NOEL WHITTAKER: Time to face tough choices

IT’S been a hectic time in politics over the past fortnight, with one message emerging loud and clear: most voters are not prepared to accept the tough medicine that is needed to get the country’s finances back on track.
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It’s hyperbolic discounting at work. The longer the period between the remedy and the outcome, the less likely it is that people will accept tough choices today that will have beneficial effects in the future. But the longer we put off making the changes, the harder it’s going to be when drastic action is forced upon us.

Today, let’s look in detail at three major influences at work; it will give you an idea of the massive problems facing any party in power.

The first is increasing life expectancies. Today, there are 3.45 million Australians aged 65 and over. This is 14.7 per cent of our current population of 23.5 million. By 2034 – just 19 years away – the number is expected to be 6.1 million, which is almost 20 per cent of the projected population of 31.6 million.

The thought of one in five Australians being aged 65 or over is scary enough, but it gets even worse when you consider these projections did not take into account the medical breakthroughs that are certain to happen in the next 20 years.

In a situation where debt has become the norm, and deficits are forecast for years ahead, how is a government going to find the funds to provide the health services and age pension to deal with all those ageing people?

Our current income tax system is unsustainable. The 65s and over are our fastest growing group, yet 87 per cent of them pay no income tax at all. This is due to a combination of concessions. The Seniors and Pensioners Tax Offset (SAPTO) enables a couple to earn $28,974 each per annum without paying tax, while anybody over 60 can hold their superannuation in a tax-free fund while drawing a tax free income from it.

Raising the taxes on super without cutting back SAPTO won’t work because retirees with less than a million dollars in super would simply exit the system and continue to enjoy a tax-free existence. The only realistic option available is to widen the GST so there are no exemptions.

Most senior citizens expect at least a part age pension. Currently, increases are linked to average weekly earnings, but the Coalition is trying to stem the rate the pension goes up. They have proposed the rate of increase be linked to cost of living from September 2017.

Let’s assume increases in average weekly earnings are 4 per cent, inflation is 2.5 per cent, and the couple’s full pension now is $30,000 a year. If it remains linked to earnings, the pension would rise to $45,000 a year in 10 years and $67,000 a year in 20 years. By linking it to the CPI, it becomes $38,000 a year in 10 years and $49,000 in 20.

Surely it is a no-brainer to reduce the increase in the age pension so that it keeps pace with the cost of living?

Unfortunately, due to the adversarial nature of politics, the opposition is running a scare campaign claiming that age pensions are being reduced – yet all the Coalition is trying to do is slow down the rate of growth.

Put all this together and you have an ageing population, all who vote, who will be a growing drain on government finances at the same time as the government is shackled by a tax system which cannot cope. Eventually, something’s got to give.

Noel Whittaker is the author of Making Money Made Simple andnumerous other books on personal finance. His advice is general in nature and readers shouldseek their own prefessional advice before making any decisions. Email [email protected]南京夜网.