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When age pensions were not welfare

When the financial planning industry was in its infancy, I often heard older people talk about the way the pension system used to be. According to their recollections, a portion of all income tax was hived off and credited to a separate fund, out of which a pension would be paid for life.

Because it was all so vague, and because there was nothing on any of my old tax returns that mentioned the alleged fund, I never took it seriously.

Digging a bit deeper

Then just before the last election, I was bombarded with emails readers had received from the Mature Australia Party. The title was certainly a barbeque stopper: "The big lie – the age pension is not welfare!"

The email claimed, "Older people spent their lifetimes paying for their pensions with an early version of the compulsory superannuation scheme. In 1945, the Commonwealth split personal income tax into two components. One of them, the social services contribution, was to be used exclusively to finance Social Security cash payments. The revenue from the contributions was paid into a National Welfare Fund.”

It said that by 1950, the balance in the fund was £100 million, which would be several trillion dollars in today's money. According to the email, in 1977, Prime Minister Malcolm Fraser transferred the balance to Consolidated Revenue but to this day, the contribution is still coming out of everybody's pay packet.

These ‘revelations’ started me on a journey to find out the truth, which culminated with my finding the seminal book on the subject, The Foundations of the National Welfare State, written by Rob Watts in 1987 and published by Allen and Unwin.

Watts claims that the idea for a National Welfare Fund started in February 1943, when Treasurer Ben Chifley was finding ways to fund Australia's contribution to the Second World War. The Curtin Government had publicly vowed never to tax low income earners, but they faced a major problem – a shortage of money.

At that stage, the states were raising their own income taxes, but the Curtin Government decided it could boost its own coffers claiming taxing rights. The states objected strongly, but on 23 July 1942, the High Court upheld the right of the Commonwealth to take over taxation.

The need to raise money

By the end of 1942, the Curtin Government had to find an additional £40 million, but what kind of spin could they put on it so it could not be described as a tax increase? They talked about introducing a separate Social Security tax, but decided that such a move would create administrative difficulties and confusion. In the end, it was simpler to raise taxes across the board.

And so the National Welfare Fund was born. True, a part of all taxes received were paid into it, and certain pensions were paid out of it. But no taxpayer had a separate balance in their own name, so there was no possibility that monies paid in would be allocated to a particular contributor.

The years passed, governments changed, and eventually they ended the charade of a separate welfare fund. Any money left was transferred to Consolidated Revenue, from where the money for social security benefits now comes.

Now, some minor political parties are agitating for the money that was originally in the National Welfare Fund to be paid to older people, on the grounds that it was their money all the time. The sad reality is that there is nothing there to pay out. It's all gone down the vast black hole called ‘government’.

 

Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance. His advice is general in nature and readers should seek their own professional advice before making any financial decisions. Email: noel@noelwhittaker.com.au

14 Comments
SJ Ant
September 15, 2021

Aged pension should be available and paid in full, at pension age for all those that worked and paid tax through their working life. Not to those that have lived off black money, cheated, never worked. It's a disgrace that we have income and assets test. Particularly an income test, as some have no choice in taking this income. Time to change its so unfair..

john
September 16, 2021

Agree 100%

Bob
September 23, 2021

Disagree 100%. It should provide a basic standard of living for those in need. And that is regardless of what was contributed in the form of taxes paid during their working life.

Phil
September 25, 2021

Agree with Bob, Social Security or Welfare is about supporting those that (for whatever reasons) are not able to keep out of poverty on their own means. Superannuation is the vehicle that generally rewards those who earned reasonable money (& paid tax) through consistent employment.

Bruce Gregor
October 31, 2016

Paul Keating introduced what should have been a Social Security contribution in 1988. It's the Contributions Tax of 15%. It currently runs at about $10 billion p.a. It was argued as necessary by Keating, to offset income tax on the retirement income generated from taxed contributions when the "taxed" superannuants eventually retired. If this were the real reason (for the Contributions Tax) then it should have been invested in a future fund from 1988 and retirement income rebates accounted for as thus. It's a pity this didn't happen as most of Keating's other innovations on super were supportive of sustainable retirement financing - key ones being preservation, lifetime annuity incentives and imputation. Thanks to Costello's "love me please" largesse in 2006 of tax free super after 60 for all (including billionaires) we have no incentives for converting Lotto lump sums into taxed retirement incomeand no tax revenue from superannuants other than a very skinny GST.

Peter C
March 15, 2017

Actually the 15% contributions tax was refunded to you in the form of a tax rebate (offset) once you started receiving your super pension. It still is for people between 56 and 60 who are receiving a super pension.

People over 60 would also have still received it, except Peter Costello completely stuffed the systems viability by deciding that all super pensioners over 60 years pay no tax.

Even I could have told you the taxes received from the mining boom were only temporary have should have been banked rather than splurged on 60 year old super-annuants. .

What should have happened is to leave it the way Paul Keating designed it, pay tax at ordinary rates on the super pension minus the 15% tax offset on any tax payable.

Warren Bird
October 27, 2016

My late father-in-law, who died in his 90's nearly 10 years ago, was a depression lad who had been told all his working life that you paid your taxes and then when you turned 65 the government would look after you.
So I think all this pre-dates Chifley and the post WW2 period by a long period of time. I don't know that he thought there was a separate fund - he just believed the government would look after him.

The fact is that they could think that way 100 years ago when average life expectancy was less than the retirement age and even if you made it to 65 you only had a few years to go.

There was also the reality of a young population and post-war immigration that meant that the current tax pool was always growing so it could cover the cost of the pension. So no one had to think too much about it until the last 30 years or so when the demographics started shifting and medical technology leapt ahead to extend life expectancy.

Reality is that we have to think of it now. And now there is a fund - it's your own super fund - which has been funded by the 'tax' that is the Super Guarantee Contribution, which originally came in during the Keating era as an alternative to a pay rise. So it is, in its economic impact, the same as a tax, but it doesn't go into consolidated revenue.

Kevin
October 29, 2016

I am at an age when the entitlement issue was strong,you are correct we do need to change to think of now.Keating told us this and I acted on it.My fellow blue collar workers did not.I think it was Menzies that stopped social security taxes in Australia but I am not sure.

During my youth travelling around the world to work in my trade other countries had social security taxes.from memory in the UK my NICS ( national insurance contributions) were around 11% of wages and employer contributions were around 13 or 14%.This covered pensions,unemployment,national health etc.Holland and Germany had higher SS taxes.

The demographic thing is a huge change,people of my age paid for their parents age pension and were then hit with now you pay for your own.Then the 10 workers to support each pensioner was not a problem.Now with a wide variety of figures given (anywhere from 2 to 4 workers per pensioner)it is a huge problem,probably made a lot worse with longer lives and far higher health care costs.

The super funds interest me.With $2 trillion at say an MER of 1.5% would the $30 billion costs alleviate the problem of pensions if we had started social security taxes again rather than super.

Or would we still be in the position of too few workers,and have the problems that Germany,China and Japan would seem to running into rapidly.

Peter C
March 15, 2017

Italy also had the same system, where money was paid to a separate pool. The problem is that "pool" is effectively bankrupt, caused by several issues including demographics. Nobody expected so many Italians to live beyond 60 years of age.

As well many small businesses and "cash" employees and contractors have avoided contributing to the fund, however once they reach pension age they are still entitled to the "minimum."

There is also the large amount of "foreign" pensioners living in places such as Australia, Belgium, Brazil,, Canada, Germany, Sweden and the U.S.A, all receiving some amount of pension.

No wonder the fund is struggling.

Rob
October 27, 2016

Aha, so this is where some people get the idea that paying taxes today ensures you an aged pension when you retire (and if you qualify of course). People seem to forget that taxes paid today go toward meeting the cost of government services today, not some mythical aged pension entitlement 30 or 40 years down the track.

Colin Nunn
August 05, 2020

"Mythical"? Yes Rob, taxes paid today do go toward meeting the (extraordinarily costly and expanded) expenses of todays government. But in fact there WAS an EXTRA taxation added in the 1940's that was intended to pay for pensions. Rather than being invested, it was lumped into a do-nothing account and eventually was placed by Malcolm Fraser into general revenue. So much for looking after the pensioners who had paid into a pension fund. Your cynicism is unnecessary.

Graham King
May 18, 2021

When I first started work in 1960 my pay slip in deductions had one shilling and sixpence social welfare when I enquired what is was the pay office said it was my pension contribution paid to the government for my retirement benefit

Robert
June 08, 2021

So your myth is that tax's today go towards (only) meeting Government Service , if only that were true we would not be in as great of Debt.
They go towards much more that had nothing to do with Government Services !
Open your eyes .. Compulsory Super has only been around since 1996.. millions of workers could not afford Super prior to this.
Yes we Earn't our Pension by the Fact it was what we were told By all Government !

Richard
October 27, 2016

In fact when I first studied taxation (Back in 1958) the act was called "IIncome Tax and Social Services Contribution Assessment Act" but it was clear that there was no "Social Services Fund" (Unlike USA )

 

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