Much of financial planning industry is devoted to structuring affairs to maximise access to the age pension.
The means test and other requirements that control access to it are a bureaucratic nightmare and expensive to administer. There are ongoing fights about the taper rate at which access shrinks with income. Debates rage about whether taxpayer support goes where it should.
Under our dividend imputation system, government corporate tax revenue is cannibalised as super funds in the tax-free retirement phase get “refunds” of the tax they haven’t paid on the dividends delivered to them.
A budget neutral proposal…
I am proposing a radical reform involving
introduction of a universal (non-means-tested) full age pension
restoring tax on the income of super funds in the retirement (pension) phase
other tax changes, including removing the seniors and pensioners tax offset, and a different tax scale for those in receipt of the pension.
The changes I propose could mean the only likely losers will be those with retirement super balances currently generating tax-free income in the region of A$100,000 per year or more.
Squeals would be heard, but there would be relatively few squealers and they might be unlikely to gain much sympathy.
The change could be budget-neutral.
Under the proposal retirement would trigger:
the automatic award of the full age pension
the conversion of the retiree’s super fund(s) into retirement mode where earnings within the fund(s) would be counted as personal income for tax purposes.
The tax scale for age pension recipients would also need to be adjusted, and the seniors and pensioners tax offset removed, in order to avoid windfall gains or losses and make the change budget neutral.
…that could make retirement simpler
At one stroke, all of the complexities involved in applying for and checking eligibility for the age pension would vanish.
Incentives to maintain large balances in super after retirement for tax-preferred estate planning would no longer be as attractive.
Introducing a universal non-means-tested full pension would increase budget outlays by about $30 billion, but this would be offset by increased tax revenues under the changes proposed which would leave most retirees no worse off in after-tax terms.
This is calculated using ball-park figures of around 4 million people of pension eligibility age with 1.8 million currently getting the full pension, 1.4 million a part pension, and 0.8 million on no pension.
Most retirees would be no worse off
Existing full pensioners would be unaffected.
The average part-pensioner could be left in the same after-tax income position by the tax scale changes which see the government recouping in extra tax revenue what it lost in extra pension outlays.
Self-funded retirees would receive a windfall gain of the full pension amount, but part of that would be offset by taxation of super income.
With proper adjustment of the tax rates the changes could mean that only those with very high income from super ($100,000 or more) would be adversely affected.
In reality, nothing is that simple. Incentives for choice of retirement age would need consideration, as would the implications of tax scales for households as well as individuals.
That shouldn’t be a deal-breaker for most retirees because they would be no worse off, but it could meet opposition from investors with other ways of lowering their tax rate, as we saw in the last election.
But my proposal, albeit radical, appears to be feasible and has the potential to abolish much of the bureaucracy and costs associated with administering the age pension and much of the tax complexity and regulations governing superannuation.
Rather than fiddling at the edges, we ought to be considering wholesale reform.
- ^ retirement income review (treasury.gov.au)
- ^ a mess (treasury.gov.au)
- ^ taper rate (theconversation.com)
- ^ removal of tax on super fund earnings (theconversation.com)
- ^ Why pensioners are cruising their way around budget changes (theconversation.com)
- ^ impose limits (theconversation.com)
- ^ refunds (theconversation.com)
- ^ 5 questions about superannuation the government's new inquiry will need to ask (theconversation.com)
- ^ seniors and pensioners tax offset (theconversation.com)
- ^ unused tax credits (theconversation.com)
- ^ It's hard to find out who Labor's dividend imputation policy will hit, but it is possible, and it isn't the poor (theconversation.com)
- ^ as we saw in the last election (theconversation.com)
- ^ Financial System Inquiry (treasury.gov.au)
Authors: Kevin Davis, Professor of Finance, University of Melbourne