As I wrote in this space three weeks ago, if the Abbott government is serious about curbing government spending it cannot afford to quarantine big spending items like education, health and social security, which comprise 60% of all spending.
Within the social security category, over $100 billion will be spent in 2013-14 on income support through the age pension, disability pensions, family benefits and other entitlements. These payments have grown rapidly in the past, and their future growth will be a major determinant of the growth of overall government spending in the future.
If the age of entitlement is over, as Treasurer Joe Hockey has said, then the Abbott government's Commission of Audit will need to review the eligibility criteria for income support entitlements. But the review should also encompass the indexation arrangements for these entitlements.
Take for example the age pension, which used to be indexed to the consumer price index (CPI). The Howard government switched to male average weekly earnings, which usually grow faster than the CPI. Then in 2009 the Rudd government granted a large one-off increase in pensions over and above the regular indexation arrangements, at a cost of $4 billion a year in today's terms. As a result pensions have risen substantially in real terms over the past ten years or so.
Both sides of politics have favoured pensioners, and this would be more understandable were the economy generating productivity gains some of which could be distributed in social benefits. But it isn't, and it is time to ask whether the present indexation arrangements are affordable.
One modest step would be to revert to CPI indexation, which would preserve the substantial real increase in pensions of the past but make further real increases discretionary and dependent on economic and budgetary conditions. After just a few years, this would cost several billion a year less than current indexation arrangements.
More could be saved by suspending indexation of all income support payments for one year. While this may sound drastic, before the high inflation era of the 1970s and 1980s adjustments to benefits were discretionary and depended on what the budget could afford each year. We are no longer in a high inflation era.
Robert Carling is a Senior Fellow at The Centre for Independent Studies. The Emergency Budget Repair Kit comprises nine tips to reduce government spending, and was released on 21 November 2013.
Home > Commentary > Opinion > Time for a fresh look at indexation of social benefits
Time for a fresh look at indexation of social benefits
Within the social security category, over $100 billion will be spent in 2013-14 on income support through the age pension, disability pensions, family benefits and other entitlements. These payments have grown rapidly in the past, and their future growth will be a major determinant of the growth of overall government spending in the future.
If the age of entitlement is over, as Treasurer Joe Hockey has said, then the Abbott government's Commission of Audit will need to review the eligibility criteria for income support entitlements. But the review should also encompass the indexation arrangements for these entitlements.
Take for example the age pension, which used to be indexed to the consumer price index (CPI). The Howard government switched to male average weekly earnings, which usually grow faster than the CPI. Then in 2009 the Rudd government granted a large one-off increase in pensions over and above the regular indexation arrangements, at a cost of $4 billion a year in today's terms. As a result pensions have risen substantially in real terms over the past ten years or so.
Both sides of politics have favoured pensioners, and this would be more understandable were the economy generating productivity gains some of which could be distributed in social benefits. But it isn't, and it is time to ask whether the present indexation arrangements are affordable.
One modest step would be to revert to CPI indexation, which would preserve the substantial real increase in pensions of the past but make further real increases discretionary and dependent on economic and budgetary conditions. After just a few years, this would cost several billion a year less than current indexation arrangements.
More could be saved by suspending indexation of all income support payments for one year. While this may sound drastic, before the high inflation era of the 1970s and 1980s adjustments to benefits were discretionary and depended on what the budget could afford each year. We are no longer in a high inflation era.
Robert Carling is a Senior Fellow at The Centre for Independent Studies. The Emergency Budget Repair Kit comprises nine tips to reduce government spending, and was released on 21 November 2013.
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