C’mon, it’s time to fix the pension

The Age Pension has just increased in line with inflation, as it does every six months.

For a single pensioner it means an extra $10 a week and for couples $15.

This is being touted by the government as the biggest increase since 2013, but that’s only because the last six months has seen the largest cost-of-living increase in a decade.

Is this rise enough when cost-of-living pressures are mounting?

Petrol prices are skyrocketing with no immediate end in sight. The new government in South Australia took up one of our suggestions in the lead up to the state election and has committed to introducing free public transport for seniors. This policy could be quickly adopted by other states and territories to alleviate transport costs in the face of the ongoing petrol price rises.

What else can the federal government do on Budget night?

It could increase Rent Assistance for those least able to afford a home. It could create an independent pension tribunal to ensure the Age Pension is adjusted adequately to meet cost-of-living changes. 

It could also stop punishing pensioners who want to work to make their lives better by getting rid of the income test. This particular policy change will not only help pensioners but will also help deliver workers at a time of critical labour shortages.

Only about 3% of pensioners work.

For many, this is not a choice.

After a lifetime of working, they may simply be exhausted or have significant health issues, which mean they cannot work anymore. It’s no surprise to learn that ill health is the primary reason for early retirement. Hardly a choice really.

Another reason pensioners don’t work is because they are caring for others. A pensioner may have wanted to keep working but the needs of an older relative, partner or even kids or grandkids may take precedent. This can make workforce engagement difficult, if not impossible.

Other pensioners don’t need to work because they have adequate savings. Rightfully, they want to use these hard-earned investments to enjoy their lives while they can. As one couple told us, they don’t see themselves pulling a caravan around at 80.

With their money invested in shares and capital markets, they are also doing their bit to bankroll the economy.

But what about those who want to work, or need to work because they don’t have enough savings?

Not everyone has earned the kind of significant income necessary to amass even a small hillock of superannuation.

If you don’t have many savings or assets (outside the family home), Centrelink will most likely use the income test to determine your pension amount.

Unfortunately, many of the pensioners with limited savings don’t see the point in working when they lose 50 cents from their pension for every dollar they earn. 

Yet, with sectors such as aged care, agriculture, hospitality, and tourism screaming out for staff, why aren’t we encouraging those who want or need to work to stay in or rejoin the workforce or work more hours than they are?

The easiest way to explain this is by using an example of a fictional aged care worker.

Nora is 68, she is single and recently divorced. Using her savings and proceeds from selling her family home, she has purchased a cheap apartment for security. With house prices the way they are, she is left with only $150,000 in superannuation.

Her super gives her $8,250 of income per year at an average of 5.5% per annum and she receives the full pension of $25,155.

She has recently started working as a personal carer for a home care provider to earn additional income. At 68, she wants to work for a few more years to boost her meagre savings and ensure she can pay for private health insurance and rising health costs well into her 80s.

Currently, she is working one day a week, which gives her about $10,000 per year extra income (gross), but her employer, struggling to find workers, has asked her to work another day with the prospect of more.

This creates a problem for Nora because the additional hours will dramatically reduce her pension – to the point that it doesn’t seem worth the effort.

For someone like Nora, already working one day a week, an additional day of work would see her lose about $6,430 of the $10,000 received in income from her employer. This is because every $1 of income earned above the income test limit results in a loss of 50 cents in the dollar of pension. 

On top of this, she must also pay income tax on the additional income she earns. This is the equivalent of about 64.5 cents in the dollar for the additional day of work!

While Nora enjoys her work and is grateful for the offer to work additional hours, at 68 she finds the job tiring, and she just can’t see the point.

Even when she factors in the additional 10 cents in the dollar of superannuation she receives (which is actually only 8.5 cents in the dollar when you factor in the 15% tax) it is just not worth her while. On top of this she must deal with constant (fortnightly) Centrelink reporting to ensure she doesn’t incur a debt.

As someone who performed significant unpaid care throughout her life, raising kids, looking after her sick mum and volunteering at her local charity, she needs to look after herself, so others don’t have to look after her.

That is why during the federal election we’re calling for an exemption to the income test for people with limited savings.

It’s a win for older Australians who want and need to work, and a win for employers and the wider economy.

As Deloitte Access Economics showed in a recent report, getting more older Australians to work could boost Australia’s GDP by tens of billions of dollars. So, let’s just do it.