Should we offer higher benefits to those over 55?
In the last blog post I noted that there were rumors of a higher benefit rate for those over 55. Since then we’ve been thrown into an information vacuum in Australia, as noted here by David Plunket.
After some detailed discussion in the e61 offices my boss (Gianni La Cava) snuck off and pulled together a micronote indicating why this policy might not be the right way to go – namely, the average person on the benefit over the age of 55 is much less likely to be in financial stress than a young Australian who is reliant on the benefit. The note isn’t saying that a higher rate isn’t beneficial – it is saying that we should be consistent when applying these arguments to younger Australians! Update: ABC coverage here.
I suggest you go read the note. As I like to pretend to add value I’m going to take a wee bit of a step back to try to contextualise why we are chatting about the payment in this post 😉
Ok, so what’s going on
There is talk of increasing the payment someone over 55 gets from the unemployment benefit, but keeping the payment the same for others. Why?
I need lists to make sense of things. So here goes! When thinking about whether payment rates should differ for individuals on the basis of their age there are three key considerations:
- Does their age tell us something about the hardship an individual may face when faced with job loss.
- Does their age tell us something about the labour supply response of the individual to a higher benefit payment.
- Does their age tell us something about our personal values about how much the individual should be self-reliant vs receive social support.
Hardship
The prior research (mentioned here and here) found some indications that it was older, single, JobSeekers who had to cut spending most sharply on job loss (Appendix H – note that it was for 36-55, not 55+). Older individuals have fewer working years to earn, and single older individuals may also have more limited social and family networks – in that regard, an older individual without savings may be in greater financial hardship which would explain that result.
One way to test this is to find data that actually tells us about financial hardship. That is where Gianni was able to make good use of HILDA – and he found that, although these individuals were financially stressed, it did not compare to the financial stress of younger JobSeeker recipients.
So “hardship on average” is not the argument here, as otherwise we’d be looking at increasing the youth allowance.
If the rationale is instead “hardship due to sickness and disability”, which is likely to increase with age, then the government should consider reversing some of the changes to access to the disability support pension and the scrapping of the sickness benefit, instead of introducing age based discrimination.
Labour supply
Hey, economists are generally ok with discrimination if they think it changes labour supply – so maybe that is the answer.
To be less facetious there are the common anecdotes that young people take the benefit and play Xbox instead of getting a job. However, international research tends to find that it is older people who are more likely to avoid working if they receive a higher benefit – a summary of the mixed evidence here https://www.aeaweb.org/articles?id=10.1257/aer.20111559.
If older people were more likely to retire or leave the labour force this would suggest that benefits should be lower (at least as a proportion of income) as people age – not higher.
Looking at the Survey of Income and Housing we can see that older benefit recipients are more likely to have left the labour force – with only 23% of those aged over 55 looking for work, compared to 40% of younger recipients (looking from 2007/08 to 2019/20).
Values
The final consideration is the likely driver of this policy. In the same way we offer people a higher payment when they reach the retirement age, or when they have a disability that prevents work, there is a social belief that the payment rate received by people with some form of lower work capacity should be higher. As mutual obligations are already reduced when an individual turns 55, a higher payment for this group is consistent.
But why are we treating two people who are the same in every way, except their age, differently? Why does the 55 year old who only has partial capacity to work get a higher payment, and an easier ride, than the 35 year old in the same circumstances.
Age is being used as a tag for need – but why not base the payment on the need itself?
Gianni’s suggestion that policy should instead look to rules around the disability support pension, and opening up access to superannuation funds early for older workers, captures this mix. If someone finds themselves in a situation where they are unable to work lets support them consistently irrespective of age – and if someone just happens to be over 55 and we want them to feel comfortable retiring, give them the option of accessing their own money.
At present, we’ve got a benefit solution that solves none of the identified problems, and makes younger Australians feel discriminated against – that just doesn’t seem right.