- Retirement planning is distorted by focus on accessing the pension
- A universal pension removes the complexities in applying for and checking pension eligibility
- The change could be budget neutral
For many retirees, the Age Pension is the key focus of their retirement financial planning, around which other financial strategies revolve. The financial planning industry is devoted to structuring retiree’s affairs to maximise access to it.
The pension means test and other requirements that control access to the pension 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.
In 2006, then-treasurer Peter Costello removed the tax on super fund earnings in the retirement phase. That has proved to be misguided.
The scale of the benefits going to wealthy households has become so inequitable it has necessitated a range of complicated administrative measures to impose limits.
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.
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 only likely losers to my proposals would 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 they would be few and unlikely to gain much public sympathy.
The change could be budget neutral.
Under my 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.
I believe this proposal would remove all the complexities in applying for and checking eligibility for the Age Pension.
In addition, 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. This would be offset by increased tax revenues, which would leave most retirees no worse off in after-tax terms.
This is calculated using ballpark 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.
Existing full pensioners would be unaffected.
The average part-pensioner would remain in the same after-tax income position by the tax scale changes. The government would recoup 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.
If the tax rates were suitably adjusted, then 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.
Tax arbitrage involving imputation credits could destroy some of the expected budget revenues – suggesting a need to at least consider removing the rebates for unused tax credits.
That should not 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.
My proposal is radical and feasible. It would 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 should consider wholesale reform.
Kevin Davis is Emeritus Professor of Finance at the University of Melbourne and was a member of the federal government’s 2014 Financial System Inquiry.
National Seniors is calling on the Federal Government to fund a cost benefit analysis of a universal pension in the upcoming 2021 Federal Budget as part of our budget submission.