over, with 65 per cent of properties
in this category owned outright.
The use of housing wealth as a vehicle for retirement income raises potential challenges. Private products
have not yet provided much of a solution to the challenge of releasing this equity and population ageing may
impact on the capital values of residential property. In relation to private products demand side barriers
have been identified as holding back the growth in the equity release market. These include a lack of public
understanding, attitudes towards housing equity (an unwillingness to sell homes), the reputation of equity
release and internal constraints (limited market intelligence, limited flexibility and cost structures).35
Supply side barriers have also been identified (including product innovation, funding, risk and capital).
Decumulation is also an issue for financial assets. There are two key challenges. The first is whether
government policy is overly restrictive in limiting the levels and forms of draw-down (perhaps to reduce the
ability of pensioners to manipulate their incomes to gain eligibility to means-tested benefits). The second is
whether families make the most of the financial assets they have built up. On this second issue the Pension
Income Choice Association has noted that in the United Kingdom the “process of shopping around [for a
retirement income] can potentially increase income in retirement by 30 per cent or more, not just for the
individual pension member but also for their spouse or partner for the rest of their lives. The process costs
nothing, yet only around 1 in every 3 people approaching retirement take the trouble to move their pension
fund to improve their retirement income.”36 This failure to shop around is of growing importance given the
trends for risk to be transferred to individuals and the demise of yields.
33Department for Communities and Local Government (2011), English Housing Survey 2009-10 Household Report.
34Cawston et al. (2010), The money-go-round, Reform.
35Just Retirement (2012), The role of housing equity in retirement planning, Just Retirement.
36Pension Income Choice Association (2009), Open letter – Pension Income Choice Association.
20
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Entitlement Reform
Pensioner incomes
Transferring risk and the demise of yields
The nature of risk that individuals face has changed. As the 2004 Pensions Commission noted, the
“declining level of pension right accumulation is being accompanied by a major shift in risk from the State,
employer, and insurance companies to individuals.”37, 38 The longer term trend towards defined
contribution pensions away from defined benefit ones has shifted more of the investment return risk to
individuals. This investment risk can be shown in the “demise of yield,” which highlights the pressure on
yields for private pensions from:
>>
>>
>>
Decreasing real interest rates. Real interest rates (i.e., after inflation) in the United Kingdom are
currently negative (around -2.0 per cent), having fallen from a peak of 7.2 per cent in 1986. This has
had a significant impact on investment and private pension income. With the Bank of England base
rate remaining at the historic low of 0.5 per cent and inflation above the target rate, saving remains
unattractive. At the same time returns are lower on fixed rate bonds which often form a large
component of pensioner private pensions. Although real interest rates are currently positive in
Australia (around 2.3 per cent) and New Zealand (around 1.5 per cent), they have fallen in recent
years from 6.6 and 4.7 per cent respectively in 2000.
Falls in the value of annuities. Annuity rates have been falling in the United Kingdom over 20 years
and the change in macroeconomic policy in response to the global financial crisis and subsequent
recessions (such as quantitative easing) has further deepened this trend (with rates falling by 20 per
cent in the last three years).39 In addition, European Union gender legislation and the effects on
insurance companies of Solvency II are expected to erode the value of annuities further. In Australia
annuities have been less popular than in the UK, however they are becoming increasingly popular as
a defensive (lower return) investment product. There is an absence of a functioning annuities market
in New Zealand leaving people “increasingly reliant on managing accumulated financial assets to
supplement New Zealand Superannuation without the benefit of longevity insurance.”40
Volatile equity markets. The growth in the gross value of pension assets has slowed since the onset of
the global financial crisis. As a result of more volatile equity markets, pension asset allocations have
moved away from equities towards investment perceived to be less risky such as bonds and new asset
classes such as property. In the United Kingdom this shift has been marked, with reduction in equity
investment between 2001 and 2011 from 67 per cent to 45 per cent of pension assets while bond
holdings increased to almost 40 per cent of portfolios. In Australia the level of equity investment is
similar to the UK, with alternative investments such as property representing almost 25 per cent of
portfolios.41
Work in retirement
Reflecting both policy changes (such as the increase in statutory retirement ages) and the demise of yield
there is a longer term trend for people to work for longer.42,43 In New Zealand there has been a substantial
increase in the effective retirement age (the age at which people actually exit the workforce) since the
mid-1980s and men and women will on average work beyond their official retirement age (the official age
for receiving a state pension).44 In Australia and the United Kingdom the effective retirement ages have
risen also, although not quite to the same level as in New Zealand. The Australian Bureau of Statistics
expects the trend for working later to continue, particularly given the impact of the global financial crisis on
superannuation balances and wealth.
The Chartered Institute of Personnel and Development has identified a range of reasons for employees to
work beyond the state retirement age. It found that the main reason is financial, with this being cited by 72
per cent of respondents of a survey included in their July 2010 Employee Outlook.45 This was followed by
wanting to continue to use skills and experience (47 per cent), social interaction (41 per cent) and self37Turner, Drake and Hills (2004), Pensions: Challenges and Choices – The First Report of the Pensions Commission, The Stationery Office,
p. 104.
38Categories of risk are: investment return risk, longevity risk (specific longevity risk post retirement, average cohort longevity risk post
retirement, long-term average longevity risks pre-retirement) and default/political risk.
39MGM Advantage (2012), MGM Advantage Annuity Index, September.
40Rashbrooke (2006), Asset decumulation: optimising income needs for retirement.
41Towers Watson (2012), Global Pension Assets Study 2012, January.
42OECD (2010), Ageing and Employment Policies: Statistics on Average Effective Age of Retirement.
43It is sometimes argued that extending working lives may put downward pressure on wage or displace employment of younger workers.
This is, however, based on view that the amount of work is fixed in the economy (the “lump of labour fallacy”). This view overlooks the
growth potential of the economy and how increasing the productivity in the labour market can improve growth and the jobs available.
44OECD (2010), Ageing and Employment Policies: Statistics on Average Effective Age of Retirement.
45CIPD (2010), Employee Outlook Report, Summer, p. 3.
21
3
Entitlement Reform
Pensioner incomes
esteem (34 per cent). The most important factor that would encourage people to work beyond state
retirement age was money (43 per cent said this was most important). Other important factors were flexible
working (28 per cent), more varied and interesting work (a fifth) and a deferred, larger state pension (16 per
cent).46
Table 11: Average effective age of retirement 1970 to 2011 (weighted average of (net) withdrawals from the labour market at different ages over a 5-year period for workers initially aged 40
and over).
Source: OECD (2011), Ageing and Employment Policies - Statistics on average effective age of
retirement
1965-70
1975-80
1985-90
1990-95 1995-2000
2000-05
2005-10
2006-11
Australia
67.4
64.1
62.5
62.3
62.0
63.7
65.1
65.2
New Zealand
69.5
66.2
63.0
63.0
64.3
65.8
65.9
65.9
United
Kingdom
67.7
66.0
62.8
62.0
62.4
63.3
64.1
63.6
Australia
65.2
60.1
60.4
59.5
59.7
61.4
63.2
62.9
New Zealand
68.9
63.8
61.3
60.8
59.9
63.9
65.4
65.7
United
Kingdom
65.7
62.6
60.7
60.7
60.9
61.4
61.9
62.3
Men
Women
This shift towards longer working lives raises a number of policy challenges. As Tinsley noted, the “over-50s
currently unemployed are much less likely than any other age group to find work in the next year,” and this
would be much worse if the “invisible unemployed” (people who have left the labour market completely) is
also taken into account.47 With the extension of working lives there is thus a role for efforts to improve the
labour market outcomes for older workers.48
46CIPD (2010), Employee Outlook Report, Summer, p. 3.
47Tinsley (2012), Too much to lose: understanding and supporting Britain’s older workers, Policy Exchange, London.
48See, for example, Harrop (2010), in “Reforming welfare: Transcript”, in Nolan (ed) (2010), The first hundred days, Reform.
22
Entitlement Reform
4
Demographic changes and
fiscal headroom
This chapter illustrates the effect of demographic changes on overall fiscal headroom and the permanent
change in affordability. This chapter also illustrates how these changes are reflected in different areas of
spending and the sensitivity of these projections to key assumptions.
How the populations will age
With people living longer and birth rates decreasing, the population as a whole is getting older. To help
quantify these changes in the ages of the populations the statistical authorities in each of the three countries
issue a range of population projections. These projections show, for example, that:
>>
>>
>>
In 2010 in Australia the median age was 36.9 years (37.1 years in 2011).49 On 2008 projections, the
median age could be 41.3 to 44.5 in 2050.50
The median age of New Zealand’s population is likely to increase from 37 years in 2012 to 41 by the
late 2030s and to 44 by 2061.51
The median age in the United Kingdom is projected to rise to 42.2 years by 2035, an increase of 2.5
years from 39.7 in 2010.52
As well as changes in the median age, these population projections can be used to show how different age
groups will grow at different rates. To illustrate Reform undertook an analysis of these population
projections. The results are shown in table 12 and the key themes that emerged were:
>>
>>
>>
>>
>>
>>
A large increase in the population aged 65 and over: projected to grow from 13.7 per cent of total
population to 22.2 per cent between 2010 and 2050 in Australia; from 13.1 per cent to 23.6 per cent
in New Zealand; from 16.6 per cent to 24.2 per cent in the United Kingdom.
The population aged 85 and over grows significantly too: projected to grow from 1.8 per cent of total
population to 4.6 per cent between 2010 and 2050 in Australia; from 1.6 per cent to 5.6 per cent in
New Zealand; from 2.3 per cent to 6.4 per cent in the United Kingdom.
The working aged population (aged 15 to 65) shrinks: projected to shrink from 67.3 per cent of the
total population in 2010 to 61.2 per cent in 2050 in Australia; from 66.4 per cent to 59.9 per cent in
New Zealand; and from 66.0 to 59.4 per cent in the United Kingdom.
This was also apparent for the working aged population under 55: projected to shrink from 49.1 per
cent of the total population in 2010 to 43.3 per cent in 2050 in Australia; from 55.4 per cent to 48.0
per cent in New Zealand; and from 54.2 to 47.6 per cent in the United Kingdom.
There is a growing old age dependency ratio: this will increase from 0.20 to 0.36 in Australia between
2010 and 2050, which means a fall in the number of working aged people per retired person from 4.9
to 2.8; it will increase from 0.20 to 0.39 in New Zealand, which means a fall in the number of working
aged people per retired person from 5.1 to 2.5; it will increase from 0.25 to 0.41 in the United
Kingdom, which means a fall in the number of working aged people per retired person from 4.0 to
2.5.
The total dependency ratio (not shown in table 12) grows too: this will increase from 0.49 to 0.63 in
Australia between 2010 and 2050, which means a fall in the number of working aged people per
dependant from 2.1 to 1.6; it will increase from 0.51 to 0.67 in New Zealand, which means a fall in the
number of working aged people per dependant from 2.0 to 1.5; it will increase from 0.52 to 0.68 in
the United Kingdom, which means a fall in the number of working aged people per dependent from
1.9 to 1.5.
49Australian Bureau of Statistics (2012), Population by Age and Sex, Regions of Australia 2010.
50Australian Bureau of Statistics (2008), Population projections 2006 to 2101.
51Statistics New Zealand (2012), National population projections: 2011 (base) – 2061, July 2012.
52ONS (2012), Population Ageing in the United Kingdom its constituent countries and the European Union.
23
4
Entitlement Reform
Demographic changes and fiscal headroom
Table 12: Demographic changes in Australia, New Zealand and the United Kingdom
Sources: Australian Bureau of Statistics (2008), Population Projections, Australia, 2006 to 2101,
Series B; Statistics New Zealand (2012), Projected Population of New Zealand by Age and Sex,
2011 (Base) to 2061, Cyclic Migration; Office for National Statistics (2011), 2010-Based National
Population Projections, Principal Projection
Australia
65+,
% of total
85+, Working age,
% of total
% of total
Working age
under 55,
% of total
Old age
dependency
ratio
Inverse
old age
dependency
ratio
2010
13.7
1.8
67.3
49.1
0.20
4.90
2015
15.3
2.1
66.1
47.8
0.23
4.31
2020
16.8
2.2
64.8
46.7
0.26
3.84
2030
19.7
2.8
62.6
45.5
0.32
3.17
2040
21.3
3.9
61.7
44.3
0.35
2.90
2050
22.2
4.6
61.2
43.3
0.36
2.76
85+, Working age,
% of total
% of total
Working age
under 55,
% of total
Old age
dependency
ratio
Inverse
old age
dependency
ratio
New Zealand
65+,
% of total
2010
13.1
1.6
66.4
55.4
0.20
5.09
2015
15.0
1.8
65.4
53.7
0.23
4.37
2020
16.8
2.0
64.0
51.6
0.26
3.80
2030
21.1
2.7
60.9
49.7
0.35
2.89
2040
23.3
4.2
59.6
49.8
0.39
2.56
2050
23.6
5.6
59.9
48.0
0.39
2.53
85+, Working age,
% of total
% of total
Working age
under 55,
% of total
Old age
dependency
ratio
Inverse
old age
dependency
ratio
United Kingdom
65+,
% of total
2010
16.6
2.3
66.0
54.2
0.25
3.99
2015
18.0
2.5
64.3
52.9
0.28
3.57
2020
18.9
2.8
62.9
50.7
0.30
3.34
2030
21.7
3.9
61.1
49.3
0.36
2.81
2040
23.6
5.1
60.1
49.3
0.39
2.54
2050
24.2
6.4
59.4
47.6
0.41
2.45
Although these population projections are well known and widely cited, the implications of the assumptions
that they are based upon is often given just passing attention. Yet estimating the degree to which
populations are ageing requires estimating changes in death rates, birth rates and factors like migration.
Given the timeframes involved in these projections, the choice of assumptions for these factors can have a
material impact on the results produced.
24
4
Entitlement Reform
Demographic changes and fiscal headroom
Table 13: Assumptions contained in national population projections
Sources: Commonwealth of Australia (2010), The Intergenerational Report 2010, Australia to
2050: Future Challenges; Bell et al. (2010), ‘Challenges and Choices: Modelling New Zealand’s
Long-term Fiscal Position,’ NZ Treasury Working Paper 10/01; Office for National Statistics
(2011), 2010-Based National Population Projections
Australia – medium
case projection
New Zealand – medium
United Kingdom –
case projection (series 5) principal projection
Migration
Intergeneration Report
projections assume annual
net migration of 180,000
people. The net migration
to population ratio is
projected to be 0.5 per
cent in 2050
Long-term annual net
migration of 10,000, or 0.18
per cent of the population
in 2050, is assumed for
baseline projections
The ONS assumes longterm net inward migration
of 200,000, or 0.25 per
cent of the population
in 2051. The OBR Fiscal
Sustainability Report
adopts a low migration
scenario for its projections
of net migration of 140,000
per year
Fertility
Projections based on 1.9
births per woman from
2013 onwards
Long-term fertility rate of
1.9 children per woman
Assumption of 1.84
children per woman
Life expectancy
2006-08 life expectancy
was 79.2 years for men
and 83.7 years for women.
Projected that by 2050, life
expectancy at birth will be
87.7 for men and 90.5 for
women
Life expectancy in 2009
was 78 for men and 82.2
for women. Statistics NZ
assumes that male life
expectancy at birth will be
84.5 years in 2050 and 88
years for women
Life expectancy 78.5 years
for men in 2010 and 82.6
for women. Expected to
rise to 83.3 years for men
in 2035 and 87 years in
2035 for women
Key assumptions contained in national population projections are shown in table 13.53 In contrast to the
United Kingdom and New Zealand, assumed migration in Australia is relatively high and has recently been
assumed upwards. The 2007 Intergenerational Report projected net overseas migration of 110,000 people
per year, which was in line with the annual average of the previous 10 years. The 2010 Intergenerational
Report raised this assumption to 180,000 people per year: “In recent years, Government policy to increase
the level of skilled migration has resulted in higher net migration and slightly younger migrants, on
average, than anticipated earlier.”54 This is significant as a lower assumed level of migration increases the
level of measured population ageing. A lower level of migration would thus lead to higher than expected
spending on age-related programmes as a proportion of GDP.
Population projections in the three countries are based on similar total fertility rates. In New Zealand the
2006 Long Term Fiscal Statement assumed 1.85 births per woman, in line with a fairly flat fertility rate
since the 1980s.55 More recent projections use a higher fertility rate of 1.9. In Australia the assumed fertility
rate also increased. In 2007 Australia’s total fertility rate was 1.8 births per woman and was projected to be
1.7 in 2047, which was an increase from the projections in the previous Intergenerational Report (1.6 in
2042). By 2010, however, the total fertility rate assumed in the Intergenerational Report had increased to
1.9. Over the last few years life expectancies have also increased at faster rates than expected. The net effect
of changes in these fertility and life expectancy assumptions is unclear – as a higher fertility rate can reduce
dependency ratios while a higher assumed life expectancy can amplify them. These effects also depend on
assumptions of how needs change with age (e.g., whether morbidity expands or compresses).
Implications for the public finances
Population ageing will have a major impact on countries’ public finances. The welfare state was designed for
a young and growing population. Like a pyramid scheme, entitlements to retired people would be paid for
by a younger generation. This younger generation would, in turn, receive benefits upon retirement funded
by the next generation of younger workers. These benefits would be largely funded on a pay as you go basis.
53For purposes of comparison this report uses the central projections (e.g., the UK Office for National Statistic’s principal variant
projection) of the countries’ statistical authorities. The Office for Budget Responsibility uses a low migration variant projection (given
stated government policy over the shorter term). The assumed level of net migration in New Zealand is around the same level (as a
proportion of the population) as that assumed for the United Kingdom by the Office for Budget Responsibility.
54Australian Government (2007), Intergenerational Report 2007.
55New Zealand Treasury (2006), New Zealand’s Long Term Fiscal Position.
25
4
Entitlement Reform
Demographic changes and fiscal headroom
Population ageing turns this model on its head. People will live in retirement longer, live with more
complex illnesses and require more specialised care towards the end of their lives. Expenditure on
entitlements will increase as the share of the population who fund these programmes falls. This means,
holding growth constant, that the value of entitlements for retired people will have to fall, tax burdens on
the working age population will have to rise, or there will have to be some combination of both.
The summaries below give details of recent government projections for each country’s public finances,
including areas of spending which are particularly affected by the ageing population. Key themes that
emerge are:
>>
>>
>>
>>
>>
>>
>>
Following short-term falls, government spending will consume increasing shares of the economy: in
Australia spending is projected to increase from 26.1 per cent of GDP in 2009-10 (22.4 per cent at its
projected 2015-16 low point) to 27.1 per cent of GDP in 2049-50; in New Zealand spending is
projected to increase from 34.5 per cent of GDP in 2009 to 36.6 per cent of GDP in 2050; in the
United Kingdom spending is projected to fall from 42.6 per cent of GDP in 2011-12 to 35.6 per cent of
GDP in 2016-17, but to then rise again to 39.4 per cent in 2051-52.
Growth in spending on health services will be significant: in Australia spending on health is projected
to increase from 4.0 per cent of GDP in 2009-10 to 7.1 per cent of GDP in 2049-50, and spending on
aged care is projected to grow from 0.8 per cent of GDP to 1.8 per cent over this period (with the bulk
of this increase being in residential aged care, accounting for 1.4 per cent of GDP); in New Zealand
spending on health is projected to increase from 6.9 per cent of GDP to 10.7 per cent between 2009
and 2050; in the United Kingdom spending on health is projected to increase from 8.1 per cent of
GDP in 2011-12 to 8.7 per cent of GDP in 2051-52, and spending on care is projected to increase from
1.3 per cent to 1.9 per cent of GDP during this period.
Health resources will increasingly be consumed by the elderly: in Australia, during the period
2009-10 to 2049-50, real health spending on people aged over 65 is expected to increase seven fold.
During the same period for people aged over 85 it is expected to increase twelve fold.
Spending on pensions will increase: in Australia, during the period 2009-10 to 2049-50 spending on
age-related pensions (the Age Pension and similar payments to veterans and war widows) is
projected to increase from 2.7 per cent of GDP to 3.9 per cent; for New Zealand Superannuation,
spending is projected to increase from 4.3 per cent of GDP in 2009 to 8.0 per cent of GDP in 2050
under the historic trends scenario; 56 spending on state pensions in the United Kingdom (the State
Pension and the Second State Pension, Pension Credit and Winter Fuel Allowance) is projected to
increase from 5.7 per cent of GDP in 2011-12 (5.6 per cent of GDP in 2016-17) to 7.3 per cent of GDP
in 2051-52.57
Tax burdens will increase: although long-term fiscal models often hold tax burdens constant (e.g.,
assume that after some period fiscal drag does not apply and taxes account for a consistent share of
GDP), Reform research has shown that population ageing is likely to lead to tax burdens increasing
over time.
Structural deficits will be a problem: in Australia a fiscal gap will emerge in 2031-32 and this will
grow to 2.8 per cent of GDP by 2049-50; in New Zealand the primary deficit is projected to increase
to 5.8 per cent of GDP in 2050; in the United Kingdom the primary budget balance is projected to
move into deficit by 2041-42 and will reach 1.5 per cent of GDP in 2051 and 2.6 per cent of GDP in
2061-62.
Government debt will rise: assuming no action is taken to reduce the fiscal gap then net debt in
Australia is projected to move above zero in the 2040s and reach around 20 per cent of GDP by
2049-50 (this assumes a constant tax GDP ratio of 23.5 per cent); in New Zealand, under the historic
trends scenario, debt is projected to be 223.4 per cent of GDP in 2050 and the cost of servicing this in
the same year would be approximately 12.7 per cent of GDP58 (in June 2010 net debt was measured at
14.1 per cent of GDP);59 in the United Kingdom public sector net debt is projected to fall from 74.3 per
56NZ Treasury (2009), Challenges and Choices: Modelling New Zealand’s Long-term Fiscal Position.
57Office for Budget Responsibility (2012), Fiscal Sustainability Report July 2012.
58NZ Treasury (2009), Challenges and Choices: Modelling New Zealand’s Long-term Fiscal Position. This scenario assumes no policy
response to the mounting cost pressures and so it should be seen as a very unlikely projection. As the NZ Treasury has noted if this
scenario was to incorporate sustainable debt assumptions then the projected level of debt would reduce dramatically.
59NZ Treasury (2012), Fiscal Strategy Report.
26
4
Entitlement Reform
Demographic changes and fiscal headroom
cent of GDP in 2016-17 to 57 per cent of GDP in 2031-32, however in the decades after 2031-32 debt
is projected to increase again, to 68 per cent of GDP in 2051-52 and to 89 per cent of GDP in 2061-62.
As with population ageing, although these projections are well known and widely cited, the implications of
the assumptions that they are based upon are often only given passing attention. Long-term fiscal
projections are heavily dependent on the assumptions in the models that produce them. Estimating the
fiscal implication of population projections not only requires estimating changes in demographic factors
(such as death rates, birth rates and migration) but a range of economic ones. Given the timeframes
involved in these projections the choice of assumptions has a material impact on the results produced. As
Reform illustrated in relation to the assumed rate of long-term economic growth, for example, a small
change in the assumptions can have a large effect. Putting the dynamic effects of changes in policy settings
to one side (such as changes in tax burdens), if the long run rate of economic growth was 2.5 per cent then
an economy would double in size every 28 years. If this was to fall to 2 per cent, this would take 35 years.
Projections for the public finances are also sensitive to the starting point chosen and where the economy is
in the economic cycle.60
Implications of growth for the sustainability of debt
Government borrowing cannot increase to an infinite level. There is some level at which borrowing loses the
confidence of markets or leads to a debt spiral. On this final point Qvigstad et al. argue there are three key
scenarios:61
>>
>>
>>
If the growth rate equals the interest rate, (as tends to be the case over the long-term) the economy
can maintain a stable public-debt ratio if it is in primary balance.
If the growth rate exceeds the interest rate, the economy can maintain a stable public-debt ratio
provided that its primary deficit does not exceed a certain size.
If, however, the interest rate exceeds the growth rate, the debt ratio can remain stable only if the
economy runs a primary surplus of requisite size.
Qvigstad et al. thus highlight the importance of expectations for economic growth when evaluating
affordability. In New Zealand, Brian Easton has developed a similar argument and done preliminary work
to quantify the New Zealand debt burden relative to a sustainable level. He emphasises that the essential
measure is the government’s primary surplus, rather than the total fiscal surplus.
This relationship between borrowing and growth is complex, and it should not be assumed that more
borrowing would automatically increase growth (even in the short-term). In the longer term there is an
important feedback loop between government debt and economic growth. A persistently high level of
government debt lowers economic growth. Public debt has negative economic effects because:
>>
>>
>>
A higher level of public debt means that a larger share of society’s resources is permanently spent
servicing the debt. This means that maintaining spending on government services requires a higher
level of taxation, which reduces economic growth.
A higher level of public debt may lead to a lower level of private capital (in a closed economy) or a
lower level of domestic income (in an open economy).
A higher level of debt prevents countries being able to introduce stimulus in situations of emergency.
60Buckle and Cruickshank (2012), “The requirements for long-run fiscal sustainability”, paper for the Long-Term Fiscal External Panel, New
Zealand Treasury, Wellington.
61Qvigstad, Llewellyn and Husom (2012, “The ‘Rule of Four’”, The Business Economist, Vol 43, No 1, p. 34) argue public debt relative to
GDP is a function of three components: “The primary balance – the government budget before the payment of debt interest; The
snowball – the difference between the (nominal) effective interest rate on public debt and the (nominal) growth rate of the economy
scaled by the outstanding stock of debt; and the stock-flow adjustment – a catch-all term which includes inter alia, realised losses/gains
from intervention in the banking sector and from valuation effects (especially important when debt is dominated in a foreign currency).”
As they note: “The change in public-debt/GDP ratio from one period to the next can be written as: Δ(Dt/Yt) = -(PBt/Yt) + [(Dt-1/Yt-1)*(itgt)/(1+gt)] + (SFt/Yt). Where: D is the outstanding debt; Y is the nominal GDP; g is the growth rate of nominal GDP; PB is the primary
balance; SF is the stock-flow adjustment; i is the implicit interest rate on the outstanding debt; t represents the time period.”
27
Entitlement Reform
5
The benefits of early action
The political challenges of reform are high (powerful vested interests) and many members of the public are
anxious about change. There are, however, real benefits from undertaking reform quickly. Delay will mean
that the political barriers to change and number of people who “lose” in any transition are higher.
Reducing the overall costs of and disruption from change
The importance of early efforts to reduce debts can be shown by the numerical example below. The Office
for National Statistics has estimated that in the United Kingdom net government debt will increase from
74.3 per cent of GDP to 89.0 per cent between 2016 and 2061. Note that this increase in debt will not be
linear (indeed, net debt is projected to fall at first and then start rising). This gives an average annual
increase in net debt of 0.40 per cent.
Table 14: Relative merits of upfront reductions in net debt
Source: Reform estimates
ONS projections for net debt, per cent of GDP
2016
2061
Average annual
increase in
net debt, %
74.3
89.0
0.40
Assumed net debt target, per cent of GDP
80.0
Consolidation required if all at end, per cent of GDP
Net debt required to achieve target if all up front,
per cent of GDP
Consolidation required if all up front, per cent of GDP
Consolidation through reduced rate of debt growth,
per cent of GDP
9.0
66.8
80.0
0.40
80
0.16
7.5
74.3
The UK government could then be assumed to have a target to have net debt no higher than 80 per cent of
GDP at the end of the projection period (2061). For illustrative purposes the government is assumed to have
three options for reducing net debt below this ceiling by the end of the period:
>>
All fiscal consolidation taking place up front.
>>
All fiscal consolidation taking place in the final year of the projection period.
>>
Consolidation taking place smoothly throughout the projection period (through a reduction in the
average annual increase in net debt).
The results of these three different options:
>>
>>
>>
All up front: a consolidation of 7.5 per cent of GDP and an annual increase in net debt of 0.40 per cent.
All in the final year: a consolidation of 9.0 per cent of GDP and an annual increase in net debt of 0.40
per cent.
Smooth consolidation: a consolidation of 9.0 per cent of GDP achieved by an average annual increase
in net debt of 0.16 per cent (compared to 0.40 per cent in the other scenarios).
These illustrative scenarios show that the total consolidation required is lowest with upfront consolidation.
Based on current GDP this (undiscounted) difference in scale of consolidation required (1.5 per cent of
GDP) is equivalent to around £23 billion.62 To put this figure in context, the total reduction in total
managed expenditure from 2010-11 to 2011-12 was also equivalent to 1.5 per cent of GDP (from 46.7 to 45.2
per cent of GDP) and, as the bulk of the fall was in capital spending, public sector current expenditure fell
by 0.6 per cent of GDP.63
62Based on March 2012 Office for Budget Responsibility estimates for nominal GDP of £1,521 billion.
63HM Treasury (2012), Public Finances Databank: B2: Government Expenditure, HM Treasury, September.
28
5
Entitlement Reform
The benefits of early action
Note that these estimates make no allowances for the business cycle or any feedback loop between fiscal
policy and economic growth. With debate over the effectiveness of monetary policy at the moment, and
depressed world demand, there is concern that reductions in government expenditure may have a negative
short-term effect on GDP.64, 65 The main implication is that the timing of debt reduction is crucial. However,
the longer the delay in dealing with the upcoming fiscal pressures, the greater the cost will be.
Consequently, the optimal path of fiscal consolidation will vary between countries, depending upon their
present macroeconomic situation and fiscal projections.
Moving quickly is not only important for lowering the overall fiscal costs of change but can play a key role in
reducing disruption from change. For any change there will be a group of people who are caught in the
transition – who, for example, find their entitlements reduced but have relatively little time or opportunity
to change their behaviour to offset these changes. With an ageing population the number of people caught
in the transition is likely to increase.
Table 15: Population 55 to 65 (Number and Percentage of Total Population)
Sources: Reform calculations based on Australian Bureau of Statistics (2008), Population
Projections, Australia, 2006 to 2101, Series B; Statistics New Zealand (2012), Projected
Population of New Zealand by Age and Sex, 2011 (Base) to 2061, Cyclic Migration; Office for
National Statistics (2011), 2010-Based National Population Projections, Principal Projection
AU
NZ
UK
2010
2015
2020
2025
2030
2040
2050
2,536
2,756
2,989
3,095
3,211
3,487
3,794
%
11.5
11.7
11.8
11.5
11.3
11.1
11.8
People
(000s)
481
531
588
599
572
540
613
%
11.1
11.5
12.4
12.1
11.2
9.8
11.8
7,342
7,341
8,195
8,768
8,408
8,008
9,190
11.8
11.3
12.2
12.6
11.8
10.7
11.7
People
(000s)
People
(000s)
%
To illustrate, the number of people aged 55 to 65 and the proportion of the population for which they account
are shown in table 15. As the Association of British Insurers has shown the population at this age group is of
particular interest as they will have relatively little time to significantly adjust their savings or consumption
patterns in response to any policy change.66 These data show the real costs of delay. If a policy affecting an
entitlement at 65 was introduced without warning in 2015, then in the United Kingdom 7.3 million people (or
11.3 per cent of the population) would have little time to adjust to the change. If, in contrast, a change was
made suddenly in 2020 then the number of people who would have little time to adjust to the change would be
higher at 8.2 million (or 12.2 per cent of the population). These data highlight the importance of not delaying
changes and, when introducing changes, signalling these changes in advance as soon as possible.
Acting before the political barriers to change become too large
Pension and healthcare entitlements are among the most valuable transfers from the State that people will
receive. The inclination for any individual is to defend such entitlements, including through the ballot box.
Given the increasing number of beneficiaries of this spending (and their relatively high propensity to vote
compared to younger cohorts) the result is a system that largely owes its existence to politics.67
The tables below show the increasing voting power of older age groups in Australia, New Zealand and the
United Kingdom. There are important institutional differences that mean that this comparison should be
seen as indicative only. In Australia, for example, voting is compulsory, while in New Zealand only
registration on the electoral role is compulsory, and in the United Kingdom neither voting nor registration
is compulsory.
64Holland and Portes (2012), “Self-defeating austerity?”, National Institute Economic Review 222.
65See for instance International Monetary Fund (2012), Fiscal Monitor: Balancing fiscal policy risks.
66Bolton (2011), “Presentation on options on funding care”, in Reform (2011), Paying for long term care, Reform, p. 28.
67Breyer and Craig (1997), “Voting on Social Security: Evidence from OECD Countries”, European Journal of Political Economy, 13 (4):
pp. 705-724.
29
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The benefits of early action
Australia
The changing age profile of voters in Australia is estimated using Elector Count data from the Australian
Electoral Commission and population projections from the Australian Bureau of Statistics. Population
projections are always subject to uncertainty and so the Australian Bureau of Statistics prepares a range of
projections. The projections employed in this study are those for “Series B”, which assumes a total fertility
rate of 1.8, net overseas migration of 180,000 and a life expectancy at birth of 85.0 for males and 88.0 for
females.
Also, as not all of the resident population is eligible or registered to vote and as turnout of registered voters
is below 100 per cent, the growth in the voting population will differ from the growth in the population as a
whole. This will also affect the composition of the projected voting population (as some groups are more
likely than others to not be enrolled or to fail to vote). To help account for this an estimated “turnout” rate is
calculated so that the number of people in each age group is within 0.1 per cent of the number enrolled in
2010. It is assumed that these enrolment percentages do not change over time.
Table 16 shows the Australian elector count by age group for the 2007 and 2010 Federal Elections. In
Australia in the three years to 2010 the number of people enrolled in 65 plus age group increased by 8.7
percentage points, or by over 223,000 voters. The over 65 group was not only the fastest growing group of
electors but was also the largest, accounting for 19.7 per cent of total electors in 2010. The second fastest
growing voting block was voters aged 55 to 64, and the groups 45 to 54 and 25 to 34 also increased.
Table 16: Australian elector count by age group in last two General Elections
Sources: Reform calculations based on Australian Electoral Commission and Australian Bureau
of Statistics (2008), Population Projections, Australia, 2006 to 2101, Series B
Age group
Election 2007,
people
Election 2010, Percentage of Total Percentage Change
people
Electors 2010
2007 to 2010
18-24
1,535,867
1,522,991
10.8
-0.8
25-34
2,217,091
2,248,820
16.0
1.4
35-44
2,561,494
2,553,273
18.1
-0.3
45-54
2,591,121
2,649,841
18.8
2.3
55-64
2,181,025
2,331,668
16.6
6.9
65+
2,558,475
2,781,667
19.7
8.7
13,645,073
14,088,260
100.0
3.2
Total enrolled
Table 17 shows projections of these electoral data. These projections assume that turnout remains
unchanged from 2010. These data show that by 2050 all age groups except for people over 65 will account
for a smaller share of voters than in 2010. The biggest falls in share of voters will be of the age groups 45 to
54, 35 to 44 and then 25 to 34 and 18 to 24. In contrast the share of electors that people aged 65 and above
account for will increase by 10.5 percentage points, from around 19.7 per cent of electors in 2010 to just
over 30 per cent of electors in 2050. In other words, for every elector over 65 in 2010 there were 4.0 electors
who were younger than this, but by 2050 this will fall to around 2.3.
30
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Table 17: Projected Australian elector count by age group (per cent of total)
Sources: Reform calculations based on Australian Electoral Commission and Australian Bureau
of Statistics (2008), Population Projections, Australia, 2006 to 2101, Series B
Age group
2010
2015
2020
2025
2030
2040
2050
18-24
10.8
10.4
9.7
9.3
9.3
9.0
8.6
25-34
16.0
16.2
15.9
15.2
14.4
14.1
13.8
35-44
18.1
17.2
16.8
17.2
16.9
15.7
15.5
45-54
18.8
17.9
17.2
16.5
16.3
16.8
15.8
55-64
16.6
16.6
16.6
16.1
15.6
15.2
16.0
65+
19.7
21.8
23.8
25.8
27.5
29.3
30.2
100.0
100.0
100.0
100.0
100.0
100.0
100.0
Total enrolled
New Zealand
A similar approach was taken to estimating the changing age profile of voters in New Zealand. The data
used were enrolment data from the New Zealand Electoral Commission and Statistics New Zealand
population projections. As with the Australian Bureau of Statistics, Statistics New Zealand produces a range
of population projections. The projections employed in this study are those for the “Cyclic Migration”
scenario, which assumes a total fertility rate of 1.9 births per woman in the long-term, period life expectancy
at birth in 2061 reaching 88.1 years for males and 90.5 years for females in 2061, and annual net migration
fluctuating between -10,000 and 30,000 over a 10-year cycle, with an average of 12,000.
As noted above, the growth in the voting population (and the composition of this growth) will differ from
the growth in the population as a whole. The New Zealand Electoral Commission compares the eligible
voting population with the enrolled electors for a range of age groups. The percentage differences in these
groups are used to adjust the Statistics New Zealand projections for the population as a whole. For the
purposes of this research it is assumed that these enrolment percentages do not change over time.
Table 18 shows the New Zealand elector count by age group for the 2008 and 2011 General Elections. In
New Zealand in the 3 years to 2011 the number of people enrolled in the 60 plus age group increased by 9.9
per cent points, or 72,116 voters. The over 60 age group was not only the fastest growing group of electors
but was also the largest, accounting for 26.1 per cent of total electors in 2011. The number of electors in
their 30s and 40s fell while the number of electors younger than 24 and in their 50s grew.
Table18: New Zealand elector count by age group in last two General Elections
Sources: Reform calculations based on New Zealand Electoral Commission and Statistics New
Zealand (2012), Projected Population of New Zealand by Age and Sex, 2011 (Base) to 2061,
Cyclic Migration
Age group
Election 2008,
people
Election 2011, Percentage of Total Percentage Change
people
Electors 2011
2008 to 2011
18-24
336,408
341,604
11.1
1.5
25-29
243,152
240,288
7.8
-1.2
30-39
556,049
526,513
17.1
-5.3
40-49
614,030
612,333
19.9
-0.3
50-59
511,101
547,974
17.8
7.2
60+
730,019
802,135
26.1
9.9
2,990,759
3,070,847
100.0
2.7
Total enrolled
Note: Data limitations mean the distribution of voters into age bands in this table differs from those below.
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Table 19 shows projections of these electoral data for 2010 to 2050. Turnout (based on a comparison
between enrolment and population data for 2011) was assumed to remain unchanged over the period.
These data show that, as with Australia, there will be considerable growth in the share of the elderly voting
population. By 2050 all age groups except for people over 55 will account for a smaller share of voters than
in 2010. The biggest falls in share of voters will be of the age groups 45 to 54, 35 to 44 and 18 to 24. In
contrast the share of electors that people aged 65 and above account for will increase by 12.2 percentage
points, from around 18.1 per cent of electors in 2010 to 30.2 per cent of electors in 2050. In other words, for
every voter over 65 in 2010 there were 4.5 voters who were younger than this, but by 2050 this will fall to
around 2.3.
Table 19: Projected New Zealand elector count by age group (per cent of total)
Sources: Reform based on New Zealand Electoral Commission and Statistics New Zealand
(2012), Projected Population of New Zealand by Age and Sex, 2011 (Base) to 2061, Cyclic
Migration
Age group
2010
2015
2020
2025
2030
2040
2050
18-24
11.1
10.7
9.8
9.3
9.3
8.5
8.2
25-34
16.1
16.7
17.6
17.4
15.8
14.8
14.4
35-44
19.6
16.6
16.0
17.3
18.3
16.2
16.1
45-54
19.7
18.2
16.7
14.9
14.4
16.3
15.3
55-64
15.5
17.8
17.3
15.8
14.1
14.6
15.8
65+
18.1
19.9
22.5
25.2
28.0
29.7
30.2
100.0
100.0
100.0
100.0
100.0
100.0
100.0
Total enrolled
The United Kingdom
The importance of elderly cohorts as a voting block has also been seen in the United Kingdom. The
combination of relatively high turnout among older members of the electorate and an ageing population
make older cohorts a powerful lobby group. Indeed, research carried out by Davidson in 2009 forecast that
in 2010 more than half of the constituencies in the House of Commons (319) would have 50 per cent or
more of their votes cast by voters aged 55 or over. This was up from 268 seats having a grey majority at the
2005 General Election.68
The United Kingdom data are different from those in Australia and New Zealand as in the United Kingdom
neither voting nor enrolling to vote is compulsory. Ipsos MORI has, however, estimated voter turnout by
age group at previous elections. These data show that the broad trend for turnout since 1997 has been
downwards, although this has not been linear, with turnout increasing at the 2010 General Election.
Turnout has, however, remained much higher for older cohorts, with the highest level of turnout in the
2010 election being for voters aged 65 plus (at 76 per cent).
By combining these turnout figures with estimates of the size of the population in these age bands, and for
projections of their growth, it is possible to provide an indication of the number of voters. Office for
National Statistics projections were employed and these projections assumed a long-term total fertility rate
of 1.84, life expectancy at birth in 2035 of 83.3 years for men and 87.1 years for women, and a long-term
assumption for net migration of 200,000 each year.
Table 21 shows the United Kingdom elector count by age group for the 2005 and 2010 elections. In the 5
years to 2010 the number of voters in the 65 plus age group increased by 8.3 percentage points, or by
around 600,000 voters. Unlike Australia and New Zealand, this was not the fastest growing voting bloc.
The over 65 group was, however, the largest group of electors, accounting for around 25 per cent of total
electors in 2010.
68Davidson (2009), Quantifying the Changing Age Structure of the British Electorate 2005-2025: Researching the age demographics of the
new parliamentary constituencies. Booth has also undertaken projections of the median voter in the UK, calculating that the median age
for voters will be 55 in 2055. Booth (2010), UK State Pension Reform in a Public Choice Framework.
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Table 20: Voter turnout by age group at the 2001, 2005 and 2010 General Elections
Source: Ipsos MORI (2005), Electoral Commission, Election 2005: Turnout
Age group
Turnout (%) 1997
Turnout (%) 2001
Turnout (%) 2005
Turnout (%) 2010
18-24
51
39
37
44
25-34
64
46
48
55
35-44
73
59
61
66
45-54
79
65
64
69
55-64
80
69
71
73
65+
79
70
75
76
71.4
59.4
61.4
61.4
Total
Table 21: United Kingdom elector count by age group in last two General Elections
Sources: Reform calculations based on Ipsos MORI (2005), Electoral Commission, Election
2005: Turnout and Office for National Statistics (2011), 2010-Based National Population
Projections, Principal Projection
Election 2005,
people 000s
Election 2010,
people 000s
Percentage of Total
Electors 2010
Percentage Change
2005 to 2010
20-24
1,455
1,896
6.1
30.3
25-34
3,807
4,478
14.3
17.6
35-44
5,639
5,830
18.6
3.4
45-54
4,932
5,898
18.8
19.6
55-64
4,986
5,360
17.1
7.5
65+
7,230
7,831
25.0
8.3
28,051
31,293
100.0
11.6
Age group
Total enrolled
Note: Data limitations mean the distribution of voters into age bands in this table differs from those below and
turnout rates for the 20 to 24 age group are assumed to equal those of the 18 to 24 age group.
Table 22 shows projections of these electoral data for 2010 to 2050. As also noted above, the growth in the
voting population (and the composition of this growth) will differ from the growth in the population as a
whole. It is assumed that these enrolment percentages do not change over time. These data show that, as
with Australia and New Zealand, by 2050 all age groups except for people over 65 will account for a smaller
share of voters than in 2010. The biggest falls in share of voters will be of the age groups 45 to 54, 35 to 44
and 20 to 24. In contrast, the share of electors that people aged 65 and above account for will increase by
9.9 percentage points, from around 25.0 per cent of electors in 2010 to 35 per cent of electors in 2050. In
other words, for every elector over 65 in 2010 there were 3.0 electors who were younger than this, but by
2050 this will fall to around 1.9.
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Table 22: Projected United Kingdom elector count by age group (per cent of total)
Sources: Reform calculations based on Ipsos MORI (2005), Electoral Commission, Election
2005: Turnout and Office for National Statistics (2011), 2010-Based National Population
Projections, Principal Projection
Age group
2010
2015
2020
2025
2030
2040
2050
18-24
8.2
7.6
6.8
6.6
7.1
7.0
6.4
25-34
14.0
15.0
15.0
13.9
12.8
13.4
13.1
35-44
18.2
16.1
15.9
17.0
17.0
14.8
15.6
45-54
18.4
18.8
17.3
15.4
15.2
16.3
14.6
55-64
16.7
16.0
17.2
17.8
16.4
14.8
16.0
65+
24.5
26.5
27.7
29.3
31.5
33.7
34.4
100.0
100.0
100.0
100.0
100.0
100.0
100.0
Total enrolled
34
Entitlement Reform
6
Entitlement reform
A good place to start when thinking about how the welfare state needs to change is to ask why these
programmes exist in the first place.69 Two key reasons are often given. The first is to try to reduce (or
prevent) poverty. This usually means ensuring families’ incomes do not fall below a certain minimum. The
second reason that may be given is to smooth families’ incomes over their lifecycles. Families may have
periods when their income drops (such as when people retire from the labour market) and it may be argued
that the welfare state should smooth some of these financial ups and downs.70
The validity of these poverty reduction and income smoothing objectives is the subject of debate.71 Yet they
are useful for focussing attention on the longer term pressures facing the welfare state and how the system
could evolve in the face of these. It has been argued, for example, that as spending on pensions is less
heavily targeted than spending on working aged benefits, population ageing will further shift the balance
between spending on out of work benefits and on pensioners and reduce the overall level of means-testing.
This will mean welfare spending as a whole increasingly reflects income smoothing rather than poverty
reduction objectives.
Of these two objectives the primary focus of the core state pension (pillar I) should be on poverty reduction.
This pillar is relatively less effective at smoothing income as it tends not to reflect previous contributions or
earnings and setting the core state pension at a level sufficient to smooth income for most pensioners would
come at high fiscal cost. Occupational and voluntary pensions (pillars II and III) are the appropriate
instruments for smoothing incomes.
Income smoothing is not just a question for the government. The market can provide tools to help with this.
These tools include savings products (which can directly smooth incomes) and insurance (which can not
only smooth incomes but pool risk) and equity release (which can allow the value of assets to be drawn
down). But at the moment there is concern that in the three countries these market options do not work as
well as they should for too many families. People fail to shop around and make the most of their assets.
A mixed model
The discussion above highlights the importance of a mixed model of provision. The need to see the public
and private pillars (market tools) as part of a mixed model means there may be little point in constraining
the public pillar if it means that the private pillar becomes less affordable. Conversely, there may also be
little point in expanding the private pillar if it comes at the expense of reducing the affordability of the
public pillar. One example of this is subsidies for savings which may reduce government savings and fail to
lift overall national savings.
But there are two additional dimensions to this. The first is that a shift between the public and private pillar
may improve allocative efficiency. It could be argued that with a stronger private pillar the evolution of the
welfare state will more clearly reflect economic priorities than political ones. There may also be
distributional effects of a switch between the public and private pillars. Subsidising the public pillar may
not increase national savings but it may broaden the ownership of wealth. (It is important not to overstate
this argument as the distribution of wealth over the lifecycle is likely to be more equally distributed than the
distribution at a single point of time.72)
The key is, therefore, for the public and private pillars to play roles that reflect their respective comparative
advantages. The literature on the appropriate role for private insurance can provide useful insights for the
appropriate balance between these pillars. There are, however, some risks that private insurance tends to be
poor at covering. Moral hazard, collective risk, adverse selection and political regulation all mean that some
risks are not insurable.
69The focus of this report is on the features of the welfare state most directly related to population ageing. For this reason spending on
some parts of the welfare state, such as education, are not directly addressed. The focus is instead on social security transfers and
health and care related spending.
70The welfare state also influences the labour market and the broader economy, and so other goals of reform (aside from reducing fiscal
cost) could be to help work pay and support consumer demand in periods of weak growth.
71Nolan (2011), The fairness test, Reform.
72There is, for instance, a relationship between age and net worth for employed individuals. This is likely to reflect time spent in the
workforce, salary increases, and changes in occupation. These findings are generally consistent with life cycle models which suggest
that people tend to save for their retirement mainly from their middle ages after they have accumulated consumer durables and housing
stock and their children are independent.
35
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Entitlement Reform
Entitlement reform
Principles of reform
Comprehensive reforms should be introduced and based on a clear set of principles. These principles
should include the following:
>>
>>
>>
>>
>>
Reforms must start quickly. Early action reduces the overall costs of change and minimises
disruption. Minimising disruption is important for building confidence in reform. Early action would
also mean that key changes are made before political barriers increase (given the increasing power of
the elderly voting lobby).
Changes must not only restrict the long-run growth of the size of the State but also reform what the
State does (e.g., redraw the line between health and social care spending).
No area of government should go untouched. Nothing should be off limits and one change (e.g.,
increasing the retirement age or auto-enrolment for defined contribution pensions) cannot do all the
heavy lifting. Failing to make all appropriate changes weakens the principles for reform and leads to
burdens falling disproportionately. Spending on services must be managed as well as spending on
transfers.
People must put aside more money for their own needs and contribute more to public services,
including health and care.
Market based solutions are required to support greater individual contributions, e.g., through
income smoothing and risk pooling (e.g., private insurance) and releasing the equity built up in
assets (e.g., equity release).
These principles translate into the key directions for reform of each of the “four pillars” of retirement
income systems:
>>
>>
>>
State pension to meet basic needs (pillar I): focus the core state pension on poverty reduction,
rationalise supplementary pension benefits and end the contributory principle.
Private occupational pensions (pillar II) and voluntary individual savings (pillar III): focus on
income growth and a consistent policy environment not subsidies.
Post retirement work (pillar IV): encourage the positive shift towards longer working lives, including
through continuing to improve flexibility of work and employment conditions.
Pillar I: target the core state pension on poverty reduction, rationalise
supplementary pension benefits and end the contributory principle
Target the core state pension on poverty reduction
Looking at the current practice in the three countries shows that they vary widely in the degree of meanstesting of the core state pension:
>>
>>
>>
In Australia, 78 per cent of people over 65 receive a targeted pension. This is the highest coverage of a
means-tested pension in the OECD and contrasts with the OECD average of 18 per cent of the
population over 65.
The United Kingdom is also above the OECD average (with coverage of 23 per cent) and has the
seventh highest reliance on targeted pensions.73 This means-testing relates to add-ons to the core
State Pension and not to the core State Pension itself, which is paid at a flat rate based on
contribution history.
New Zealand is the only OECD country with a public pension that is not means-tested, has no
earnings related criteria or direct individual contributions. 95 per cent of the population over 65
receive the non-means-tested basic pension.74 This is the most generous minimum pension in the
OECD (measured as a percentage of economy wide average earnings), even when compared with
both contributory and non-contributory schemes.
Every approach to providing a core state pension has trade-offs associated with it. In Australia, for example,
means-testing benefits has been seen as a key strategy for reducing poverty and was a feature of the 200910 “Secure and Sustainable Pensions” package, which increased the value of benefits while tightening the
73OECD (2011), Pensions at a glance 2011: Retirement income systems in OECD and G20 countries.
74English (2012), Budget Economic and Fiscal Update, New Zealand Treasury.
36
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Entitlement Reform
Entitlement reform
income test rules to fund this.75 Yet there is also concern that means-tests weaken incentives for people to
participate in the labour market and to save and support themselves. This effect of means-testing
(especially asset testing) on savings is likely to have been dampened by the system of compulsory savings,
as this compulsion reduces scope for behavioural change (although some scope remains and there would,
nonetheless, still be a “utility loss”). The impact on the labour market has, however, been of concern.76
The potential for means-testing to discourage people from saving or working has also been raised in the
United Kingdom. These concerns have been made more acute by the introduction of auto-enrolment. The
concern is that confidence in the pensions system will be lost if people are automatically enrolled into
private pensions which then have the effect of reducing entitlement to means-tested assistance. The
solution to this problem has been to propose introducing a single tier pension for future cohorts of retirees.
New Zealand’s universal pension could thus provide some potentially relevant lessons for the United
Kingdom. The New Zealand experience highlights that it should also not be assumed that a universal
system would automatically improve incentives to save and work. As well as financial incentives,
individuals’ decisions to save and work also depend on personal preferences and circumstances, and
uncertainty over the age at which they will retire, what their income until and during retirement will be, and
their life expectancy at the age of retirement.77 When considering the effect of means-tested pensions on
financial incentives to save, for example, it is necessary to consider both income and substitution effects:
>>
>>
One incentive for people to make provision for their retirement is to gain a financial return from that
investment (the substitution effect). These incentives reflect the amount of extra income in
retirement produced by each dollar in contributions. A positive real payback means that the
investment has returned more (in real terms) than the individual contributed. By reducing the return
from saving a means-test could reduce this payback and weaken incentives to save.78
Yet while a means-test may mean that people lose some of their income from saving, the decision to
save is also influenced by a desire to reach a certain income in retirement. An income smoothing
model suggests that if the level of government entitlement is below the desired income at retirement,
then individuals would be encouraged to save while still working to increase their income and living
standards in retirement. Incentives to save are reduced when people know that they will receive a
benefit even if they make no preparation for their own retirement.
The universal New Zealand pension also illustrates the trade-off between poverty reduction and targeting
efficiency. In a universal system the pension must be set at a minimum level (which is subject to cost
constraints) and generosity to higher income pensioners is limited (meaning pensions are less likely to
“replace income from work” for higher earners). This also means that as fiscal constraints increase there
will be greater pressure to erode the real value of pensions for all pensioners. The options in this case are to
either allow pensioner poverty to increase or to more effectively target resources to poorer pensioners.
As well as the reliance on means-testing, the other policy variable that can influence the poverty reduction
effectiveness of state pensions is the approach to indexation. In the longer term changes to the indexation of
the state pension can have very significant fiscal implications.79 But as well as this, the approach to
indexation has important distributional implications and a major effect on the interaction of this
programme with other parts of the welfare state. If the state pension is indexed in line with prices only (and
there is no floor), while the purchasing power of the benefit will be retained the relative income of
pensioners will be likely to fall relative to people in work. The consequence is that pensioner poverty could
increase over time when measured against poverty measures based on relative incomes.80
75Cawston et al. (2011), Old and broke, Reform.
76To potentially help address this concern the income test in Australia includes a small earnings’ disregard.
77Scobie, Le and Gibson (2007), “Housing in the Household Portfolio and Implications for Retirement Saving: Some Initial Findings from
SOFIE”, New Zealand Treasury Working Paper, 07/04, Wellington.
78McCauley and Sandbrook (2006), “Financial Incentives to Save for Retirement”, DWP Research Report Series, No. 403, Department for
Work and Pensions, United Kingdom.
79
Reform estimated that, for example, the shift from CPI indexation to the triple lock in the United Kingdom will increase expenditure on the
state pension by 0.7 per cent of GDP between 2010 and 2040, which is equivalent to £10.9 billion in today’s money.
80Piggott and Sane (2009), “Indexing pensions”, SP Discussion Paper, No. 0925, World Bank.
37
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Entitlement Reform
Entitlement reform
Rationalise supplementary pension benefits
Supplementary benefits may aim to recognise the additional costs that some pensioner families may face
due to their specific needs (such as disability). By targeting benefits on need it is possible that greater levels
of assistance can be provided to these families at a lower overall fiscal cost. These benefits can, however,
make the system of assistance more complex and have problems of take-up. Yet not all means-tested
benefits face the same problems of take-up, and low levels of take-up of benefits reflect administrative
failures and the poor design of programmes. The approach to means-testing the Pension Credit in the
United Kingdom is an example of a poorly designed benefit that has very low levels of take-up.81
Australia, New Zealand and the United Kingdom all provide additional support for housing, health and care
related costs. The two means-tested systems (Australia and the United Kingdom) also provide additional
benefits that “top up” the main pension. In the United Kingdom this pillar of supplementary benefits is
particularly costly and poorly targeted, especially for the universal pension benefits like the Winter Fuel
Allowance, free bus passes and free TV licenses.
Even a small increase in the generosity of poorly targeted programmes comes at a very large financial cost,
meaning that resources have to be spread thinly and less is available for poor families. Political incentives
mean that the wrong type of support tends to increase in value. This can be shown in the contrasting recent
histories of the Winter Fuel Allowance and the Pension Credit in the United Kingdom.82 This poorly
targeted spending may also weaken the welfare system as a whole by undermining legitimacy. As data from
the British Social Attitudes Survey has shown the increasing spending on poorly targeted middle class
welfare in the United Kingdom from 1997 onwards was associated with a fall in public support for benefits
to people in need.83
End the contributory principle in favour of residence tests
Both of the core state pensions in New Zealand and the United Kingdom do not contain income or asset
tests. Yet, unlike the New Zealand system, eligibility for the United Kingdom’s State Pension depends on
contribution history (qualifying years of National Insurance). However, as David Martin has noted, the
“contributory principle” now has little practical application. The Basic State Pension is only one of six state
benefits that depend wholly or partly on contributions.84 Following a report by the independent Office of
Tax Simplification, in Budget 2011 the Coalition Government announced a consultation on options for
merging National Insurance Contributions and Income Taxes.85
The true nature of National Insurance Contributions means that they should be more appropriately seen as
hypothecated taxes and not contributions. These contributions, the fund into which they are paid (the
National Insurance Fund) and the benefits paid out all operate on a pay as you go basis. The National
Insurance Fund (into which most National Insurance Contributions are paid) is not a “fund” in any normal
sense of the word as resources have not been put aside to cover future liabilities. This system does not
address the rising fiscal costs associated with the ageing population. Contributions are not linked to benefits
and, as the Mirrlees Review documented, the system merely adds to the complexity and cost of the welfare
system.86
The Government has proposed to move to a flat rate pension of £140 a week.87 The proposed level of £140 a
week is consistent with the current level of the Guarantee Credit, which provides a minimum pension
income for people above the pension credit qualifying age (which is currently below the State Pension age).
The Government has proposed maintaining the contributory principle, but as the Guarantee Credit would
also lift the retirement incomes of retirees without contribution histories to this level, assessing
contribution histories makes little practical difference. The introduction of a flat rate pension could thus be
combined with the end of the contributory principle and the use of a residence test for eligibility.
81House of Commons Work and Pensions Committee (2009), Tackling Pensioner Poverty: Government Response to the Fifth Report from
the Committee, Session 2008–09.
82As Nolan (Nolan (2011), The fairness test, Reform) has noted, since its introduction in 2003-04, the Pension Credit has increased at a
slower rate than the Winter Fuel Allowance.
83Nolan (2011), The fairness test, Reform.
84The others are the bereavement allowance, contribution-based jobseeker’s allowance and employment and support allowance,
incapacity benefit and statutory maternity pay (Martin (2010), Abolish NICs: Towards a more honest, fairer, simpler system, Centre for
Policy Studies).
85Office of Tax Simplification (2011), Review of tax reliefs: Final report.
86Institute for Fiscal Studies (2011), “Integrating personal taxes and benefits”, in Mirrlees, J. (2011), Tax by Design, Institute for Fiscal
Studies.
87The Government has estimated that this change would be revenue neutral if introduced for additional recipients as it would involve
combining the State Pension, Second State Pension and the Savings Credit component of the Pension Credit.
38
6
Entitlement Reform
Entitlement reform
Pillars II and III: focus on income growth and a consistent policy environment not
subsidies
Lower the costs of systems of compulsion and auto-enrolment
It is often argued that (perhaps due to overly high discount rates) individuals will underprovide for their
income in retirement. To help encourage greater individual provision two approaches employed in
Australia, New Zealand and (most recently) the United Kingdom have been compulsion and autoenrolment into defined contribution pension schemes.
Compulsion in Australia and auto-enrolment in New Zealand have been seen to be a success due to the very
high levels of participation in these schemes and the significant build-up of funds under management.
However, it is also important to not assume that the build-up of assets in the funds indicates success as:
>>
>>
A proportion of the income directed to superannuation funds has been diverted from other saving. In
Australia this switching has been estimated as being in the order of 30 to 50 per cent.88 In New
Zealand, Law, Meehan and Scobie found that “members adjust their savings portfolio such that only
about one third of the contributions they make to their KiwiSaver account represents additional
savings.”89
The costs associated with tax concessions lead to a potential opportunity cost of reduced government
savings.
The Reserve Bank of Australia has shown that the switching effect of compulsion and auto-enrolment is
most likely to take place in above-median-income households, as financially constrained households have
less opportunity to reduce holdings of other assets.90 The Reserve Bank of Australia has also argued that
compulsory pensions will only raise wealth if households do not increase consumption to fully offset the
growth of their pension account (e.g., borrow against the equity held in the account).91
The cost of these schemes also means that they are much less effective at increasing national savings than is
often expected. Indeed, a large proportion of new members joined KiwiSaver not because of auto-enrolment
but to capture the subsidies (with the majority of participants actively choosing to enrol rather than being
auto-enrolled). This may provide some benefit in changing the distribution of wealth (ensuring that wealth
ownership moves beyond a small proportion of (higher-income) households) but the value for money of
these subsidies can be questioned. If compulsion and auto-enrolment are to be used then there is little case
for also subsidising participation.
A shift towards defined contribution schemes may lead to an increase in the overall protection gap. This
highlights important differences in the policy environments between New Zealand and the United
Kingdom. These differences include the relatively low level of pre-existing savings in New Zealand, which
meant that KiwiSaver filled a clear gap. In the UK a high proportion of people already hold a private
pension. There is thus a greater risk of members and employers levelling down and reducing their levels of
savings to the level required through auto-enrolment only. There is also a greater risk that auto-enrolment
will cannibalise the business of current providers.
As well as a potential fall in contribution rates, the overall protection gap may increase from a shift towards
defined contribution schemes as these schemes transfer risk for investment and longevity away from
employers and onto individual employees. The experience with KiwiSaver also highlights the need for
appropriate regulation of suppliers and information to customers. There will, for example, be a need to
communicate with a new group of customers on the risks of defined contribution schemes and to
understand their risk profiles. This regulatory response will, however, have to be proportionate and not
damage the development of the market.
One key challenge that the increased coverage of defined contribution pensions could present is the
potential increase in the number of people with multiple, small pension pots. In May 2009 the Australian
Government commissioned a review of the Australian superannuation system. This Review’s final report
(published in June 2010) noted that: “While there are some individuals who have sound reasons to hold
88Connolly (2007), “The effect of the Australian Superannuation Guarantee on Household Saving Behaviour”, Research Discussion Paper
2007-08, Reserve Bank of Australia, Canberra.
89Law, Meehan and Scobie (2011), “KiwiSaver: An initial evaluation of the impact on retirement saving”, New Zealand Treasury Working
Paper, 11-04.
90Connolly (2007), “The effect of the Australian Superannuation Guarantee on Household Saving Behaviour”, Research Discussion Paper
2007-08, Reserve Bank of Australia, Canberra.
91Connolly (2007), “The effect of the Australian Superannuation Guarantee on Household Saving Behaviour”, Research Discussion Paper
2007-08, Reserve Bank of Australia, Canberra.
39
6
Entitlement Reform
Entitlement reform
more than one super account […] each duplicate account incurs administration costs. In many cases, this is
simply a deadweight cost to the individual and the system overall.”92 The Review went on to note that
consolidation of accounts could be a “time-consuming and frustrating process,” with one provider reporting
that “only 6 per cent of members who started a consolidation process actually completed it.” 93 As part of the
2011 Stronger Super reforms the Australian Government thus proposed introducing measures to help
auto-consolidation of super funds.94
Restrict tax breaks for savings and insurance
Pillars II and III should play an increasingly central role in the welfare states in the future. Yet developing
the correct policy settings to encourage growth in these pillars provides challenges. In particular, in the
United Kingdom and Australia the current approach includes the use of tax breaks for savings and
insurance. Yet there is a concern that this use of tax breaks negatively impacts on government accounts
while failing to increase the overall level of saving or take-up of private insurance.95 For example, on
savings:
>>
>>
>>
International evidence on subsidies for savings indicates that much of the increase in private savings
generated by these schemes is simply a transfer from public to private savings, as the subsidies are
paid out of taxpayers’ funds.
These schemes also incur significant windfall costs – for example, people are paid for undertaking
activities they would undertake anyway – and additional deadweight costs of taxation, such as the
efficiency costs arising when taxes influence taxpayers’ behaviour.
Tax relief is also of greater value to high income households and not the low and middle income
households where saving remains lowest. Most tax relief on private pensions is paid to high earners
and men.
Tax breaks can also add to the complexity of the tax system, increase administration and compliance costs,
and undermine the tax system’s overall fiscal integrity (once a particular group is provided with a
concessionary treatment, it is hard not to introduce concessionary treatment for other groups).
Rather than tax breaks the better approach would be to emphasise the likely increase in the use of these
products that would come from stronger income growth. In the longer term increasing the rate of growth of
incomes has, for example, a powerful effect on increasing the levels of individuals’ savings. This power of
income growth to increase the value of savings becomes more apparent the longer the time perspective
taken, the larger the rate of growth of income, and the larger the real return on savings.
Provide clearer signals over the roles of the market and drawdown of assets
One implication of the projections of increasing public debt as a proportion of GDP is that governments will
face more pressure to assess the value for money of age-related spending and tax breaks for savings or
insurance. This means that many people will need to make a greater contribution to their own living
standards during retirement through accumulating greater assets during their working lives and more
effectively converting these assets to income at or during retirement (decumulation).
At the same time, private sector providers are facing their own challenges. As the Chartered Insurance
Institute has noted, pension funds may face a challenge to their solvency as increasing life expectancy
means private pensions are paid out to an increasing number of people over a greater number of years.96
This makes improvements in modelling longevity risk crucial. Private providers are also facing challenges
from regulation and financial repression (policies designed to ensure that domestic investors continue to
fund government deficits).97
Both “demand” and “supply” barriers hold back the growth in private products. Key barriers were identified
by Berry and the most serious ones are on the demand side (including the attitudes of the people who could
92Cooper et al. (2010), Super System Review: Final Report, Australian Commonwealth Government.
93Cooper et al. (2010), Super System Review: Final Report, Australian Commonwealth .
94Details of accounts with low balances will be provided to members’ active funds. The information will be provided on: lost accounts,
accounts with no contribution or rollover for two years with a balance under AU$1,000 and accounts in eligible rollover funds. Funds will
be responsible for auto-consolidation, but members will be able to opt out. There are also plans to increase the threshold for autoconsolidation of lost and inactive accounts to at least AU$10,000 (Australian Government (2011), Stronger Super Information Pack).
95Curry and O’Connell (2004), Tax Relief and Incentives for Pension Saving, Pensions Policy Institute.
96CII (2012), Future Risk: Defusing the Demographic Timebomb, Centenary Future Risk Series: Report 5, Chartered Insurance Institute, p. 5.
97CII (2012), Future Risk: Defusing the Demographic Timebomb, Centenary Future Risk Series: Report 5, Chartered Insurance Institute, p. 5.
40
6
Entitlement Reform
Entitlement reform
potentially buy the products).98 On the supply side a greater role for private insurance in the welfare system
implies a need for the insurance industry to provide more and better products to fill the welfare gap (more
product innovation and better communication with customers).
A key role that government can play in supporting private providers would be to provide greater clarity over
policy. This requires a certain and stable policy environment (based on a policy making approach free from
political whim and consistent with principle), clear messages that set out the responsibilities of the State
and the individual,99 and a stronger relationship between private providers and the State. These points are
discussed below.
Developing policy in a way free from political whim and consistent with principle requires an open process
of consultation and robust scrutiny of policies. Decisions regarding savings and the purchase of private
income support policies are by their nature long-term decisions. The more uncertain the decision making
environment, the harder it will be for families to make the decisions that are in their longer term interests
and for private providers to complement State programmes.
Financial products and services demanded by individuals will continue to shift from those that accumulate
savings during working lives to those that facilitate their draw-down during ever longer years of retirement
and old age care.100 For this reason there needs to be a greater focus on the development and take-up of
market solutions to help families draw-down the equity in their assets. Immediate need annuities and
equity release products could help fill this need but, especially for equity release, are held back by public
attitudes. As Lord German has noted in the United Kingdom, there is a perception that a “home is a family
asset to be valued as a statement of personal freedom, and intended for passing on to other members of the
family.”101 There needs to be a clear message that this perception cannot last given the need for welfare
programmes to broaden their funding bases and the large amount of equity tied up in family homes.
Industry and the State also need to work more closely together in responding to the fiscal challenges created
by population ageing. This could include:102
>>
>>
>>
>>
Strengthened cross-departmental working.
Simplified public programmes (such as the rules around State support for care costs) to help private
products to integrate simply with State support.
Coordinated efforts to make it easy for people to understand what funding and services they are
entitled to and how and where they can access it.
The establishment of formal public-private partnerships. As Constantinou has noted, examples
include the administrators and the risk underwriters of the mandated Eldershield system in
Singapore, mandatory insurance for people opting out of the compulsory German State system and
common triggers for benefits between the State and private sector products in France. 103
Pillar IV: increase retirement ages and extend working lives
Increase the retirement age and support older working
Moves to equalise the retirement ages for men and women and to increase these ages are consistent with
trends in a number of other countries. There are plans to increase the pension age to 67 or above in 13
countries.104 Several OECD countries also plan to tie the retirement age to longevity. Denmark, Italy and
Greece have already developed institutions to tie the retirement age to life expectancy.105 In the United
Kingdom the 2012 Budget announced a commitment to ensure “the State Pension age is increased in future
to take into account increases in longevity.” The Government has not released details on how it intends to
do this.
Although an increase in the state pension age is often a major plank of reform it is necessary to be realistic
about the benefit that such an increase can provide in isolation. Increasing the retirement age can provide
98Berry, C. (2011), Past Caring? Widening the Debate on Funding Long Term Care, International Longevity Centre, p. 24.
99Constantinou (2011), “Affordable and sustainable funding”, in Reform (2011), Paying for long term care, Reform, p. 8.
100CII (2012), Future Risk: Defusing the Demographic Timebomb, Centenary Future Risk Series: Report 5, Chartered Insurance Institute,
p. 13.
101German (2012), “Introduction”, in German (ed) (2012), Making the most of equity release: perspectives from key players, Smith Institute,
p. 8.
102Just Retirement (2012), The role of housing equity in retirement planning, p. 4.
103Constantinou (2011), “Affordable and sustainable funding”, in Reform(2011), Paying for long term care, Reform, p. 8.
104OECD (2012), OECD Pensions Outlook 2012, OECD, Paris.
105OECD (2012), OECD Pensions Outlook 2012, OECD, Paris.
41
6
Entitlement Reform
Entitlement reform
significant fiscal savings and it is unlikely to be possible to deal with the cost of age-related spending
without making this change. However, increasing the retirement age is not sufficient to address the
increased fiscal cost of population ageing on its own.
A higher state pension age would also have important distributional implications. The Institute for Fiscal
Studies has shown, for example, that an increase in the retirement age may be regressive as this may
reinforce health inequalities (people who die younger lose a greater proportion of the state pension
entitlement).106 Given the generally long periods for implementation such an increase may also fail to
provide expected savings and may be largely offset by changes that increase the generosity of transfers, such
as changes to indexation.
A higher state pension age may also encourage increased labour market activity of elderly workers. This
may help grow the tax base and be consistent with any trend for elderly workers preferring to remain
attached to the labour market. An older workforce, nonetheless, creates challenges for employers and for
labour market policies, as shown by the difficulty that the unemployed elderly already experience in finding
work. It is necessary to have a realistic view on the ability of people to work longer and how this may require
re-skilling in the labour force. Governments may also need to reduce restrictions over (increasing the
flexibility for) hiring and firing older people.107
106Emmerson and Tetlow (2010), Pensions and retirement policy: 2010 Election briefing note, No. 16, Institute for Fiscal Studies, BN104, p. 8.
107CII (2012), Future Risk: Defusing the Demographic Timebomb, Centenary Future Risk Series: Report 5, Chartered Insurance Institute,
p. 14.
42
Entitlement Reform
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Connolly (2007), “The effect of the Australian Superannuation Guarantee on Household Saving Behaviour”,
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Entitlement Reform
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45
Entitlement Reform
Annex 1: Short overview of the countries’
welfare states
Retirement age
The retirement ages and plans to change them in the three countries are:
>>
Australia: state pension age 65 for men and rising to 65 for women. Plans to increase to 67 by 2013.
>>
New Zealand: state pension age 65 for both men and women. No plans to further increase age.
>>
United Kingdom: state pension age 65 for men and rising to 65 for women. Plans to increase to 68 by
end of 2046. The Government has also committed to linking future increases in the age to longevity.
State pension
Approaches taken to means-testing the state pension in the three countries are:
>>
>>
>>
Australia: payments are subject to both an income test and an asset test (the test that results in the
lowest payment applies). The income test includes an earnings disregard (“work bonus”) and the
asset test includes residential property (although not the principle home). Payments are taxable
although there is a senior tax offset.
New Zealand: payments are not subject to an income or asset test. Payments are taxable.
United Kingdom: the Basic State Pension is paid at a flat rate (not means-tested) and is based on
contribution history. The pension may be topped up by an additional means-tested additional state
pension. This means-test includes income and not assets, and people may choose to contract out of
the additional state pension. The pension is taxable and higher personal tax allowances for older
people are being phased out.
Supplementary pension benefits
The three countries all provide supplementary pensions for retirees with additional needs. These include:
>>
Australia: a means-tested Pension Supplement, Accommodation Support, and a Carer Allowance.
>>
New Zealand: Accommodation Supplement, Disability Allowance and Community Services Card.
>>
United Kingdom: Pension Credits (an income guarantee and a top-up for people who have savings),
Community Care Grant, Housing Benefit, Attendance Allowance and Carer’s Allowance.
All three countries also provide a range of additional programmes that provide support to all or most
pensioners (not just those with additional needs). These include:
>>
Australia: the Commonwealth Seniors Health Card, the Seniors Supplement and Gold Card.
>>
New Zealand: the SuperGold Card.
>>
United Kingdom: various pension add-ons, such as the Winter Fuel Allowance, free bus passes and
free TV licences for the over 75s.
Indexation
The indexation of pensions relates to the indexation of the state pension and the regulations governing the
indexation of private pensions. On state pensions the approaches take in the three countries are:
>>
>>
Australia: the Age Pension is increased in line with price increases (the Consumer Price Index (CPI)).
When necessary a further increase is made to ensure that it does not fall below 25 per cent of pre-tax
Male Total Average Weekly Earnings.108
New Zealand: New Zealand Superannuation increases in line with CPI inflation but is also subject to
a floor and ceiling which are linked to wages. For couples the net-of-tax rate at 1 April must be not
less than 65 per cent and not more than 72.5 per cent of net-of-tax weekly earnings. The Government
108OECD (2011), Pensions at a glance 2011: Retirement income systems in OECD and G20 countries, OECD, Paris.
46
Entitlement Reform
Annex 1: Short overview of the countries’ welfare states
has committed to increase the floor from 65 to 66 per cent of the net-of-tax earnings measure. The
rate for single people is based on the couple rate. For single people the rates are set at 65 per cent of
the net-of-tax couple rate for those living alone and 60 per cent of the net-of-tax couple rate for those
sharing accommodation
>>
United Kingdom: the state pension is increased in line with a “triple lock,” where the pension will
increase with the higher of growth in average earnings, growth in CPI or 2.5 per cent.
Auto-enrolment and compulsory defined contribution pensions
The three countries have all sought to expand the provision of defined contribution pensions. The
approached take, however, differ in important ways:
>>
>>
>>
Australia: the Australian Superannuation Guarantee is a compulsory pension scheme requiring
employer contributions of at least 9 per cent of earnings. The contribution rate will increase to 12 per
cent by 2019. Employers are required to make these contributions even if employees make no
contributions of their own. Employee contributions are voluntary and are paid out of after-tax
income. For low to middle income earners the Government pays a matching subsidy and possibly
also a Low Income Superannuation Contribution. The preservation age is 55 for people born before 1
July 1960 or 60 if born after 30 June 1964
New Zealand: KiwiSaver is an auto-enrolment scheme, where employers contribute 2 per cent and
members may contribute 2, 4 or 8 per cent. The programme is heavily subsidised, with key subsidies
applying upon the opening of an account and for member contributions. For some savers a
proportion of the funds in scheme may be accessed for purchasing a house, but generally the
preservation age is the later of turning 65 or contributing into the scheme for five years
United Kingdom: From 1 October 2012 larger firms (120,000 workers and above) will be required to
automatically enrol workers who are not already saving into a pension into workplace pension
schemes. Member contribution rates will start at 2 per cent and are scheduled to increase to 5 per
cent. Employer contributions are scheduled to start at 1 per cent and rise to 3 per cent by October
2018.
Tax free savings and tax relief
The approaches to providing tax relief for private pensions differ in the three countries:
>>
>>
>>
Australia: has a tax regime that could be characterised as tTE (concessionary tax rates apply to
payments made out of gross income, income earned by the fund is taxed and withdrawals are
exempt). There are no tax free savings accounts. Income paid as salary sacrifice is not counted in
taxable income but counts towards Concessional Contributions.
New Zealand: has a tax regime that could be characterised as TTE (contributions are made out of
taxable income, income earned by the fund is taxes and withdrawals are exempt). There are no tax
free savings accounts.
United Kingdom: has a complex tax regime that differs between registered and non-registered
schemes. Taxation of registered schemes could be characterised as tEt. Tax relief is provided on
contributions to private pensions and on drawdown (a lump sum of 25 per cent of the pension fund is
eligible for relief). Figures from the Pensions Policy Institute suggest that total tax relief on private
pensions is over £39 billion or 2.8 per cent of GDP (the net cost of tax relief is estimated at £30 billion
or 2.2 per cent of GDP).109
Health and accident insurance
The three countries take quite different approaches to encouraging health and accident insurance. The key
features of the approaches are:
>>
Australia: a Private Health Insurance Rebate varies by income and age of family members (higher
rebates for families with older members). Most people are eligible for a 30 per cent rebate on their
insurance costs. This is the fastest growing component of Australian government health expenditure.
People who purchase health cover after 31 July following their 31st birthday will have to pay a Lifetime
Health Cover loading on top of their premiums. This loading increases for every year they are over
109Pensions Policy Institute (2011), Pension Facts May 2011.
47
Entitlement Reform
Annex 1: Short overview of the countries’ welfare states
30. People who are not covered by a private health insurance policy and earn income above a certain
income threshold may have to pay the Medicare Levy Surcharge.
>>
>>
New Zealand: health insurance is not subsidised. Universal, no fault accident insurance is provided
through compulsory levies to the Accident Compensation Corporation (ACC). ACC is the sole
provider of accident insurance for all work and non-work injuries. ACC is funded through a
combination and levies and income from each source go into an account based on the source. Since
1999 ACC has operated on a “fully funded model,” where levies are required to cover the full lifetime
costs of claims (rather than paying costs on a pay as you go basis)
United Kingdom: health insurance is not subsidised.
Health fees
The approaches the three countries take to charging in their health systems include:
>>
>>
>>
Australia: GP fees vary from clinic to clinic although the Australian Medical Association (AMA)
publishes guidelines. There are fees for specialists, such as dentists (with some subsidies provided by
government). The Medicare Benefits Schedule (for which all citizens are eligible) sets a subsidy for
health services at 75 per cent for in-hospital treatment and 85 per cent fee for out-of-hospital
services. Medicines are free of charge when administered at a public hospital. The Pharmaceuticals
Benefit Scheme (PBS) provides a government subsidised price for Medicare patients.
New Zealand: GP fees are set by the GP and can vary from clinic to clinic. There are fees for dentists
and optometrists, although some groups are exempt from paying. Medicines are provided free of
charge in some circumstances, and where charges are levied some medicines are subsidised.
United Kingdom: GPs are free at the point of use. There are fees for some services, such as dentists,
with some exemptions. People with low incomes may be able to get help with NHS costs through the
Low Income Scheme (LIS). Medicines are free of charge when administered in hospital or at an NHS
walk-in centre, for prescribed contraceptives, medication personally administered by a GP and
medication supplied at a hospital or primary care trust clinic for the treatment of a sexually
transmitted infection or tuberculosis. Prescriptions are also free of charge for children under 16 and
people over 60. Since 2008 “top-up payments” (for additional pharmaceuticals and services not
provided by the NHS) are permitted.
The three countries all have mixed economy models for the funding of long term care.
>>
>>
>>
48
Australia: Around 70 per cent of the total cost of residential care is covered by government subsidy
and the remainder comes through co-payments and accommodation costs. For care at home, the
Extended Aged Care at Home (EACH) package supports individuals to remain in the home as long as
possible. There are other federal nursing and care programmes, including Home and Community
Care (clients are contribute to the costs of the care delivered, with fees based on after tax income, and
banded as low, medium and high) and Community Aged Care Packages (support for meals,
gardening and laundry, with fees calculated in the same way as EACH and a daily subsidy available).
New Zealand: Help with cost of long-term care in rest home or private hospital is dependent on
income and assets thresholds (indexed to CPI). For people whose assets are less than the asset
threshold (83 per cent of people in residential care) there is the tax-funded Residential Care Subsidy
(funded through local District Health Boards). District health boards fund services (such as personal
care, household support, carer support and equipment to help with safety at home) that enable older
people to be supported to live in their own homes.
United Kingdom: People with assets above £23,500 (including the value of the home) are required to
pay for the total costs of their residential care. People with assets between £14,250 and £23,250 are
expected to make a partial contribution. Only those below £14,250 qualify for the maximum local
social services budget, which varies between local authorities. For care at home, Local authorities
carry out a care (or needs) assessment.
Entitlement Reform
Annex two: Key age-related features of the
countries’ welfare states
Note: The focus of this report is on the features of the welfare state most directly related to population ageing. For
this reason spending on some parts of the welfare state, such as education, are not included in the table below.
Sources: Available on request from Reform.
Policy Lever
State Pension
Age
Australia
>>
>>
State Pension
>>
>>
>>
>>
>>
>>
The state pension qualifying
age is 65 for all men. The
female qualifying age has been
increasing from 60 to equal the
male qualifying age of 65 by
2014.
New Zealand
>>
>>
The state pension age is 65 for all
men and women.
Rates differ between single
pensioners (as at September
2012, AU$712.00 per fortnight)
and couples (AU$1,073.40 per
fortnight).
Taxable although there is a Senior
Australians and Pensioners Tax
Offset which allows an individual
to earn up to AU$32,279 taxable
income and pay no tax; or a
couple can earn up to AU$28,974
each and pay no tax.
>>
>>
>>
>>
>>
Not dependent on retirement.
Income Test
Payments are subject to both an
income test and an asset test.
The test that results in the lowest
payment will apply.
Income tests differ between
single pensioners (as at 2012,
the pension reduces by 50 cents
for each dollar earned fortnightly
over AU$152) and couples (a
withdrawal rate of 50 cents
for each dollar over AU$268
(combined fortnightly earnings)).
>>
There are no plans to increase
the age.
From 1 July 2017 the age for
men and women will increase
from 65 years to 65.5 years. The
qualifying age will then increase
by six months every two years
and is scheduled to reach 67 by
1 July 2023.
Age Pension
Eligibility requires satisfying
residence requirements.
United Kingdom
>>
New Zealand Superannuation
Eligibility requires satisfying
residence requirements.
>>
Rates differ and at 1 April
2012 were as follows:
single pensioners living
alone NZ$400.07 per week;
single pensioners sharing
accommodation NZ$367.45 per
week; and partnered pensioners
NZ$302.40 per week each.
New Zealand Superannuation is
treated as taxable income and is
not dependent on retirement from
work. There is no income or asset
test and there are no benefits
from deferral.
Between 2007 and 2011, the
proportion of people aged
65 years or over receiving
New Zealand Superannuation
increased from 92.8 per cent to
95.0 per cent.
>>
>>
>>
The State Pension age for men
is 65 and the age for women has
been increasing since April 2010
from 60 to meet 65 by December
2018.
The age for men and women
will then increase to 66 between
December 2018 and April 2020,
to 67 by the end of 2036 and to
68 by the end of 2046.
In Budget 2012 the Government
announced a commitment “to
ensuring the State Pension age
is increased in future to take into
account increases in longevity.”
Basic State Pension
Rates reflect National Insurance
contribution history. To receive
the full Basic State Pension
generally requires 30 qualifying
years (a year in which National
Insurance contributions are
paid). The full pension is paid
at a flat rate (as at 2012-13,
£107.45 a week). A smaller, prorata pension is paid for fewer
qualifying years.
It is possible to earn National
Insurance Credits without
contributing under certain
circumstances, such as when
unable to work through illness or
on Statutory Maternity Pay.
People who do not qualify but
who are married (or in a civil
partnership) with a qualifying
spouse can claim up to 60 per
cent of the qualifying spouse’s
pension.
An age addition (of 25 pence a
week) is paid to people over 80.
49
Entitlement Reform
Annex two: Key age-related features of the countries’ welfare states
Policy Lever
Australia
>>
>>
>>
>>
>>
>>
>>
>>
50
The cut-off point is AU$1,697.20
fortnightly income for a single
person and AU$2,597.60
fortnightly income for a couple.
New Zealand
>>
Asset Test
Includes residential property (not
the principal home), business
and farms, household contents,
money in bank accounts,
savings, shares and any
superannuation assets.
Assets reduce the pension by
AU$1.50 per fortnight for every
AU$1,000 above threshold. The
start point for the asset test
varies between homeowners (as
at September 2012, for single
homeowners the threshold is
AU$192,500 and for couples
it is AU$273,000) and nonhomeowners (for single nonhome owners the threshold is
AU$332,000 and for couples it is
AU$412,500).
Gifting rules permit the transfer
of an asset or amount gifted up
to AU$10,000 in a single financial
year or AU$30,000 over five years
before entitlement is affected.
>>
>>
>>
Gifting does not include selling or
reducing assets to meet normal
expenses.
There are hardship provisions,
which may provide an income
support payment for people who
are in severe financial hardship,
but who may not meet the
eligibility requirements.
Deferral
The Pension Bonus Scheme
provided a lump-sum incentive
for people who remained in the
workforce past pension age and
defer claiming Age Pension. The
scheme is now closed to new
entrants who did not qualify
for Age Pension before 20
September 2009.
The Work Bonus means the
first AU$250 of employment
income earned each fortnight
is disregarded as income. Any
unused amount is added to the
person’s Work Bonus balance,
which can accumulate to a
maximum annual amount of
AU$6,500.
>>
>>
>>
Indexation
Indexed annually based on the
Consumer Price Index (CPI)
or average weekly earnings
(measured by the Quarterly
Earnings Survey). Indexation
is based on the CPI unless the
after-tax amount payable falls
below 66 per cent or exceeds
72.5 per cent of after-tax average
ordinary weekly wage. In this
case the pension will increase
with average weekly earnings.
Funding
New Zealand Superannuation is
paid for on a pay as you go basis
from general taxation.
The New Zealand
Superannuation Fund was
established to invest money on
behalf of the Government to meet
New Zealand Superannuation
costs of the future. The Fund
began investing in 2003
with NZ$2.4 billion cash. At
September 2012, the Fund had
assets of NZ$20 billion.
The fund aims to smooth
expenditure so that the same rate
of total contributions (including
capital contributions to the Fund),
as a percentage of GDP, would
be sufficient to meet the cost of
New Zealand Superannuation
over a 40 year period.
The Government is scheduled
to draw-down from the fund in
2031.
United Kingdom
>>
>>
>>
>>
>>
>>
>>
Government suspended
payments to the Fund in 2009.
These are scheduled to begin
again in 2016-17.
The Fund employs a double
arm’s length autonomous
structure (a non-government
committee appoints Guardians,
who manage the fund on a
commercial basis).
>>
The pension is taxable but there
are age-related income tax
allowances for 65 to 74 year olds
(£10,500 in 2012) and people
75 or over (£10,660 in 2012).
Allowances are withdrawn above
a higher threshold; the income
limit is £25,400 for both. The
Budget 2012 announced the
phasing out of these allowances.
The basic state pension is not
dependent on retirement from
work.
Additional State Pension
Accrual rates are based on
the length of employment
and earnings. Accruals for the
Second State Pension are based
on earning above a threshold
(as at 2011-12, £5,564 from any
one job) and rates include 40
per cent (on incomes between
£5,564 and £14,700) and 10 per
cent (on incomes from £14,700
to £40,040).
It is possible to contract out of
the Additional State Pension by
joining a private pension scheme.
The Government proposes
introducing a single-tier flat rate
pension for people with complete
National Insurance records.
Deferral
It is possible to both defer take
up and to stop receipt after
claiming for a period.
When deferring, the State
Pension increases by 1 per
cent for every 5 weeks that
the pension is not claimed
(approximately 10.4 per cent a
year). Alternatively a recipient
may qualify for a lump sum
payment and an unenhanced
pension if claiming is delayed
for 12 consecutive weeks. As at
2012 the lump sum is the amount
of pension payments foregone
plus interest at 2 per cent a year
over the Bank of England base
rate.
Indexation
Indexed annually on the basis of
the “triple lock” – the higher of
earnings growth, growth in the
CPI or 2.5 per cent.
Entitlement Reform
Annex two: Key age-related features of the countries’ welfare states
Policy Lever
Australia
>>
>>
>>
Additional
Pension Benefits
>>
>>
New Zealand
The Work Bonus balance
can be used to offset future
employment income that
exceeds $250 in a fortnight.
It can also be deferred,i.e., all
eligible pensioners can have up
to $6,500 of employment income
offset each year, whether work is
continuous or sporadic.
United Kingdom
>>
Indexation
Indexed twice a year to the
highest of the CPI, Male Total
Average Weekly Earnings
(MTAWE) and the new Pensioner
and Beneficiary Living Cost Index
(calculated through modification
of the CPI).
>>
Funding
Funded from general taxation.
Pension Supplement
Assistance to help people meet
the costs of daily household
and living expenses, including
phone, internet, utilities
and pharmaceutical costs.
Automatically added to age
pension, carer payments and
disability support payments.
As at September 2012, the
maximum payments were
AU$60.60 a fortnight for single
pensioners and AU$91.40
a fortnight for couples, and
minimum payments (for
recipients of means-tested
support) were AU$32.50 for a
single person and AU$49.00 for
a couple.
Seniors Supplement
The Seniors Supplement gives
assistance for regular bills
such as energy, rates, phone
and motor vehicle registration
and is provided to eligible
Commonwealth Seniors Health
Card holders. It is a non-taxable
payment made each quarter.
>>
>>
SuperGold Card
Provided to all superannuitants.
Holders receive discounts
in shops, discounts for local
government services and
government concessions such
as free off-peak public transport.
Total government funding of the
scheme was NZ$21.7 million
in the 2012-13 financial year. In
2011 there were approximately
590,000 SuperGold Card holders.
>>
>>
>>
Community Services Card
Holder qualifies for subsidised
health services such as GP visits
and prescriptions. Eligibility
(both for superannuitants and
non-superannuitants) is based
on income, with thresholds
varying between family size and
composition.
>>
Funding
Funded from general taxation
and National Insurance (a
hypothecated tax). National
Insurance is paid into the National
Insurance Fund, which is separate
from the Consolidated Fund.
The National Insurance Fund is
run largely on a pay-as-you-go
basis, with a balance in the fund
of (in 2012-13) 37 per cent of the
estimated benefit payments for
that year. If the balance in the
fund falls below 1/6th of annual
benefit expenditure a Treasury
grant is required.
Incomes below a lower earnings
limit (£146 per week) do not
face a levy, incomes between
the lower income limit and the
upper earnings limit (£817 per
week) face one marginal rate (12
per cent for the Primary Class 1)
and incomes above the upper
earnings limit a different marginal
rate (2 per cent on incomes
above £817). Members of
contracted out pension schemes
may face lower rates.
Pension Credit
Pension Credit is made up of two
parts, the Guarantee Credit and
the Savings Credit.
The Guarantee Credit provides
an income guarantee, which
tops up weekly income (as at
2012-13, £142.70 for single
pensioners, £217.90 for couples).
Based on State Pension age.
The Savings Credit provides
a top up for people who have
made provision towards their
retirement. It provides up
to £18.54 a week for single
pensioners and £23.73 a week
for couples. Income limits are
about £189 a week for single
pensioners and £277 a week for
couples. Based on state pension
age.
From October 2014 this payment
will be amended to include
support for eligible rent.
51
Entitlement Reform
Annex two: Key age-related features of the countries’ welfare states
Policy Lever
Australia
>>
>>
>>
>>
>>
>>
>>
52
The Commonwealth Seniors
Health Card is available to older
Australians, who are of the
pension age, but not receiving
an income support payment
from the Department of Human
Services or the Department of
Veterans’ Affairs. The card helps
with the cost of prescription
medicines, medical services
provided by the Australian
Government and some rail travel.
Gold Card
The Gold Card is provided
to veterans of the Australian
defence force and widows of
former prisoners of war. Qualifies
the holder for treatment and care
for all health care conditions
at the Department of Veterans’
Affairs’ expense.
Rent Assistance
Rent Assistance for pensioners,
providing extra financial help to
people who receive full or part
of the Age Pension, pay rent for
their accommodation (excluding
Government rental) and pay a
minimum amount of rent, which
acts as the rent threshold.
Above the rent threshold, there is
a maximum amount which will be
paid out and this is dependent on
the amount of rent paid and living
arrangements.
Carer Payment
Financial support for people who
are unable to work in substantial
paid employment because they
provide full-time daily care to
someone who is frail aged.
New Zealand
>>
>>
>>
>>
Accommodation Supplement
Support for housing costs.
Amount received depends
on income, assets and living
situation. Assistance is available
for rent, board and home
ownership costs. Rates vary
among single and married people
and families with and without
children.
Income-Related Rents limit the
rent paid by tenants of social
housing on low incomes to no
more than 25 per cent of their
income.
Disability Allowance
Recipients of New Zealand
Superannuation may qualify for
a Disability Allowance. This is for
people with a disability and who
need help with everyday tasks
or ongoing medical care. The
payment is based on disability
and income tests and, as at
1 April 2012, provides up to a
maximum of NZ$60.17 per week.
This is a non-taxable payment.
Special needs grants
Payment to help people in certain
circumstances pay for something
when they have no other way of
paying for it.
United Kingdom
>>
>>
>>
>>
>>
Subject to an income and assets
test.
Carer Allowance
Supplementary payment for
parents or carers who provide
additional daily care to an adult
or dependent child who has a
disability or medical condition or
is frail aged and care for them in
their own home or the home of
the carer. The Carer Allowance
is not subject to an income and
asset test and is not taxable. Can
be paid in addition to the Age
Pension.
>>
>>
Community Care Grant
Available to people who have,
or will start to in the next
six weeks, receive Pension
Credits and need help to live
independently. Amount depends
on circumstances, i.e., as at
2012-13 there is a reduced rate
for people aged under 60 with
savings of over £500 and for
people aged over 60 with savings
of over £1,000.
Attendance Allowance
Financial assistance for people
over 65 who require help caring
for themselves or someone to
supervise them due to a mental
or physical disability. As at 2012
rates vary depending on the
severity of disability and range
from £51.85 per week to £77.45
per week.
Carer’s Allowance
Available to adults who spend
at least 35 hours a week caring
for a person and (as at 2012)
earn less than £100 a week after
tax. The person being cared for
must receive a certain benefit,
such as Attendance Allowance or
Disability Allowance.
The weekly rate is £58.45. If a
person receives certain other
benefits at or above this rate
then they may not receive Carer’s
Allowance.
Carer Premium and Carer
Addition
The Carer Premium is an
additional amount of money
included in the calculation of
Income Support, Income-based
Jobseeker’s Allowance, Incomerelated Employment and Support
Allowance, Council Tax Benefit
and Housing Benefit.
The Carer Addition is an
equivalent amount paid with
Pension Credit.
To be eligible for Carer Premium
or Carer Addition a person should
be in receipt of Carer’s Allowance.
In addition, if someone is not
eligible for Carer’s Allowance
because they are paid another
benefit at or above the rate of
£58.45, they can still receive the
Carer Premium or Carer Addition
if they meet all the other criteria
for Carer’s Allowance.
Entitlement Reform
Annex two: Key age-related features of the countries’ welfare states
Policy Lever
Australia
>>
>>
>>
>>
>>
>>
>>
Carer Allowance can be received
for up to two adults in a person’s
care.
New Zealand
United Kingdom
>>
The person being cared for will
be medically reviewed every two
year.
Payment rate is AU$114.00 per
fortnight.
Carer Supplement
All Carer Allowance recipients are
also eligible for an annual lumpsum payment, to assist with the
costs of caring for a person with
a disability or medical condition.
In 2012 the payment is AU$600.
Those receiving the Carer
Allowance will receive the Carer
Supplement for every eligible
person in their care.
>>
>>
>>
Disability Support Pension
For people under state pension
age. Assistance for disability
which is subject to the same
income and asset tests as the
Age Pension.
Transitional rates
There is also a “transitional
rate” for the Age Pension,
Bereavement Allowance, Carer
Payment and Disability Support
Pension. This is a special rate for
those who would have received
a lower pension because of 2009
income test changes.
>>
>>
>>
>>
Winter Fuel Payment
Universal payment made in
winter to help with fuel costs.
For the year 2012-13 this will
be available to all people born
before 5 July 1951.
How much a person receives is
dependent on their age in the
qualifying week. In 2012 the
payments are £200 for people up
to age 80 and £300 for people
aged 80 or over in the qualifying
week.
Free TV licences for the over
75s
A universal benefit that provides
free television licences for people
75 and over.
Concessionary travel
People in England become
eligible for free off-peak travel
on local buses when they reach
the eligible age (the current State
Pension Age for women). Similar
schemes operate in Wales,
Scotland and Northern Ireland for
people over 60.
Housing Benefit
Available to people with savings
below £16,000 (unless they are
receiving the Guarantee Credit).
Not available to people who live
in the home of a close relative.
Universal Credit will replace
Housing Benefit from 2013.
In place of Housing Benefit,
people on low incomes renting
from private tenants may receive
a Local Housing Allowance from
their local council. This varies by
area and number of bedrooms. In
2011, maximum weekly rates for
different sizes of property were
introduced.
Disability Living Allowance
In April 2013, Disability Living
Allowance will be replaced with
the Personal Independence
Payment, which will be for
people of working age, 16-64.
For anyone aged 65 or over
already receiving the Disability
Living Allowance there are
currently no plans to replace this.
53
Entitlement Reform
Annex two: Key age-related features of the countries’ welfare states
Policy Lever
Australia
Private Pensions
>>
>>
>>
>>
>>
54
The OECD estimate for
household net savings rate in
2012 is 9.6 per cent, an increase
from 2.4 per cent in 2006.
Australian Superannuation
Guarantee
Compulsory pension scheme
requiring employer contributions
of at least 9 per cent of ordinary
earnings. The contribution rate is
increasing to 12 per cent by 2019
at a rate of 0.25 per cent a year
until 2015 and then 0.5 per cent
a year.
As at 2012, employers are
not required to contribute to
the scheme for workers with
incomes below AU$450 before
tax a month. The maximum
contribution base (income
beyond which contributions
are not made) is income above
AU$45,750 per quarter (indexed
to average weekly ordinary time
earnings).
Concessional contributions
(which include compulsory
employer contributions) below
a cap (for 2011-12, AU$25,000
for people under 50, AU$50,000
for older people) are taxed in the
fund (at 15 per cent, an extra
31.5 per cent applies to funds
above the contributions cap).
Non-concessional contributions
(including members’ voluntary
after-tax contributions) are not
usually taxed in the fund (again
this is subject to a cap, which is
six times the concessional cap).
For low to middle income earners
the government provides a
matching subsidy (of 100 per
cent), up to a maximum subsidy
of AU$1,000. The full subsidy is
available for incomes below a
lower threshold (AU$31,920) and
abates so is not available above
a higher threshold (AU$61,920).
New Zealand
>>
>>
>>
>>
>>
>>
>>
>>
The OECD estimate for
household net savings rate in
2012 is 1.3 per cent, an increase
from -8.9 per cent in 2006.
KiwiSaver
People are auto-enrolled when
they first enter the labour market
or change jobs. Members then
have eight weeks to opt-out.
Voluntary entry to the scheme is
allowed.
Employer and member
contributions are made from
gross income. The minimum
member contribution rate is 2 per
cent of income, but contributions
can also be 4 per cent or 8 per
cent. The employer contribution
rate is 2 per cent.
From 1 April 2013 the minimum
employee and employer
contributions will increase to 3
per cent.
United Kingdom
>>
>>
>>
>>
>>
Most payments into the scheme
are managed by the Inland
Revenue, which directs the funds
to the appropriate scheme.
Funds are held in private
accounts and a member either
chooses their fund or is enrolled
into a default private sector
scheme. In March 2012, 23.4 per
cent of members were enrolled in
default schemes.
As at May 2012, KiwiSaver had
1.932 million members, of which
727,881 were auto-enrolled,
245,390 were auto-enrolled
through an employer and around
958,286 actively chose to enrol.
254,746 people had been autoenrolled but opted out, 30,393
members had closed accounts
and 79,799 members were on
contribution holidays.
Government subsidies include a
NZ$1,000 “kick start” payment
to new accounts (accounts have
to remain open for 3 months to
qualify). Member contributions
qualify for a government subsidy
of 50 cents per dollar contribution
up to a maximum subsidy of
NZ$521.43 per annum.
>>
>>
The OECD estimate for
household gross savings rate in
2012 is 6.6 per cent, an increase
from 3.1 per cent in 2006 (data
for net savings rate not available).
Private Pensions
In 2010-11, 35 per cent of people
aged 16-64 in Great Britain were
contributing to a private pension
scheme.
Total contributions to private
(non-state) pensions rose to
£99.7 billion (6.8 per cent of
GDP) in 2009, from £85.6 billion
in 2009.
UK private pensions fall under
two main categories: personal
and occupational.
Personal pension schemes
are contract-based pensions
available to any UK resident
under 75 years of age.
Individuals’ contributions
are invested and a fund
accumulates. All private pension
schemes are defined contribution
(DC). The pension payable in
retirement is dependent on
how much is paid into the
scheme, the performance of the
investment and the annuity rate
(if an annuity is taken).
The number of people
contributing to personal pensions
in 2009-10 was 6.0 million, down
from 6.4 million in 2008-09.
Previously in the UK for
those with a DC scheme it
was compulsory to purchase
an annuity by age 75. New
legislation passed through
the Finance Act 2011 means
that investors may now defer
taking benefits from their fund
indefinitely, or draw down an
unlimited amount (if they can
prove they have a minimum
lifetime pension income of at
least £20,000 a year).
Entitlement Reform
Annex two: Key age-related features of the countries’ welfare states
Policy Lever
Australia
>>
>>
>>
>>
>>
>>
>>
For earners with incomes below
AU$37,000, the government
may also provide a Low Income
Superannuation Contribution.
In 2012-13, the Low Income
Superannuation Contribution is
15 per cent of the concessional
super contributions an individual
or an employer makes, with a
minimum payment of AU$20 and
a maximum of AU$500.
Most people can choose the
fund their contributions are paid
into. There are five basic types
of funds: public sector funds,
corporate funds, industry funds,
retail funds and self-managed
funds.
New Zealand
>>
>>
>>
>>
Self-employed people do not
have to make contributions. 29
per cent of the self-employed
have nil superannuation
compared to 13 per cent of wage
and salary earners.
Nearly 40 per cent of Australians
have two or more super
fund accounts with different
providers, around 10 per cent
have three or more accounts.
Average balances in 2009-10
were AU$71,645 for men and
AU$40,475 for women.
>>
The age at which an individual
can access their funds is 55 for
people born before 1 July 1960
or 60 if born after 30 June 1964.
Accessing funds before
retirement is only allowed in very
limited circumstances, including
severe financial hardship,
compassionate grounds, a
terminal medical condition,
or permanent or temporary
incapacity.
Fees for superannuation funds
can include administration
costs, investment management
costs and insurance premiums.
Research from SuperRatings
shows that average fees in
Australia are about 1.3 per cent
of a person’s balance.
>>
>>
>>
In 2010-11, government
subsidies accounted for around
50 per cent of contributions
(NZ$1.2 billion).
United Kingdom
>>
>>
Funds can be accessed at the
later of turning 65 or reaching the
fifth anniversary of membership.
In some funds it may be possible
to withdraw some or all of the
balance in accounts (except
for the NZ$1,000 kick-start
and member tax credit) to put
towards buying a first home.
Fees for default schemes are
negotiated by the government
and fees charged by an
employer’s or an individual’s
chosen scheme are set by the
scheme, but are under the
regulation of the KiwiSaver Act
which prevents the charging of
“unreasonable fees.” Across
KiwiSaver schemes in the year
ending 30 June 2012, the largest
item of expenditure was fees,
which totalled NZ$129.0 million.
In 2012, fees as a percentage of
the average balance for the year
were 1.25 per cent, compared to
2.18 per cent in 2011.
>>
>>
Five years after the introduction
of the scheme, the average
KiwiSaver member had around
NZ$6,600 in their accounts.
Tax free savings accounts and
tax relief
No tax free savings accounts.
Taxed, taxed, exempt regime,
where savings are paid out of
taxable income, earnings in funds
are taxed and drawdown of funds
is tax exempt.
As of 1 April 2012, employers’
contributions have been taxed at
the following rates: Contributions
up to NZ$16,800 at 10.5 per
cent; NZ$16,801 - NZ$57,600
at 17.5 per cent; NZ$57,601
- NZ$84,000 at 30 per cent;
NZ$84,001 and over at 33 per
cent.
>>
>>
>>
Occupational schemes are
workplace pension schemes in
the private and public sectors.
In 2010 there were 8.3 million
active members of UK
occupational pension schemes,
which is the lowest number of
members since the 1950s. In the
same year, 5.3 million members
of occupational schemes were in
the public sector and 3.0 million
in the private sector.
In March 2011 there were 51,700
occupational pension schemes.
Of this 44,000 were occupational
defined contribution (DC)
schemes, 6,000 defined benefit
(DB) and 1,700 hybrid schemes.
Hybrid schemes are a mix of final
salary schemes and personal
pension schemes (individual
funds into which an employer
and employee contributes).
In 2010 the average employee
in private sector defined benefit
occupational pension schemes
contributed 5.1 per cent of salary
to their pension, compared with
2.7 per cent for employees in
defined contribution occupational
pension schemes. In 2010 the
average employer contribution
rate for private sector defined
benefit occupational pension
schemes was 15.8 per cent of
salary, compared with 6.2 per
cent for defined contribution
occupational pension schemes.
The proportion of employees that
are members of DB occupational
schemes has fallen from 46
per cent in 1997 to 30 per cent
in 2011. The proportion in DC
schemes (occupational and
group personal) has increased
from 10 per cent in 1997 to 16
per cent in 2011.
In 2010-11 employees’ pension
participation (at 50 per cent) was
higher than the self-employed (at
21 per cent).
A report in July 2012 from the
RSA found that pension fees in
the UK can account for up to
40 per cent of typical retirement
savings over the lifetime of the
savings.
55
Entitlement Reform
Annex two: Key age-related features of the countries’ welfare states
Policy Lever
Australia
>>
>>
>>
>>
>>
The Australian Government
estimates that out of its 11.5
million strong workforce there
are 33 million pension accounts,
5 million of which are “lost,”
with a value of AU$20.2 billion.
As a result, the Australian
Government is introducing an
auto-consolidation system.
Tax free savings accounts and
tax relief
Currently no tax free savings
accounts.
Income paid as salary sacrifice
is not counted in taxable income
but counts towards Concessional
Contributions so once this is
exceeded an extra tax rate of
31.5 per cent will apply.
New Zealand
>>
Private sector superannuation
schemes
In New Zealand the private
pensions market is relatively
small. It is more common for
people to provide for their
retirement income through
investing in other income-earning
assets such as shares or rental
property.
United Kingdom
>>
>>
>>
Super contributions are taxed
in the hands of the super fund
at 15 per cent up to a cap of
AU$25,000 paid in tax per year.
For people over 60, super
contributions from a taxed source
are free of tax. For people under
60 the taxable component of the
super drawdown is assessable
income. For most people the
regime can thus be summarised
as tTE (concessionary tax of
15 per cent on Concessional
Contributions, earnings in the
fund taxed and withdrawal tax
free).
>>
>>
>>
>>
56
The Government has estimated
that 50,000 small pension pots
are created every year and that
by 2050 there will be 4.7 million
small pots in the system. There
have been calls for an aggregator
scheme for these small pots.
Auto-enrolment
From 1 October 2012, some
employees over 22 and earning
more than £8,105 a year have
been automatically enrolled into
workplace pension schemes.
Auto-enrolment will be phased
in, beginning with the largest
firms (with 120,000 or more
employees) and will be fully
phased in by 2018.
As at 2012, member contribution
rates will start at 2 per cent of
income between £5,564 and
£42,475. Contribution rates are
scheduled to increase to 5 per
cent in October 2017 and then to
8 per cent in October 2018.
Employer contributions are
scheduled to start at 1 per
cent of salary over a minimum
(currently £5,564) up to a
maximum limit (currently
£42,475). This is scheduled to
rise to 2 per cent in October
2017 and then to 3 per cent in
October 2018.
Members may opt-out at any
time. Each scheme sets a time
limit on when you can opt-out.
Members who do not opt-out
and are not put into a scheme
by their employer will be enrolled
into a default provider (the
National Employment Savings
Trust (NEST)). Department for
Work and Pensions estimates
that between 2 million and
5 million people will participate
in NEST.
Tax free savings accounts and
tax relief
In 2010-11 there were 14.3
million adult Individual
Savings Accounts (ISA), with
subscriptions during the year of
around £54 billion. At the end
of 2010-11 the market value of
adult ISA holdings stood at £385
billion. In 2011-12 the estimated
cost to the Exchequer of the tax
relief for ISAs was £2.1 billion.
Entitlement Reform
Annex two: Key age-related features of the countries’ welfare states
Policy Lever
Australia
New Zealand
United Kingdom
>>
>>
>>
Public Sector
Pensions
>>
>>
>>
>>
The public sector workforce
accounts for around 15.6 per
cent of total employment (1.9
million public sector employees
in June 2011).
>>
>>
Represented 15 per cent of total
pension assets in 2010.
Public sector workers are
excluded from the mandatory
superannuation scheme.
The partially funded defined
benefit Australian Public Sector
Superannuation Scheme (PSS),
with assets at about 30 per cent
of liabilities, was closed in 2005
and replaced with a defined
contribution plan (PSSap) for new
workers. Each State has its own
plan for its employees, most of
which are funded and based on
either defined benefit or hybrid
pension formulas.
>>
The public sector accounts for
around 18.4 per cent of total
employment (43,595 in 2012).
KiwiSaver is now the main
pension scheme available to
new members. The Individual
Retirement Plan (IRP) is an
alternative defined contribution
scheme with around 2,000
members.
Schemes now closed are: State
Sector Retirement Savings
Scheme (SSRSS) - a defined
contribution scheme with an
employer contribution of between
1.5 per cent and 3 per cent;
Government Superannuation
Fund (GSF) – a defined benefit
scheme; National Provident
Fund (NPF) – which has features
of defined benefit and defined
contribution schemes (with
a government guaranteed
minimum 4 per cent return on
investment).
>>
>>
>>
>>
>>
>>
Contributions to occupational
or public service pensions are
paid from pay before deducting
tax (but not National Insurance).
Contributions to personal
pensions are paid out of taxable
income, but this tax is claimed
back by the pension provider at
the basic rate of 20 per cent. A
higher rate taxpayer can claim
the difference back through a
tax return. Pension funds do
not pay tax on capital gains or
investment income. When the
pension matures the member
can take up to 25 per cent as a
tax-free lump sum.
In 2011-12, the annual cap on
tax relievable contributions
was £50,000 and the lifetime
allowance was £1.5 million.
In 2010-11 the total government
expenditure on pension tax
relief (based on comparing EET
treatment with TTE treatment)
was £32.9 billion. Liable tax on
pension payments was £9.0
billion, giving a total relief of
£23.9 billion. National Insurance
relief on employer contributions
was estimated at £13.0 billion
(2010-2011).
The public sector accounts
for around 20.7 per cent of
employment (6.1 million in Q1
2012).
Represented 12 per cent of total
pension assets in 2010.
Annual expenditure in 2011-2012
on public sector pensions was
£7.0 billion. This is forecast to
rise to £11.0 billion by 2016.
80 per cent of public sector
employees are members of one
of the seven main public sector
pension schemes (the NHS,
local government, teachers, civil
service, armed forces, police and
fire). With the exception of the
local government scheme, all
schemes are unfunded.
Only 1.7 per cent of public
sector employees are in defined
contribution schemes.
All benefits are indexed to CPI.
57
Entitlement Reform
Annex two: Key age-related features of the countries’ welfare states
Policy Lever
Australia
>>
Health and Care
Services
>>
>>
>>
>>
>>
>>
>>
>>
>>
58
New Zealand
United Kingdom
A Future Fund established in
2006 invests departmental
budget surpluses to help with
future funding of public sector
superannuation liabilities.
Hospital beds and length of
stay
3.8 hospital beds per 1,000
(2009-10). 33.0 per cent of beds
were in private hospitals (84,938
beds, of which 56,900 public).
In 2009-10 the average length of
stay for in-patient care was 5.9
days.
Fees
GP fees are set by the GP and
can vary from clinic to clinic. The
Australian Medical Association
(AMA) publishes guideline fees,
recommending AU$64 (2009)
as a standard charge, of which
the Government would cover
AU$34.30.
Fees for specialists, such as
dentists. Government announced
(Aug 2012) AU$4 billion package
to subsidise dental treatment
for children aged 2 to 18 years
or from low income and rural
households.
Medicare Benefits Schedule (for
which all citizens are eligible) sets
the subsidy for services at 75 per
cent for in-hospital treatment and
85 per cent fee for out-of-hospital
services.
Prescriptions
Medicines free of charge when
medication is administered at a
public hospital.
The Pharmaceuticals Benefit
Scheme (PBS) provides a
government subsidised price for
Medicare patients. Costs vary
but are capped at AU$35.40 per
prescription for general patients
or AU$5.80 for concessional
patients. A safety net threshold is
set at AU$1,363.30 which is the
maximum payable. These rates
increase annually with CPI.
Acute Care
Free at point of use.
Free treatment and
accommodation as a public
(Medicare) patient in a public
hospital.
>>
>>
>>
>>
>>
>>
>>
>>
>>
>>
Hospital beds and length of
stay
2.8 hospital beds per 1,000
people (2011). 16.3 per cent of
beds were in private hospitals
(12,348 total beds, of which
10,338 public).
>>
>>
In 2010 the average length of
stay for in-patient care was 8.4
days (falling since 2006).
Fees
GP fees set by the GP and can
vary from clinic to clinic.
>>
>>
Fees for dentists and optometry.
Exemptions from payment
include: children and adolescents
up to age 18 (dental).
Subsidies available for holders of
Community Service or High Use
Health cards.
>>
Prescriptions
Medicines provided free
of charge in the following
circumstances: children
under 6 years old, medication
administered at a public hospital.
Where charges are levied,
subsidised medicine NZ$5.00
(from Jan 2013), capped at
NZ$15.00 (as at 2012). Nonsubsidised medicines face higher
costs.
Costs are lower for
concessionary or low income
patients (Community Services
Card) or people with long term
illnesses (High Use Health Card).
>>
>>
Acute Care
Free at point of use.
Accident Cover (Accident
Compensation Corporation)
Fully-funded through government
contributions and private levies.
Income collected goes into an
account based on the source
(work, earners, non-earners,
motor vehicle) and costs relating
to injury are paid from one of
these accounts based on the
type and cause of the injury.
>>
Hospital beds and length of
stay
3.0 hospital beds per 1,000
people (2010). 4.0 per cent of
beds were in private hospitals
(184,014 total beds).
In 2010 the average length of
stay for in-patient care was 7.7
days (falling since 2000).
Fees
GPs are free at point of use.
Fees for some services, such
as dentists. Exemptions from
payment include: claimants of
Income Support allowance,
Jobseeker’s Allowance and
Pension Credit (guarantee credit).
People with low incomes may be
able to get help with NHS costs
through the NHS Low Income
Scheme (LIS). The scheme
covers: prescription costs,
dental costs, eye care costs,
healthcare travel costs, wigs
and fabric supports. People can
apply as long as their savings,
investments or property (not
counting their place of residence)
do not exceed a capital limit.
Prescriptions
Prescriptions are free of charge
for children under 16, people
over 60 and pregnant women.
Medicines also free of charge
in the following circumstances:
medication administered
at a hospital or an NHS
walk-in centre, prescribed
contraceptives, medication
personally administered by a
GP, medication supplied at a
hospital or primary care trust
clinic for the treatment of a
sexually transmitted infection or
tuberculosis.
Standard £7.65 charge; three
monthly prescription card
£29.10; 12 month certificate
£104.00 (2012 prices).
Entitlement Reform
Annex two: Key age-related features of the countries’ welfare states
Policy Lever
Australia
>>
>>
>>
>>
>>
>>
>>
>>
Medicare
Funded out of general tax
revenue and by a 1.5 per cent
income tax levy (forms part of
general revenue).
People with incomes below a
lower threshold (variable by age
eg AU$19,404 for working aged
in 2012) do not have to pay a
Medicare Levy. A reduced levy
is paid to an upper threshold
of AU$22,828 (working aged)
in 2012. Incomes above this
face the full levy (which may
be reduced based on family
circumstance).
Additional levy (Medicare Levy
Surcharge) imposed on highincome earners without sufficient
private health insurance. The
thresholds vary with family type
(for single people, 1.0 per cent
over AU$84,000, 1.25 per cent
over AU$97,000, 1.5 per cent
over AU$130,000).
Private health insurance
Public expenditure on health is
around 69 per cent of total health
expenditure.
New Zealand
>>
>>
>>
>>
>>
>>
Wage and salary earners pay
NZ$1.70 for every NZ$100 of
earnings (inclusive of tax) into
the scheme. Employers and selfemployed pay NZ$1.15 excluding
tax for every NZ$100 of earnings.
Private health insurance
Publicly funded spending on
health in New Zealand was 6.9
per cent of GDP in 2011-12.
In 2012 public spending
accounts for around 83 per cent
of total health expenditure.
Private spending (which includes
private insurance, private
households’ out-of-pocket
expenditure and non-profit
institutions serving households)
accounted for the remaining
funding, at 16.8 per cent of total
health expenditure.
Around 32 per cent of the New
Zealand population (1,389,000
people) is covered by private
health insurance (June 2010).
United Kingdom
>>
>>
>>
>>
>>
>>
Since 2008 “top-up payments”
(for additional pharmaceuticals
and services not provided by the
NHS) are permitted. Patients are
required to cover any NHS costs
as a result of top-up treatment.
Acute Care
Free at point of use.
Private health insurance
Public health expenditure is
around 83 per cent of total health
expenditure.
15.9 per cent of total health
expenditure was private
expenditure (2009), 62 per cent
of which was out of pocket
expenses.
15.8 per cent of people are
covered by a private medical
insurance policy in the UK (2011).
No tax incentives for private
health insurance.
There are no tax incentives for
private health insurance.
33 per cent of Australian health
care costs are privately funded,
with 11 per cent of the value of
all health services provided by
private health insurers.
45.7 per cent of Australians have
hospital treatment insurance
(10.3 million people) and 52.5 per
cent purchase general treatment
insurance (June 2011).
Patients receive a means-tested
(by income and age) Private
Health Insurance Rebate of
up to 40 per cent. People with
incomes over AU$130,000 (as at
2012) cannot claim the rebate.
The rebate had an annual cost
of AU$4.7 billion in 2010-2011
and is the fastest growing
component of government health
expenditure, projected to grow
in real terms from AU$192 to
AU$319 per capita from 2012-13
to 2022-23.
20 per cent tax offset for net
medical expenses over AU$2,060
in 2011-12. Cost to Government
of AU$500 million (2010-2011).
59
Entitlement Reform
Annex two: Key age-related features of the countries’ welfare states
Policy Lever
Australia
Care Funding
>>
>>
>>
>>
>>
>>
>>
60
In 2009, long-term care public
expenditure (health and social
components) was 0.84 per cent
of GDP.
Total government aged care
expenditure was AU$12.2 billion
in 2010-11, including expenditure
on residential care services of
AU$8.1 billion and expenditure
on community care services of
AU$3.4 billion.
New Zealand
>>
>>
>>
In 2009, 13.9 per cent of the
population aged 65 or over
received long term care in the
home or in an institutional setting.
Residential Care
There are 182,850 operational
residential places (June 2010),
with 71 per cent classed as “high
care,” requiring 24 hour nursing.
Around 70 per cent of the total
cost of residential care is covered
by government subsidy, the
remainder through co-payments
and accommodation costs.
All residents in residential care
homes will pay a Daily Fee of 85
per cent of the basic Age Pension
(AU$42.21 per day) from March
2013. In addition to this, an asset
tested accommodation charge is
levied for all “high care” residents
with total assets, including the
former principal residence (unless
exempt if a protected person),
in excess of AU$39,000. The
charge increases to a maximum
of AU$67.04 per day for residents
with assets of just under AU$1.7
million.
Care at Home
The Extended Aged Care
at Home (EACH) package
supports individuals to remain
in the home as long as possible.
Contributions are capped at
17.5 per cent of basic pension
(AU$8.90 per day, 2012).
Recipients with high incomes
pay up to 50 per cent of the
additional income.
>>
>>
>>
>>
In 2009 long-term care public
expenditure (health and social
components) was1.3 per cent of
GDP.
United Kingdom
>>
In 2009, 16.1 per cent of the
population aged 65 or over
received long term care in the
home or in an institutional setting.
Residential Care
Help with cost of long-term
care in rest home or private
hospital (public hospital is
free for residents but long
term care is not provided by
public hospitals unless medical
conditions require treatment) is
dependent on income and assets
thresholds (indexed to CPI).
There is no income limit. Income
includes 50 per cent of private
superannuation payments, New
Zealand Superannuation and
normal income but excluding
spouse’s salary.
The asset threshold (NZ$213,297
in 2012) excludes the value of
the home and car of the person’s
spouse or a dependent child.
For people whose assets are
less than the asset threshold (83
per cent of people in residential
care) there is the tax-funded
Residential Care Subsidy (funded
through local District Health
Boards).
>>
>>
>>
To be eligible for residential
care people need to have high
or very high needs which are
indefinite and cannot be safely
met with a package of care in the
community.
The Residential Care Subsidy
provides financial assistance
for the cost of long-term care
in rest home or hospital and
is dependent on income and
assets.
Care at Home
District health boards fund
services (such as personal care,
household support, carer support
and equipment to help with
safety at home) that enable older
people to be supported to live
in their own homes. These are
needs-assessed.
>>
>>
>>
In 2007, public expenditure on
long term care was 0.8 per cemt
of GDP. Age UK has estimated
that in 2011-12 spending on long
term care was £7.3 billion. Age
UK has also estimated that in
2011-12 private expenditure on
social care (including charges for
council-funded services, top-up
payments to supplement local
authority payments for residential
care home fees, and privately
bought home and residential
care) was £8.8 billion.
Residential Care
People with assets above
£23,500 (including the value of
the home) are required to pay for
the total costs of their residential
care. People with assets
between £14,250 and £23,250
are expected to make a partial
contribution. People with assets
below £14,250 do not face any
charges.
Care at Home
Local authorities carry out a care
(or needs) assessment. Each
local authority sets eligibility
criteria that are used to decide
who qualifies for the services
they provide or commission.
Users may be able to claim
Attendance Allowance, Carer’s
Allowance, and Disability Living
Allowance (if under 65). Help
may also be available for home
improvements through local
government and means-tested
Disabled Facilities Grants.
Equity Release
Home ownership in the UK was
66 per cent in 2010-11.
People over 65 hold 29 per cent
of owner occupied homes.
In 2009, 63.9 per cent of one
person households over state
pension age owned their home
(59.5 per cent outright and 4.4
per cent with a mortgage). For
one person households under
state pension age, 55.5 per cent
owned their own home (18.9
per cent outright and 36.6 per
cent with a mortgage). Of all
households, 31.9 per cent owned
their homes outright and 37.1 per
cent with a mortgage.
Entitlement Reform
Annex two: Key age-related features of the countries’ welfare states
Policy Lever
Australia
>>
>>
>>
>>
>>
>>
>>
Commonwealth Home and
Community Care (HACC) is a
federal nursing care programme.
All HACC clients contribute to the
costs of the care delivered, with
fees based on after tax income,
and banded as low, medium and
high.
Community Aged Care Packages
(CACP) is a federal social
assistance programme (providing
support for meals, gardening and
laundry). Fees are calculated in
the same way as EACH with a
daily subsidy of AU$37.32.
Federal government provides
60 per cent of community care
services funding, with states
and territories making up the
remaining 40 per cent.
Equity Release
Home ownership rates (including
outright ownership and
ownership with a mortgage) have
fallen from above 70 per cent to
below 70 per cent. In 2011 the
rate was 66.9 per cent.
New Zealand
>>
>>
>>
>>
Equity Release
72.4 per cent of all private
dwellings were owned by their
occupants in 1991, 70.7 per cent
in 1996, 67.8 per cent in 2001
and 66.9 per cent in 2006.
In 2006, 53.2 per cent of people
owned their own homes. Of
people aged 65 and over, 76.2
per cent owned their own homes.
United Kingdom
>>
>>
Reverse mortgage and buyback schemes are available.
In 2007 more than 4,500 loans
were issued with a value of
NZ$227 million.
Funds were mostly used for
living expenses (27.5 per cent
of respondents) and home
maintenance (26.9 per cent).
Health was less often mentioned
(10.8 per cent).
>>
In 2011, £959.6 million was
released through lifetime
mortgages and home reversion
plans. There is an estimated
£343.4 million yet to be drawn
from loans arranged during 2011.
This gives a total of over
£1.3 billion of total lending.
The top three uses for released
equity were house maintenance
and repairs (46 per cent),
holidays (36 per cent) and debt
clearance (35 per cent). Only 8
per cent use funds to pay for
health or care needs.
There have been calls for
government to support equity
release by improving regulation
and public awareness.
Reverse mortgages, home
reversion schemes and shared
appreciation mortgages are
available.
The reverse mortgage market
reached AU$3.3 billion in 2011,
representing over 42,000 reverse
mortgages (having grown 22.5
per cent in 24 months). The
average size of each loan is
AU$78,250.
Funds were mostly used to
supplement retirement income,
undertake home improvements
or clear outstanding debt.
61
£20.00
ISBN number 978-1-905730-88-9
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