How a rising share of taxpayer-funded welfare is flowing to Australia's most well-off households

Our social safety net is growing very quickly.It's growing faster than the economy, so it's becoming more expensive.And what we find in the analysis that we've done is that that growth is disproportionately flowing to the most well -off Australian households.

Before we go to your report, the Treasurer's capital gains tax and negative gearing bill is passing its last hurdle.Labor says it rebalances the tax system between assets and wages to make it fairer.What's your view?

Well, I think there is a broad conversation that's happening right now focused on the tax changes about what's fair and the fairness in our taxation system.The report that we've done looks at the other side of the coin, which is the fairness in our transfer system.And I think we're better off looking at them together and making sure that they both stack up as fair.

Well, you say Australia has one of the best social safety nets in the world, but you say it's not catching the right people.

Well, what's happening is our social safety net is growing very quickly.It's growing faster than the economy, so it's becoming more expensive.And what we find in the analysis that we've done is that that growth is disproportionately flowing to the most well -off Australian households.And that's going against the direction of fairness, if we're honest about it.And so we're looking at what has been a really proud history of means testing in Australia that's done a great job historically of targeting that support to the people who really need it, and saying, let's have a look again at some of our big programs and see if we can adjust the means testing rules to return to that main principle of equity, which also helps those programs to remain sustainable over the longer term.

of an aging population.

A lot of it is, and in the savings that we've identified, so we've identified $21 billion of savings across four programs, the child care subsidy, parental pay leave, the aged pension and aged care.Across those four programs, $21 billion of savings that come primarily from the top 20 % of Australian households by wealth or income.The majority of that savings comes from the pension because it is such a large program.And the reason why the savings are so significant in pension is because we apply a stronger means test for wealth, specifically the owner -occupied home, which gets a very, very light treatment in the pension means test, and it ends up being pretty inequitable.

Well, let's look at your example of two neighbours, one who owns a very expensive house and is able to access the pension, and another renter who has quite a bit of money in super but can't.

Before I talk about the examples, I think there's a couple of important myths to bust about the pension.One is that it's an entitlement.We often think of the pension as something that everybody gets, but in modern -day Australia, that's just not the case.Across the entire retiree population in Australia, 40 % are self -funded retirees, 20 % get the part pension, and 40 % get the pension.So we're talking about that 60 % of the population of the retired population that have access to the pension.The second myth is that the owner -occupied home doesn't matter when you come to the pension.

Also not true, because the asset test that we use has a different threshold if you're a homeowner or a not -homeowner.So people who are not homeowners are slightly better off in terms of the pension with the asset test, but the difference isvery slight.So we end up strongly preferencing it.we end up strongly preferencing homeowners.And the way that works out in these two examples is, say you have a couple who own a $3 million house, a $5 million house.

They may not have a lot of assets, but they will qualify for a full pension, 50 grand a year almost, plus, if one of them goes into aged care, about $150 ,000 a year in aged care support.If you have another couple who rents their house and they have one and a half million dollars in superannuation, they get no pension whatsoever and only about half the aged care support.That is fundamentally unequal in terms of the assets and the financial capacity of those two couples to self -fund their retirement.But the second part of our proposal addresses the fact that you may be the owner of a pretty expensive home, but it doesn't mean that you have a lot of cash.And for that, we're proposing what we call the Retirement Contribution Scheme.It's modeled on HECS.

It's a zero -interest loan from government that you can draw down over the time of your retirement to support your income, regardless of if you have access to the pension or not.So it helps retirees achieve that standard of living in retirement that we all want them to have, but at a lower cost to the taxpayer, because that loan is repaid when those assets eventually are sold.

So the idea is then people with valuable homes actually sell their homes in order to fund their retirement rather than rely on the pension?

Well this is one of the main points.There is no forced asset sale here and also the loan could be against any asset.It could be against superannuation, shares, investment properties or your home and there definitely would not be anybody forced to sell their home.In fact it would helpa lot of people transition from having the pension to what they need for funding for aged care support.The sale would come eventually down the track, but what we find in our modeling is that because asset prices also go up over time, and the amount of lending is capped at the pension rate or 150 percent of the pension, Actually, the equity that you would have in your asset pool is still likely to be greater by the time you're 87 than even with that loan than it was when you entered retirement.

So this really can work out the best for everybody, the pensioner and the taxpayer.

So the claim is then better means testing will save the budget $21 billion.What is that better means testing?

Well, the better means testing is a tighter income test on the parental pay leave and child care subsidy, and applying that tighter asset test for wealth for the pension and aged care.And $21 billion is a lot of money.It can fund a 1 .7 percentage point point tax cut across all income tax thresholds.It can get rid of 70 % of the fiscal deficit this year.It's worth $5 ,000 per household of Australian households that are in the bottom 40 % of that income distribution.It's actually nearly as much as we currently spend on JobSeeker and rent assistance combined.

So freeing up that cash can do a lot in terms of budget repair and going to better support for the Australians who really need it.

But is there any political appetite, do you think, for this type of change?

Well, I hope so.And going back to the start of our discussion, we're talking about fairness and equity.And what's happening with the growth of our social safety net, if we aren't able to target it, it becomes more and more expensive.And we do get upgetting into this unfortunate dialogue about who gets what from the budget, which is really tax, instead of thinking about how we can better target the spending to make sure that everybody really does get what they need and taxpayers don't end up paying more than they have to.

Amy Oster, thank you so much.

Thanks, Alicia.