The two part series titled ‘Farewell Welfare’ published in the Daily Reckoning three weeks ago elicited a good deal of reader response.
The essence of the articles was that the welfare system is funded courtesy of today and tomorrow’s tax payer. There is no government ‘social security fund’ set aside from which welfare is paid.
With the ranks of age pensioners swelling thanks to retiring baby boomers and increased life expectancies, future taxpayers are facing the prospect of an increasing percentage of their hard earned being pilfered to fund the antiquated age pension system.
The standard response to justify receipt of an age pension is ‘I’ve paid taxes all my life.’ The harsh reality is ‘so what?’ Those taxes were used by the government of the day to fund whatever programs they sought fit to include in their budgets at that time. There is no provision for a social security fund in the budget (this was a contentious point with some readers — see below).
The simple equation with welfare is one person’s income is another person’s taxes.
The more people on the welfare side of the equation, the greater the amount the worker surrenders to the taxman.
My point is the next generation and the generations yet to be born are not going to be overly keen sacrificing a greater amount of their income to pay pensions to aging boomers.
In the next decade or two, access to an age pension is going to become much more difficult. Relying on the age pension to partially fund your retirement is destined to end in disappointment.
Some readers agreed that the welfare system, as we know it today, is unsustainable. They also see necessary but unpleasant changes to the system are in our destiny.
Others wanted to highlight an error in my statement that there is no ‘social security fund’ provisioned for in the budget.
I enjoy the articles that you write in The Daily Reckoning, but I think there might be an error in the last article “Boomers are a spoilt lot”. It came to my attention on a ABC radio talk back program, when an elderly person rang in to correct a statement that had been made about the provision by government for an age pension. To my knowledge the legislation has not been repealed to this day, and is still in hansard. The legislation for this was apparently done in the 1920’s , probably not long after the temporary income tax was made permanent, that 8% of income tax was to be set aside for age pensions, ….
Fi Vern Goudie
Re Baby Boomers—Why don’t you get your facts right before you put pen to paper. A levy was imposed on all Taxpayers after the Depression and this levy money went to paying the Pension. The monies collected was added to a Pension Account by the Govt each year and then paid to Pensioners. This system worked well until the FRASER GOVERNMENT CANCELLED THE ACCOUNT AND PUT ALL MONIES IN CONSOLIDATED REVENUE. THEY FORGOT TO REDUCE THE LEVY AMOUNT FROM ALL TAXPAYERS. THE SAME AS YOU HAVE FORGOT THIS LEVY EXISTED…. WRITE AN ARTICLE ON HOW MUCH BIG BUSINESS HAS COST THE COUNTRY SINCE THEY TOOK OVER THE GOVERNMENT OF THE DAY——1970 TO NOW THEN YOUR ARTICLE WOULD BE WORTH THE PAPER IT IS PRINTED ON.
E C H
Both readers are correct. There was once a Social Services Contribution levy/tax.
However, the introduction of the contribution was not in the 1920s or after the Great Depression.
Here is a direct extract from the Australian Bureau of Statistics 1988 Yearbook article History of Pensions and other Benefits in Australia (emphasis mine):
‘There was a further development of specific relevance to social security in 1945. The Commonwealth split the personal income tax into two components. One, the social services contribution, was to be used exclusively to finance social security cash payments. Revenue from the contribution was paid into the National Welfare Fund, from which all such cash payments were to be made, but there was no link between personal contributions and entitlements. The fund was supplemented by subventions from payroll tax and general revenue. In the event, the social services contribution was again merged into a single personal income tax in 1950. All cash payments are now made direct from general revenue.’
Yes, there was a brief five year period when the politicians decided to be accountable and provision for age pensions. That all ended in 1950.
For the past 64-years, taxes have all gone into the one pot to be spent or squandered by a procession of Liberal and Labor governments.
The legislation may still exist for the Social Services Contribution levy. But that’s academic. The reality is there is no such fund.
The following extract from the 2014 federal government budget shows in cold, hard numbers just how much taxpayers are up for in the coming years.
click to enlarge
In 2014, $145 billion in taxes are committed to paying social security and welfare. In 2017-18 this figure rises to nearly $170 billion. Throw in health expenditures of $75 billion, and more than half the taxes collected in 2017-18 will be committed to these massive budget items.
The scary number is, over the next four years, a total of $900 billion of taxpayer money is earmarked to be spent on health and welfare.
This is an unsustainable trajectory. The problem is most people take the provision of these services as a given, without truly appreciating the source of funding.
In my opinion, it is unfair for my generation (baby boomers) to indenture the unborn into a tax servitude they had no say in. We should be mature enough to have the debate on how best to maintain a social security support system without creating an environment of resentment from younger generations.
Unfortunately, entitlement long ago replaced gratitude when it comes to welfare, and this discussion is unlikely to happen. Therefore, as is usually the case, we wait for the system to break before we try to fix it — like the smoker who decides to quit after being diagnosed with lung cancer. Sadly, by then too many people will be addicted to welfare and having to forcibly quit or reduce the intake will be very painful.
As you can see from the budget expenditure table, welfare in our society is so pervasive and costly, it’s hard to imagine what life was like without it.
To give you a quick insight, here’s an extract from the ABS 1988 Yearbook article:
‘At the turn of the century there was no social security system in Australia. Charitable relief was provided to needy persons by voluntary organisations, in some cases with the assistance of government grants. The main areas of need which attracted charitable assistance were the ‘sick poor’, neglected children, old people who were destitute and women who had been deserted or who had ‘fallen’ pregnant. The unemployed were assisted by grants of wages, or rations, in return for relief work provided by the government.’
Over the past hundred years, we have come a long way in how we care for the needy, sick, disabled and aged in our society. This is a good thing.
Unfortunately, the sheer number of welfare recipients means the system we have created over the last century is fast becoming unaffordable.
No reasonable person wants to go back to the days of yesteryear. But the world of tomorrow — with a tax base unable to support a welfare apex — demands we take action today to lower people’s expectations.
Adopting a mindset of saying ‘farewell welfare’ will stand you in good stead for your retired years. Any change to the contrary will be a pleasant one.
Editor, Gowdie Family Wealth