Why we should save up to be sick

Budgets will be overwhelmed within a generation unless there are major changes to the funding of health.
Budgets will be overwhelmed within a generation unless there are major changes to the funding of health. Photo: Bloomberg
by David Leyonhjelm

It is wrong that we are forced to deposit a prescribed amount of our earnings into a particular type of account and are prevented from withdrawing it until we reach a certain age. It is also wrong that people who are able to save prior to retirement, but who choose not to do so, get an age pension funded by others.

If the first wrong (forcing everyone to save) reduces the second wrong (the irresponsible receiving tax-funded age pensions), then it’s worth doing. That’s the logic of our superannuation regime.

Such logic can and should apply more broadly.

It is wrong that people who are able to save to prepare for future ill health, but who choose not to do so, receive public health services. This wrong could be reduced by obliging people to save and use the money to cover future health costs.

Some think we already do this through the Medicare levy, but they are wrong. The levy is not an insurance premium and only covers a small fraction of public health costs. It is really just another tax on income.

We already have forced saving through the superannuation regime, with bipartisan agreement that the compulsory rate of saving should rise. Given this, it would make sense to compel people to draw down these savings before they are granted access to public health services.

Singapore has had a similar scheme for many years, where it is considered a great success.

Such an approach would not affect the poorest in society who are unable to accumulate superannuation savings. They would continue to have immediate access to benefits in instances of ill health and remain eligible for the age pension upon reaching the appropriate age.

It would only affect those who are able to save but who currently choose not to, and might prompt some of these people to undertake additional precautionary saving, to reconsider any unhealthy practices, and to avoid unnecessary visits to the GP. Any of these changes would reduce costs on taxpayers.

Growing budget problem

Alternatively, it would simply put off the day that taxpayers are required to cover the health expenses of the irresponsible.

Like many developed countries, Australia has a massive and growing budget problem because of health and social welfare commitments. In 2013, federal government expenditure on health was $61 billion and social security and welfare $132 billion, of which assistance to the aged comprised $51 billion. Combined, they account for over 50 per cent of total federal government expenditure, far exceeding defence or any of the other big-ticket items normally associated with governments.

Future demand for age pensions will be limited by superannuation savings, but state and federal budgets will be overwhelmed within a generation unless there are major changes to the funding of health.

Already a common topic of discussion among the baby-boomer generation is whether they have accumulated enough super or will be forced to rely on the pension in retirement. This is as it should be. The age pension, while modest, whittles away at the natural incentives to save for retirement. As such, it is important that only those who absolutely need it are eligible.

Using our system of compulsory savings accounts to achieve independence from taxpayers makes sense.

But for those in their twenties and thirties, saving for a distant retirement is not a high priority. Using the funds to cover health expenses is far more relevant.

Of course this would require a phase-in period. Compulsory superannuation, which began in 1992, is only now starting to make a real difference. Funds managers should also compete more transparently on cost and performance than they do now, so account holders can choose a fund that suits them. Earnings in the savings accounts should ideally be tax free, and insurance should play a part for those who have not accumulated a high balance.

But if it is wrong to force people to save, it is also wrong that others pay for the health and retirement of those who refuse to save. Two wrongs can make a right.

The Australian Financial Review