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