The push to let seniors work without losing benefits

Article by Effie Zahos courtesy of InvestSMART.

Costs are rising fast for retirees, forcing age pensioners to stretch their money a lot further. But our complex age pension system penalises seniors who want to earn extra money through paid work.

It’s crazy that at a time when Australia is facing a serious shortage of skilled workers, only 2% of age pensioners are in paid work. That’s just 76,000 people. By contrast, 24.8% of pensioners in New Zealand benefit from employment.

Sure, not every pensioner can or wants to work. But it’s a fair bet plenty of younger pensioners would relish the opportunity to keep their hand in the workforce and top up their income.

The problem lies in what National Seniors calls the “byzantine means testing arrangements” for the age pension.

Let me explain. At present, the age pension is worth $967.50 per fortnight ($25,155 annually) for a single. Or $1,458.60 fortnightly for a couple combined ($37,923 annually).

These figures fall well below the income level that industry body ASFA says is needed to fund a comfortable retirement – $45,962 annually for singles, and $64,771 for couples.

In fact, as it stands, the full age pension doesn’t even fund ASFA’s idea of a ‘modest’ retirement, which requires $29,139 of annual income for singles, or $41,929 for a couple.

Of course this assumes, retirees even qualify for the age pension. The assets test is reasonably generous at $270,000 for singles and $405,000 for a couple. It’s the income test that can be the real stumbling block.

A single age pensioner can earn up to $180 per fortnight ($320 for couples), before their pension is scaled back. But here’s the thing. Pensioners lose 50 cents for every dollar earned over these limits. That’s the equivalent of being taxed at 50%.

Pensioners can sign up for the Work Bonus, and earn an additional $300 each fortnight which isn’t assessed. But it’s complicated. Pensioners need to report their income each fortnight, and if you don’t have a laptop that means heading off to wait in line at Centrelink every two weeks.

There’s another catch. Let’s say a single pensioner receives an age pension of $967.50 per fortnight, plus work income of $180, and adds an extra $300 each fortnight through the Work Bonus. That still only adds up to $37,635 annually, which is $8,327 less than the annual income of $45,962 that ASFA says is needed to live a comfortable lifestyle.

All this goes a long way to explaining the low rate of workforce participation among pensioners while employers struggle to fill job vacancies.

Not surprisingly, National Seniors is lobbying for older Australians with limited retirement savings to be able to work without fiscal penalty. It’s suggesting employment income should be exempt from the Age Pension means test. In this way, a single pensioner who earns $75,000 in addition to their $25,000 pension, would earn taxable income of $100,000 and pay $25,000 in tax meaning they’ve paid for their own pension by working. The icing on the cake would be an extra $7,500 in super for their retirement.

There are other possible solutions. The main point is that change is needed to increase workforce participation for senior Australians in a way that is fair and simple.

As National Seniors points out, pensioners in New Zealand are not penalised for earning additional income. If Australia had a workforce participation rate for over-65s similar to New Zealand’s 24.8%, it could result in an additional 450,000 available workers, something that would benefit the economy, and prevent many age pensioners living close to the poverty line.