Age-based pension payments

5.114 In this section, the ALRC considers the qualifying age for Veterans’ Age Service Pension, and the treatment of employment income in means testing for Age Pension recipients.

5.115 No changes to the qualifying age for Veterans’ Age Service Pension are proposed. The ALRC proposes that the Work Bonus amount—an amount of employment income that is disregarded in calculating the rate of payment for Age Pension and Age Service Pension—be indexed in order to maintain its value as a workforce incentive.

Veterans’ Age Service Pension

5.116 Veterans of the Australian Defence Force who have rendered qualifying service are eligible to receive an age-based income support payment—the Age Service Pension—five years earlier than the civilian Age Pension.^[191] It is currently available to male veterans who are aged 60 years and older and to female veterans who are aged 55 years and older.^[192]

5.117 The qualifying age for Age Service Pension is not scheduled to increase in line with forthcoming changes that will increase Age Pension age to 67.^[193] The Tax Review proposed that the current five-year difference between qualifying age for Age Pension and Age Service Pension be retained with any increase to Age Pension age.^[194]

5.118 The Australian Institute of Superannuation Trustees supported maintaining the five-year gap between Age Pension age and Age Service Pension age.^[195] Ex-service organisations opposed any increase to the qualifying age for the Age Service Pension.^[196]

5.119 The Returned & Services League of Australia (RSL) and the Alliance of Defence Service Organisations (ADSO) argued that the qualifying age for Age Service Pension is not related to the qualifying age for the Age Pension.^[197] ADSO said that the qualifying age is ‘an independent judgement based on the effects of war and should be seen as an absolute figure, not a top-down figure with reference to age pension’.^[198]

5.120 Stakeholders submitted that military service has adverse health effects for veterans.^[199] The Department of Veterans’ Affairs stated that ‘studies into the health and well-being of veterans following military deployment have found statistically significant increases in mortality and morbidity among our veterans’.^[200] The RSL submitted that the contemporary experience of military service, including the multiple deployments served by many military personnel, may mean that the ageing effects of war are greater now than in the past.^[201]

5.121 Eligibility for an age-based income support payment may act as an incentive to leave the workforce, or a disincentive to continue participating in paid work.^[202] However, the ALRC considers that there is a distinction to be made between removing barriers to work and raising the qualification age for an income support payment. The latter may compel veterans to remain in the labour force. In light of this and of evidence of the continuing adverse health effects of military service, the ALRC does not propose any increase to the qualifying age for Veterans’ Age Service Pension.

Age Pension and employment income

5.122 As well as its place in the social security system, the Age Pension forms one pillar of Australia’s three-pillar retirement income system, alongside compulsory saving through the superannuation guarantee and voluntary superannuation.^[203] The Age Pension acts as a safety net payment—ensuring that people over Age Pension age have access to an income that provides a reasonable minimum standard of living.^[204]

5.123 A high proportion—68.3%—of persons over Age Pension age were in receipt of the Age Pension at March 2012.^[205] 40.9% of these were in receipt of the full rate of Age Pension.^[206] When combined with all forms of income support (including Commonwealth Seniors Health Card) 85% of persons over Age Pension age were in receipt of some income support at March 2012.^[207]

5.124 A person may continue to work after reaching Age Pension age. If so, employment income will be assessed as part of the income test in determining eligibility to receive the Age Pension. At March 2012, 3.9% of Age Pension recipients had earnings from employment.^[208]

5.125 A number of elements in the design of the Age Pension allow continued workforce participation after reaching Age Pension age. These include the design of the means test and Work Bonus.^[209]

Means testing for Age Pension

5.126 Employment income, along with income from other sources, is assessed under the income test for Age Pension.^[210] Each dollar of assessable income over the free area amount reduces the level of payment by 50 cents in the dollar.^[211]

5.127 A number of submissions argued that the income test provided disincentives to work for Age Pension recipients.^[212] For example, the Australian Chamber of Commerce and Industry argued that ‘once eligible for an aged pension and associated benefits recipients become reluctant to seek higher remuneration from paid employment’.^[213] The Government of South Australia supported removing or relaxing the income test for the Age Pension.^[214] The Australian Council of Trade Unions and the Superannuated Commonwealth Officers’ Association Inc also supported a relaxation of the income test.^[215]

5.128 The increase in the payment rate for Age Pension in 2009 was weighed against a change in the withdrawal rate from 40 cents in the dollar to 50 cents in the dollar.^[216] This increase was justified on the basis of ensuring the long-term sustainability of the pension system, and so that increases in the payment could be targeted at those most in need.^[217] Professor Peter Whiteford, Associate Professor Gerry Redmond and Dr Bruce Bradbury have noted that the increases in the Age Pension payment rate more than halved the poverty among persons aged 65 years and older.^[218]

5.129 The calibration of the means test is designed to strike a balance between the cost of an income support payment to the taxpayer, the adequacy of the payment and the incentives for people to undertake employment or earn other income. This is known as the ‘iron triangle’ of means testing.^[219] Changes to the design of the means test along any of these axes will involve some trade-off against one or both of the others. For example, relaxation or removal of the means test would increase the cost of the income support payment to taxpayers.^[220]

5.130 The ALRC is conscious that the primary purpose of the Age Pension is to act as a safety net payment. This is in keeping with the targeted nature of the system of income support payments. Significant relaxation or removal of the income test is at odds with such a targeted approach. The current income test appears to be an appropriate compromise between payment adequacy and incentives for private provision. Therefore, the ALRC does not propose any changes to the income test. Proposed changes to the Work Bonus scheme, addressed below, are intended to promote incentives to work while remaining consistent with payment design.

Work Bonus

5.131 ‘Work Bonus’ was introduced in 2009 to reduce the amount of employment income that is assessable in the Age Pension income test in an instalment period. Work Bonus allows a person to earn up to $250 per fortnight, without it being assessed as income under the pension income test.^[221] Any unused amount of the fortnightly $250 Work Bonus accumulates in an ‘Employment Income Concession Bank’, up to a maximum amount of $6,500.^[222] Credit in this income bank can then be carried forward and be used to offset employment income that would otherwise be assessable under the pension income test.^[223] Work Bonus is also available to Veterans’ Age Service Pension recipients.^[224]

5.132 Work Bonus was introduced in place of another incentive designed to promote prolonged workforce participation after Age Pension age, the Pension Bonus Scheme.^[225] Stakeholders largely welcomed the Work Bonus scheme.^[226] NWRN noted that Work Bonus appeared, on preliminary data, to be having some effect on the workforce participation of Age Pension recipients, as well as upon the amount of employment income they received.^[227] However, some submissions felt that awareness and understanding of Work Bonus was low among Age Pension recipients, and proposed greater information about and promotion of this scheme.^[228]

5.133 Some stakeholders called for an increase in the Work Bonus amount, either through regular indexation or through a wholesale increase.^[229]

5.134 The Pension Review noted that the indexing of pensions is critical to maintaining the standard of living of pension recipients.^[230] The ALRC considers that it is similarly important to index the Work Bonus amount to maintain over time the incentive for workforce participation for Age Pension recipients.^[231] The ALRC therefore proposes that the Work Bonus amount be automatically indexed in the same manner as for Age Pension.

Pensioner Education Supplement for Age Pension recipients

5.135 Pensioner Education Supplement (PES) is available to pension recipients (and certain other income support recipients) to assist with the costs of full or part-time study.^[232] It is intended to help students improve their chance of finding a job through study.^[233] There is no maximum age limit for PES,^[234] however it is not available to Age Pension recipients or to persons in receipt of the Age Service Pension under the Veterans’ Entitlements Act.^[235]

5.136 For the purposes of PES, approved courses of education or study include secondary courses, tertiary courses including pre-vocational, diplomas, graduate certificates and Masters courses.^[236] There is no minimum duration for a course to be approved.^[237] A person is not eligible for PES if they have completed a course for a Masters degree, Doctorate or a qualification of the same standing at an educational institution.^[238]

5.137 NWRN submitted that PES should be extended to Age Pension recipients, arguing that this restriction on eligibility is ‘out of step with other Government policies which support participation through life-long learning’.^[239]

5.138 The ALRC considers that there is a principled basis for extending PES to those over Age Pension or Veterans’ Age Service Pension age. While the link between PES and workforce participation is not direct, extending access to PES for Age Pension and Veterans’ Age Service Pension recipients is consistent with the broad objective of promoting mature age workforce participation. Excluding these pension recipients from access to PES arguably implies that they are ‘retired’ from the workforce.