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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. 2 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. 5 1 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. 6 1 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. 7 1 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: >> >> >> >> >> 8 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). 1 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: >> >> 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. 9 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. 10 2 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. 11 2 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 >> >> >> 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: >> >> >> 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 2 Entitlement Reform 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 2 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 2 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 3 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 5 Entitlement Reform 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 5 Entitlement Reform The benefits of early action 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. 31 5 Entitlement Reform The benefits of early action 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. 32 5 Entitlement Reform The benefits of early action 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. 33 5 Entitlement Reform The benefits of early action 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 6 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 6 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 6 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 References Australian Bureau of Statistics (2008), Population Projections, Australia, 2006 to 2101. Australian Bureau of Statistics (2011), Housing occupancy and costs, 2009-10. Australian Bureau of Statistics (2012), Population by Age and Sex, Regions of Australia 2010. Australian Electoral Commission, http://www.aec.gov.au. Australian Government (2007), Intergenerational Report 2007. Australian Government (2011), Stronger Super Information Pack. Bassett et al. (2010), Reality check: Fixing the UK’s tax system, Reform. Bell et al. (2010), “Challenges and Choices: Modelling New Zealand’s Long-term Fiscal Position”, New Zealand Treasury Working Paper 10/01. Berry (2011), Past Caring? Widening the Debate on Funding Long Term Care, International Longevity Centre. Beveridge (1942), Social Insurance and Allied Services, HM Stationery Office. Birch (1999), Budget Economic and Fiscal Update. Booth (2010), UK State Pension Reform in a Public Choice Framework. Breyer and Craig (1997), “Voting on Social Security: Evidence from OECD Countries”, European Journal of Political Economy, 13 (4): pp. 705-724. Brown (1999), Budget 1999. Buckle and Cruickshank (2012), “The requirements for long-run fiscal sustainability”, paper for the LongTerm Fiscal External Panel, New Zealand Treasury, Wellington. Carling (2012), Australia’s future fiscal shock, Issue Analysis, No 134, Centre for Independent Studies. Cawston et al. (2009), The end of entitlement, Reform. Cawston et al. (2010), The money-go-round, Reform. Cawston et al. (2011), Old and broke, Reform. CIA (2012) The World Factbook. CII (2012), Future Risk: Defusing the Demographic Timebomb, Centenary Future Risk Series: Report 5, Chartered Insurance Institute. CIPD (2010), Employee Outlook Report, Summer. Commonwealth of Australia (2010), The Intergenerational Report 2010, Australia to 2050: Future Challenges. Connolly (2007), “The effect of the Australian Superannuation Guarantee on Household Saving Behaviour”, Research Discussion Paper 2007-08, Reserve Bank of Australia, Canberra. Cooper et al. (2010), Super System Review: Final Report, Australian Commonwealth Government. Costello (1999), Budget 1999-2000. Curry and O’Connell (2004), Tax Relief and Incentives for Pension Saving, Pensions Policy Institute. Davidson (2009), Quantifying the Changing Age Structure of the British Electorate 2005-2025: Researching the age demographics of the new parliamentary constituencies. Department for Communities and Local Government (2011), English Housing Survey 2009-10 Household Report. 43 Entitlement Reform References Department for Work and Pensions (2010), Benefit Expenditure Tables: Medium Term Forecast. Emmerson and Tetlow (2010), Pensions and retirement policy: 2010 Election briefing note, No. 16 (IFS BN104). English (2012), Budget 2012, Key facts for taxpayers. English (2012), Budget Economic and Fiscal Update, New Zealand Treasury. Financial Services Council (2012), Pensions for the Twenty First Century: Retirement Income Security for Younger New Zealanders. German (ed) (2012), Making the most of equity release: perspectives from key players, Smith Institute. Haldenby et al. (2009), The front line, Reform. Hartwich and Gill (2011), Price drivers: Five case studies in how government is making Australia unaffordable, Center for Independent Studies, Policy Monograph 125. HM Treasury (2012), “Public Finances Databank: B2: Government Expenditure”. Holland and Portes (2012), “Self-defeating austerity?”, National Institute Economic Review 222. Horney et al. (2010), “Fiscal Commission should not focus on Gross Debt”, Centre on Budget and Policy Priorities. House of Commons Work and Pensions Committee (2009), Tackling Pensioner Poverty: Government Response to the Fifth Report from the Committee, Session 2008–09. IMF (2012), World Economic Outlook. IMF (2012), Fiscal Monitor: Balancing fiscal policy risks. Insurance Industry Working Group (2009), Vision for the insurance industry in 2020, HM Treasury. Ipsos MORI (2005), Electoral Commission, Election 2005: Turnout . Just Retirement (2012), The role of housing equity in retirement planning. Law, Meehan and Scobie (2011), “KiwiSaver: An initial evaluation of the impact on retirement saving”, New Zealand Treasury Working Paper, 11-04. Liedtke and Schanz (2012), “Editorial and Executive Summary,” in Liedtke, P. and K. Schanz (eds) (2012), Addressing the Challenge of Global Ageing: Funding Issues and Insurance Solutions, The Geneva Association. Lloyd (2011), Immediate Needs Annuities: Their role in funding care, The Strategic Society Centre. Malpass (2011), The Decade-long Binge: How government squandered ten years of economic prosperity, Centre for Independent Studies, Canberra. Martin (2010), Abolish NICs: Towards a more honest, fairer, simpler system, Centre for Policy Studies. McCauley and Sandbrook (2006), “Financial Incentives to Save for Retirement”, DWP Research Report Series, No. 403, Department for Work and Pensions. MGM Advantage (2012), MGM Advantage Annuity Index, September. Mirrlees (2011), Tax by Design, Institute for Fiscal Studies. New Zealand Electoral Commission, http://www.elections.org.nz. New Zealand Treasury (2006), New Zealand’s Long Term Fiscal Position. New Zealand Treasury (2009), Challenges and Choices: Modelling New Zealand’s Long-term Fiscal Position. New Zealand Treasury (2009), Challenges and Choices: New Zealand’s Long-term Fiscal Position. New Zealand Treasury (2012), Fiscal Strategy Report. 44 Entitlement Reform References Nolan (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). Nolan (ed) (2010), The first hundred days, Reform. Nolan (2011), The fairness test, Reform. OECD iLibrary, http://www.oecd-ilibrary.org. OECD (2010), Ageing and Employment Policies: Statistics on Average Effective Age of Retirement. OECD (2011), Government at a Glance. OECD (2011), Ageing and Employment Policies: Statistics on Average Effective Age of Retirement. OECD (2011), Pensions at a glance 2011: Retirement income systems in OECD and G20 countries. OECD (2012), OECD Pensions Outlook 2012. Office for Budget Responsibility (2012), Fiscal Sustainability Report July 2012. Office of Tax Simplification (2011), Review of tax reliefs: Final report. Office for National Statistics (2011), 2010-Based National Population Projections. Office for National Statistics (2012), Population Ageing in the United Kingdom, its constituent countries and the European Union. Osborne (2012), Budget 2012. Pension Income Choice Association (2009), Open letter – Pension Income Choice Association. Pensions Policy Institute (2011), Pension Facts May 2011. Piggott and Sane (2009), “Indexing pensions”, SP Discussion Paper, No. 0925, World Bank. Qvigstad et al. (2012), “The rule of four”, The Business Economist, Vol. 43, No. 1, pp. 31-44. Rashbrooke (2006), Asset decumulation: optimising income needs for retirement. Reform (2011), An NHS for Patients: Reform submission to the NHS future forum, Reform Reform (2011), Paying for long term care, Reform. Saga (2012), The impact of recent fiscal and monetary policy decisions on pensioner households. Scobie, 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 SHIP (2010), A call for greater clarity on retirement funding. Statistics New Zealand (2006), Census of population and dwellings. Statistics New Zealand (2012), National population projections: 2011 (base) – 2061. Statistics New Zealand (2012), Projected Population of New Zealand by Age and Sex, 2011 to 2061. Swan (2012), Budget Overview, Appendix G. Tinsley (2012), Too much to lose: understanding and supporting Britain’s older workers, Policy Exchange, London. Towers Watson (2012), Global Pension Assets Study 2012. Turner, Drake and Hills (2004), Pensions: Challenges and Choices – The First Report of the Pensions Commission, The Stationery Office. 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 Reform 45 Great Peter Street London SW1P 3LT T 020 7799 6699 [email protected] www.reform.co.uk