How seniors became our most fierce lobby
In the end, the election was not a referendum on wages, as Bill Shorten predicted. Nor was it the climate change election, as progressives hoped and science demanded.
Instead, it became a generational contest between the aged and the rest, as predicted in these pages a year ago. And as so many times before, older voters delivered for the Coalition.
More specifically, according to Ian Henschke, chief advocate for National Seniors Australia, they delivered because of one policy – Labor’s plan to reform Australia’s uniquely generous franking credits system.
Henschke claims research showing opposition to the policy shifted 2 per cent of votes from Labor to the conservative parties, enough to get the Coalition back into government.
Of course, many factors influence election results. We’ll get a much more detailed picture come November, when the next Australian Election Study – the definitive academic assessment of voting behaviour – is released. But there is good reason to believe Henschke is generally right, although the scare campaign promulgated about Labor’s non-existent plan to impose death taxes also played a part.
In any case, the basic reality is unarguable: the electoral success of the conservative parties relies heavily on keeping seniors happy, even more heavily over time as younger voters increasingly abandon them.
Understand that and you’ll understand why the Morrison government responded so quickly to the concerns of pensioners about the deeming rates that applied to their savings income.
And why the Labor Party is still vigorously debating with itself whether it should continue to advocate reform to Australia’s retirement income regime, which delivers billions of taxpayer dollars to wealthy retirees at the expense of working-age people.
“One in three voters is over 60,” Henschke says, boasting of the power of his constituency to bend the will of government. “That’s our catchcry.”
That sentiment was part of a key meeting in Sydney last October, where a consortium of seniors groups gathered to discuss Labor’s tax reforms. The meeting covered retirement lobbies, but also connected to groups such as Probus and Rotary. There were politicians there, too: Tim Wilson and then assistant treasurer Stuart Robert. This was an organised bloc. Politics has long held that older voters are not mobilised, but that was no longer true.
Robert Gottliebsen, a business columnist for The Australian, was also present. He says he played a “not insignificant role” in rebranding the franking credits reform as a “retirement and pensioners’ tax”. As he wrote later, in an article that claimed Labor’s loss was planned at this meeting: “Retirees don’t march in the street but they belong to connected organisations which enable them to become a massive political force if they are aroused.”
That power is growing, according to Clive Bean, professor of political science at Queensland University of Technology.
“Older people are becoming a larger proportion of the electorate over time, and they are, it seems, more and more solidly behind the Coalition,” he tells The Saturday Paper.
“Conversely, younger voters are ever more likely to support the Greens and Labor.
“I suspect that explains a lot about recent political manoeuvrings. The Coalition needs to do all it can to retain [older voters].”
Bean cites data from previous Australia Election Studies to underline his point. In 2001, 19 per cent of voters were over 65. By the 2016 election, the percentage had grown to 23.
Furthermore, they have shown themselves as a group to be increasingly likely to vote against Labor.
When John Howard stumped up for re-election in 2001, 56 per cent of over-65s voted for the Coalition, while 34 per cent voted Labor. By 2016, the percentage voting for the Liberal or National parties had grown marginally to 57 per cent. But Labor’s share had fallen dramatically, to just 28. The difference between the Coalition gain and the Labor loss reflects a general trend towards minor parties, Bean says.
It is a lucrative symbiosis. In exchange for their votes, older Australians get many benefits.
A series of spending and tax decisions taken in the early 2000s – the tax-free superannuation withdrawals, the franking credit rebates, the generosity of the seniors’ tax offsets, as well as other measures not restricted to older Australians but which disproportionately benefit them, such as the treatment of capital gains and negative gearing – have massively skewed the system towards older Australians.
The result is growing generational inequality. It’s obvious in the data on wealth and incomes: according to the Grattan Institute, the average household aged 55 to 64 was $300,000 richer in 2018 than that same household back in 2003. For the 64-to-74 age group, the difference was more than $500,000. Despite this, the proportion of over-65s paying tax almost halved in that period. By contrast, those in the 25-to-34 age bracket saw almost no change in their net wealth.
Averages, of course, hide the extremes. As Henschke points out, the largest cohort of people receiving the Newstart allowance are those aged 55 to 64. These are people in the decade before retirement, in need of government assistance because they have lost their jobs.
“As of last December, there were 173,000 of them. The number grows at around 10,000 more a year. They stay on the benefit for an average of 190 weeks. This is extraordinary, as it means about four years of their life on average is spent on Newstart,” he says.
“While they are doing that, they are chewing up the savings and often their superannuation to pay the mortgage and other bills.”
In April, National Seniors and the Council on the Ageing joined the chorus calling for the government to increase Newstart, which has not gone up in real terms – and has declined relative to wages – for 25 years. Contrary to their quick responses in the franking credit and deeming rate debates, on this the government has been largely silent. This bloc does not persuade them the way wealthy older voters do.
The deeming issue is different. The basic principle of deeming is simple – the more people earn from their savings, the more their pension is reduced. But the government cannot know precisely what rate of return each pensioner is getting because they may have it invested in different ways. So they instead “deem” an average rate of return.
Henschke explains: “That rate was tied to the Reserve Bank cash rate until 2010, and then decoupled because Wayne Swan gave a big increase to the pension.”
As interest rates have fallen over recent years, though, deeming rates have not fallen in line and Henschke suspects a ploy by the government to contain its spending on pensions.
“The gap got wider and wider, until it was 2.5 per cent,” he says. “To leave the deeming rate unchanged for four years and four months, while there were five consecutive drops in the cash rate, suggests a deliberate policy.”
Finally, the government acted to do something about it. Two drops in the cash rate in successive months clearly helped bring attention to the issue, but Henschke points to the political muscle Australian seniors displayed in opposition to Labor’s franking credits policy during the election. Perhaps the government was both a little spooked and a little grateful, he thinks.
Also significant was the fact the senior lobby won support for its cause from Centre Alliance, which controls two senate votes that will likely prove critical to the passage of government legislation for at least the next term of parliament.
Still, Henschke believes the government’s reductions should have been greater.
Backdated to July 1, the deeming rate for those with income-producing assets of up to $51,800 for singles, or $86,200 for couples, was cut from 1.75 per cent to 1 per cent.
For any assets above that level, the rate was reduced less, from 3.25 per cent to 3 per cent.
The logic behind the differing rates is that those with more assets are more likely to have them invested at higher rates of return – in shares, for example. But Henschke questions that assumption.
“What I’m concerned about is the people who have money in bank accounts … who don’t want to play the stockmarket, who want to have their money available, people who feel comfort in cash,” he says.
Other economic experts suggest the new rates are fair, however.
“Arguably,” says one, “someone with only $50,000 in assets may have them in a low-return account, but even term deposits can return well above the cash rate.
“Someone with a couple of hundred thousand is unlikely to have it all in low-rate at-call accounts. So the higher deeming rate is actually pretty generous. A 3.25 per cent return is well below what one would get with a diversified portfolio.”
Notably, full pensioners got nothing, and they are doing it tougher. Particularly as they are less likely to own a home. Home ownership rates are falling among the retired, as they are in the Australian community generally.
“If you wanted to help those in greatest need,” says one welfare expert, “you would increase rent assistance, but rent assistance has not been increased. But even when Labor greatly increased pensions in 2009, they took no cognisance of the evidence given at the review that it was those who were renting who were worst off.”
But at least some pensioners got something, which is testament to the power of their lobby. Henschke’s group claims 130,000 members – media-savvy and politically connected.
Then there’s the SMSF Association, an alliance of self-managed superannuation fund (SMSF) owners, investment companies, stockbrokers, financial advisers and shareholders, which did much to torpedo Labor’s plans.
Asked how much money makes a pensioner “wealthy”, the association’s chair, Professor Deborah Ralston, seems to suggest it takes several million dollars.
Ralston says that before the election “a thing we heard a lot was that a third of franking credits went to wealthy people, which tended to be people in SMSFs [holding] over $2.5 million.
“If you think about it, there’s an average of two people in every SMSF, so they were saying wealthy people would be those with over $1.25 million in super. Which makes you wonder what wealthy is.”
In fact, she tells The Saturday Paper, people with that kind of money in their super – or more – made up only a “tiny minority”, about 60,000 of the 1.2 million people who would have been affected by Labor’s proposed change.
Labor’s policy, she says, was portrayed as “a kind of wealth tax … but actually hit a lot of people of relatively modest means”.
Of course, the term “modest means” is subjective, as is “wealthy”.
Australia’s dividend imputation system was first introduced by the Hawke government in 1987, to general approval. The way it worked was people receiving dividends from their shareholdings in Australian companies got a credit for the amount of tax the company already had paid, so as to prevent double taxation.
These credits could then be used by the recipients to lower their individual tax bills – down, in some cases, to zero.
But once the individual’s entire tax liability had been offset, they could not claim further credits, making those credits effectively worthless. Then, in 2001 the Howard government changed the rules, such that people could claim these “excess” imputation credits as cash refunds.
Not surprisingly, a growing number of people began structuring their affairs so that instead of paying tax to government, government paid them. The cost to the government has grown, and still is growing fast – more than $5 billion a year now, projected to be $8 billion within a decade, given to people who pay no tax on their incomes.
So, who were these people? Well, shareholders, obviously, but particularly wealthy shareholders and more particularly retired people who held their shares in self-managed superannuation funds, because retirees pay no tax on the income from their super, regardless how substantial it is.
An example calculated by the Grattan Institute clearly showed what a lucrative lurk this was for the retired rich.
A self-funded retiree couple could have a $3.2 million super balance, plus their own home, plus $200,000 in Australian shares held outside super.
“Even drawing $130,000 a year in superannuation income, and $15,000 a year in dividend income, they would … pay no income tax whatsoever,” said the Grattan Institute.
According to the Parliamentary Budget Office (PBO), the vast bulk of shares are held by high-wealth households. In 2015-16, 71.8 per cent of all shares, by value, were owned by people with net wealth of $1.97 million or more. The top-three income deciles owned more than 92 per cent of all shares. Households in the lower half of the wealth range owned just 3.2 per cent between them.
And when it looked at who got those excess credits, the PBO again found they went overwhelmingly to people with large super accounts.
More than half – 52.7 per cent of the total credits claimed by SMSFs – went to accounts holding $2.44 million or more. In all, 82 per cent of the total went to people with more than $1 million in super.
Just 0.9 per cent went to those with a balance between $181,000 and $279,000, which was about the average amount of super held by people at retirement.
So when Ralston says Labor’s plan would have hit a lot of people of “relatively modest means”, the key word is “relatively”.
Relative to Dick Smith, perhaps, their means are modest. On Wednesday the multimillionaire businessman confessed to The Sydney Morning Herald and The Age his surprise at learning he had received about $500,000 in franking credits in 2016-17, and about $250,000 in 2017-18.
“I found I was getting this ridiculous money from the government,” Smith told the papers’ Michael Koziol.
“That’s wrong, I said – I’m wealthy … I think it’s outrageous for wealthy people to be getting money from the government.”
Smith complained about the cash refunds to the tax commissioner, Chris Jordan, and asked to pay more tax. Jordan wrote back saying it was the first such request he could recall.
None of this is to say there were not some people of indisputably modest means who would have been hurt.
“While the majority of the money goes to people with very large balances,” says one tax expert, “it doesn’t mean a relatively small credit of $1000 or $5000 is not still worth a lot to somebody on an income just above the age pension cutoff.”
Ahead of the election, groups such as Ralston’s and National Seniors ensured many such people received publicity.
Liberal MP Tim Wilson played a big part, too, initiating an inquiry into Labor’s policy by the house of representatives economics committee and taking it around the country, taking evidence and submissions from aggrieved retirees of what Ralston would call modest means.
In fact, Wilson’s “inquiry” could be more accurately seen as a partisan show conducted at taxpayers’ expense and aimed at damaging Labor – a reality driven home by an analysis of the wording of the 1300 submissions, which found “at least” 249 contained text written by Wilson himself.
Another fact: while many of those who made submissions may not be described as the top end of town, they were nonetheless comparatively well-off.
Sample anonymised submission: “We are self-funded retirees. Our joint income is primarily from a superannuation income stream and a small share portfolio. This income is less than $80,000 which includes a dividend imputation refund of less than $4000. We do not consider ourselves wealthy despite what Mr Shorten and his colleagues imply in their press conferences.”
Actually, a household with disposable income of $80,000 is doing better than three-quarters of households, including those of young workers whose taxes subsidise them.
Labor’s problem was that while such people stood to lose relatively small amounts, there were a lot of them. Ralston’s analysis of PBO costings found more than a million individuals and 100,000 SMSFs received franking credit refunds of less than $5000.
That’s a lot of upset voters, and what’s more, upper-middle-class voters alert to the ways of influence, with a lot of time on their hands, resources and lobbying power through their accountants and political representatives.
Hence Labor’s current dilemma. The franking credits regime presents a big and fast-growing impost to government and to the programs and services Labor would like to direct to those younger people who vote for it.
What to do? They could just abandon all attempts at reform and notions of intergenerational equity. They could, as some have suggested, grandfather existing arrangements, thus allowing rich baby boomers a perk unavailable to succeeding generations. They could do as Dick Smith suggests and set a threshold, so that moderately well-off people continue to benefit, while the seriously rich are cut off. But that would still be very costly.
It’s going to be very interesting to see where Labor lands on the issue. But it seems pretty certain that it will not go to the next election with the same policy as it did the previous. There’s one big lesson from May 18: don’t come between older voters and their nest eggs.
This article was first published in the print edition of The Saturday Paper on Jul 20, 2019 as "How seniors became our most fierce lobby". Subscribe here.