The truth about middle class welfare

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Yellow placard, 'Save the middle class'The proposed changes to tax on superannuation for people with over $2 million has prompted a flurry of comment on the need to cut back on 'middle class welfare'. The impression is created that the truly needy will miss out on much needed extra cash as politicians pander to middle class voters who decide elections.

Such an impression is almost entirely false.

In terms of where tax dollars are allocated, Australia has very definitely concentrated on providing lower class welfare. For 30 years it has had the lowest level of middle class welfare of any developed economy. According to the Organisation for Economic Cooperation and Development (OECD) only 15 per cent of government transfers go to the top half of the population. The average for OECD countries is 45 per cent.

More than two fifths of redistributed tax benefits go to the bottom 20 per cent of the population; only 3 per cent goes to the top 20 per cent. In America, the corresponding figure is 16 per cent.

As Peter Whiteford, professor of the Crawford School of Public Policy observes, the much criticised expansion of 'middle class welfare' under the Howard Government only increased the average real welfare payments for the richest 20 per cent of working age Australians by around $1.60 per week.

Over the same period, the real earnings of this group went up by more than $500 per week, a rise which received a favourable tax effect. Real taxes went up, but not in proportion to the income rise.

'The expansion of middle class welfare on average gave the richest 20 per cent less than $2 per week, changes in tax scales gave them 30 times as much,' commented Whiteford.

Yet Australia does not spend as much as most OECD countries on cash benefits: unemployment benefits, family benefits, disability benefits and other benefits. The OECD average for such benefits is 22 per cent of total income, but it is only 14 per cent in Australia (in America it is only 9 per cent).

Australia targets low income households much more tightly however, to the extent that the OECD reckons Australia's redistributive policies are more efficient than elsewhere. A 2011 OECD report said income inequality in Australia has fallen quite sharply since 2000, and is now similar to that of the OECD average for the first time.

About 5 per cent of household disposable income is redistributed to low income households in Australia, compared with only 2 per cent in Japan and less than 0.5 per cent in the United States. Only Denmark, Sweden and Belgium have such a high level of redistribution.

Australia's social welfare system, in other words, has been designed for the needy, not the middle class.
It has left a hole — insufficient middle class welfare. Which is why the introduction of compulsory superannuation resembles the welfare systems of most OECD countries.

Most OECD countries have welfare systems designed to smooth income requirements over the lifetime of the middle class, which is why such a high proportion of tax revenue goes back to the middle class. Australia's welfare system, by contrast, has been more concerned with the redistribution of income from rich to poor.

Forced saving through superannuation is designed to achieve that smoothing effect for the middle class population, in a manner that is at arms length from government. It has already resulted in a superannuation pool of about $1.3 trillion, the fourth largest accumulation of capital of that type in the world.

While it has been achieved by tax breaks for those with higher earnings — 'middle class welfare', as it were — it will provide some much needed underpinning for the middle class as the country ages, although it is unlikely to greatly relieve the pressure on government finances as was initially anticipated.

Still, government finances are unusually healthy in Australia, in part because promises to the middle classes in their retirement have been contained. Australia collects 23 per cent of GDP in taxes, a level that has varied little over the last three decades. It is slightly below the OECD average of 26 per cent.

More crucially, government expenditure has been contained. Australia has the lowest level of government debt in the OECD: about 21 per cent of GDP. The main debt problem in Australia is household debt, which is about 100 per cent of GDP (total debt is about 270 per cent of GDP).

That soaring household debt has largely been the result of another tax distortion that definitely has benefited the property owning middle class — negative gearing on houses and no tax on the family home. No political party will ever be interested in making changes to either of those policies. 


David James headshotDavid James has been a business journalist for 25 years and is the author of Managing for the Twenty First Century and The Business Devil's Dictionary. He has a PhD in English Literature from Monash University. 


Topic tags: David James, superannuation

 

 

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Existing comments

The only thing I have issues with is that when an exemption was put on the capital gains tax we saw the number and size of family homes rise markedly. The wealthy invested a much greater proportion of their savings in their dwellings which they frequently sold after the stipulated period when it was the designated family home. These MacMansions have grown like mushrooms in our area. Some Capital Gains Tax should have been put on the amount above a certain level. The larger the home here the fewer people dwell there is the rule around here!
Patricia Ryan | 09 April 2013


The main problem in Australia still remains the challenge to provide good superannuation for all. The attempts by Keating and Howard went into the right directions, but never really achieved to cut the dependency of old age pensions from tax revenues. Superannuation contributions will help to reduce such dependency in future, but it will not eliminate the the current risk to such funds from changes in investment performance. We have seen massive downturns in values of many superannuation funds since 2007and many people had to apply again for old age pensions. We have managed superannuation funds and we have self-managed superannuation funds. We should look at a third option, which is the case in countries like Switzerland. We should have an independent Government guaranteed and owned superannuation fund, which can act as a low cost secure core fund. We need some basic security for money saved, which is not the case under the current system.. If we fail to provide for a secure superannuation system, then tax money will keep on being needed to provide for older Australians. At the moment we have a fairly unjust system. We may have two people with a similar income. One of them is spending most of his money on booze, smokes and weekly entertainment like watching live sporting entertainment. The other person is spending his income in moderation and pays extra into his superannuation fund. When both of them reach the pension age, the saver is punished by getting a lesser pension than the person who had spent all his money. The Government is punishing savers and is rewarding “spend-it alls”.
Beat Odermatt | 09 April 2013


There are still too many poor people in Australia. From memory, I think ACOSS have recently stated that 1 in 6 Australians are living below the poverty line and 1 in 8 children. A society can surely be judged by how well it looks after all its people. Our politicians could do much better. Australia is not 'the lucky country' for far too many people. We need conviction politicians with a sense of 'fair go' for all. I don't see too many such politicians in this country, but of course they all belong to the wealthy class. Just look at their huge superannuation payments, which I believe they can take as soon as they leave parliament.
Grant Allen | 10 April 2013


Very sensible comment by Beat Odermatt. One can add further to it: those who spend everything in their super after retirement on frivolous things like cars, expensive travel to obscure destinations, etc. and then claim the pension or part-pension (with all the extra benefits) are in fact being supported by those who saved and live frugally as fully-funded retirees!
Saul | 11 April 2013


Wise comments by Beat Odermatt. I would just add that the independence of a government guaranteed and owned super fund is paramount. It should be run along the lines of the Commonwealth Bank before it was privatised and not be subject to government interference or attempts to siphon funds. That should go without saying but I've said it anyway.
Brett | 11 April 2013


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