Age Pension

36. The Age Pension is designed to provide income support to older Australians who need it, while encouraging Age Pensioners to maximise their overall incomes. It is not designed to provide a replacement for income achieved over a working life.[31] As explained by the Tax Review, ‘the balance between the role of the Age Pension as a safety net and its role as a supplement to retirement savings is a threshold issue for the design of the Age Pension and its integration with the retirement income system’.[32]

37. In 2009, fewer than 5% of Age Pensioners had earnings from employment.[33] In particular, the Age Pension is likely to provide the majority of retirement income for individuals with broken work patterns—such as women (who are more likely to have career interruptions because of caring responsibilities), intermittent workers, carers and people with disability.[34]

38. A number of initiatives have been introduced to encourage continued workforce participation in the early years of retirement, such as the Pension Bonus Scheme, Work Bonus and changes to the means test. In addition, if an Age Pension recipient or his or her partner undertakes a continuous period of employment of up to three months, payment of the pension is suspended so that it can be restored on cessation of employment. Suspension should only occur if earning and other income combined would yield a nil rate of payment. For any longer periods of employment, the payment is cancelled.[35]

Qualifying age

39. With increasing life expectancy, a growing number of people are reaching Age Pension age and receiving payments for a longer period than has previously been the case.[36] In line with other countries—such as the United Kingdom and United States—from 1 July 2017, the qualifying age for the Age Pension will increase from 65 to 65.5 years. The qualifying age will then rise by six months every two years, reaching 67 by 1 July 2023.[37] As a result, it is anticipated that people will spend longer periods in employment increasing the tax base and reducing the amount of time that people need to cover with their own savings, including superannuation, and enable them to add to these savings.[38]

40. The qualifying age for a Service Pension under the Veterans’ Entitlements Act 1986 (Cth) is different. The Service Pension is essentially an income support payment payable subject to a means test,[39] available five years earlier than the Age Pension in recognition of premature ageing of service personnel.[40] It is currently available to male veterans who are 60 years or older, and to female veterans who are 55 years or older.[41]

41. In order to retain consistency with the incremental increase of the qualifying age for the Age Pension to 67 years—and to create incentives to remain in paid employment—the question is whether the ages for eligibility for the Service Pension under the Veterans’ Entitlement Act should also be increased incrementally.

Question 2. As there is a five year difference in qualifying age for a Service Pension under the Veterans’ Entitlement Act 1986 (Cth), should it be increased incrementally in the same manner as for the Age Pension?

Means test

42. The Age Pension, like other income support payments, is subject to a means test—comprising either an income test or an assets test. Under the means test, people with significant income or assets must draw on them before ‘calling on the community for assistance’ through the Age Pension.[42]

43. The income test assumes that a person’s need for support can be determined by the level of income. The assets test is designed to ensure that individuals, who have substantial assets, use their assets to support themselves in retirement. The rate of income support payable depends on the income and assets test. A person is paid under the test that produces the lower rate of payment. The combined operation of the two tests targets payments based on need.[43]

44. Income test rules changed for the Age Pension on 20 September 2009, with the introduction of the Secure and Sustainable Pension Reform Package. Prior to September 2009, income was assessed annually. Since then, it has been assessed fortnightly.

45. The operation of these tests can mean that it is more financially beneficial to remain on income support (and receive the various concessions and supplements attached to them)[44] than to seek work. The operation of these tests can therefore act as a disincentive to work. Some measures have already been introduced in an attempt to counter this disincentive such as the Pension Bonus Scheme; Work Bonus and a range of offsets within the personal taxation system.[45]

46. If income earned from employment was exempt from the income test for the Age Pension, this barrier would be removed. However, to adjust the income or asset test for all income support payments for mature age persons would lead to differential treatment between those who are over 45 and those who are not.

Question 3. In what ways, if any, should the means test for the Age Pension be changed to remove barriers to mature age participation in the workforce or other productive work?

Pension Bonus Scheme

47. The Pension Bonus Scheme pays a one-off tax free lump sum to people who qualify for the Age Pension but defer receipt and remain working for at least 960 hours a year.[46] A full year bonus period is a period of 365 days of accruing membership. The actual period can be more than one year if the bonus period is interrupted by a period of non-accruing membership.[47] Bonus periods cannot be accrued once the member has turned 75 years of age.[48]

48. The Pension Bonus Scheme was designed to act as an incentive for Age Pensioners to undertake or continue some level of workforce participation where they are able to do so. The amount of the pension bonus is based on the length of time a person deferred their receipt of Age Pension and the amount of Age Pension that is eventually received.

49. The Department of Veterans Affairs (DVA) administers a parallel scheme. Like qualifying age, eligibility ages for veterans with qualifying service and widow/ers are five years lower than for Age Pension. Pension bonus generally ceases to accrue under the DVA scheme when a person reaches 70 years, compared to 75 in the social security scheme.[49]

50. Registration in the Pension Bonus Schemes is closed to new entrants other than those who qualified for Age Pension before 20 September 2009,[50] and registration for the scheme must have occurred within 13 weeks of first qualifying for the Age Pension.[51] Some who were eligible may have missed out on the Pension Bonus Scheme because they had not pre-registered before reaching Age Pension age,[52] or were unaware of the work test requirements.[53] While no new incentive scheme similar to the Pension Bonus Scheme has been introduced, a range of other incentives—in particular Work Bonus, tax offsets and changes to superannuation—also encourage participation in the workforce.[54]

Question 4. In what ways, if any, should the Pension Bonus Scheme be changed to remove barriers to mature age participation in the workforce?

Work Bonus

51. Work Bonus was introduced in 2009 to reduce the amount of assessable employment income in an instalment period.[55] Work Bonus was expanded on 1 July 2011 to allow Age Pensioners, especially those with seasonal or intermittent jobs, to keep more of their Age Pension if they choose to work. A person can earn up to $250 a fortnight, without it being assessed as income under the pension income test.[56]

52. Any unused amount of the fortnightly $250 Work Bonus accumulates in an ‘Employment Income Concession Bank’, up to a maximum amount of $6,500. Credit in the income bank can then be carried forward and be used to offset employment income that would otherwise be assessable under the pension income test. Work Bonus is not available to a person who is self-employed.[57]

Question 5. How effective has the Work Bonus been in removing barriers to work for mature age persons? In what ways, if any, could it be improved?

[31] The Treasury, A More Flexible and Adaptable Retirement Income System (2004), 1.

[32] The Treasury, Australia’s Future Tax System: Retirement Income Consultation Paper (2008), 12.

[33] Social Security and Other Legislation Amendment (Pension Reform and Other 2009 Budget Measures) Bill 2009 (Cth), Bills Digest.

[34] The Treasury, Australia’s Future Tax System: Retirement Income Consultation Paper (2008), 16.

[35] FaHCSIA, Guide to Social Security Law (2012) <www.fahcsia.gov.au/guides_acts> at 11 April 2012, [3.4.1.60].

[36] The Treasury, Australia’s Future Tax System: Consultation Paper (2008), 100. When the Commonwealth Government first paid the Age Pension at age 65, average life expectancy was 55 for men and 59 for women; those numbers now are 80 and 83 respectively: D Stammer, ‘The Four Pillars of Retirement Need Strengthening’, The Australian, 15 July 2009.

[37]Social Security Act 1991 (Cth) ss 23(5A), 23(5D).

[38] FaHCSIA, Pension Review Report (2009), xxi.

[39] The rates of payment are the same as for the Age Pension and it is subject to the same income and assets tests as the Age Pension.

[40] Department of Veterans’ Affairs, Report of the Review of Veterans’ Entitlements (2003), 248. It is also available on grounds of permanent unemployability at any age and pulmonary tuberculosis at any age.

[41]Veterans’ Entitlements Act 1986 (Cth) ss 5QA, 5QB.

[42] The Treasury, A More Flexible and Adaptable Retirement Income System (2004), 1.

[43] The Treasury, Australia’s Future Tax System: Retirement Income Consultation Paper (2008), 36; FaHCSIA, Guide to Social Security Law (2012) <www.fahcsia.gov.au/guides_acts> at 11 April 2012, [4].

[44] Such as Concession Card; Health Care Card and Rent Assistance.

[45] FaHCSIA, Australia’s Future Tax System: Pension Review Background Paper (2008), 9.

[46]Social Security Act 1991 (Cth) ss 92T(1)(3), 92X(1); FaHCSIA, Guide to Social Security Law (2012) <www.fahcsia.gov.au/guides_acts> at 11 April 2012, [3.4.7.60]; Pension Bonus Bereavement Payment may be paid to the surviving partner of a deceased Pension Bonus Scheme member who did not claim Pension Bonus Scheme before death: Social Security Act 1991 (Cth) s 93WA FaHCSIA, Guide to Social Security Law (2012) <www.fahcsia.gov.au/guides_acts> at 11 April 2012, [1.2.3.70].

[47]Social Security Act 1991 (Cth) s 92P; FaHCSIA, Guide to Social Security Law (2012) <www.fahcsia.gov.au/guides_acts> at 11 April 2012, [1.1.B.80].

[48]Social Security Act 1991 (Cth) s 92C; FaHCSIA, Guide to Social Security Law (2012) <www.fahcsia.gov.au/guides_acts> at 11 April 2012, [1.2.3.70]; [3.4.7.40].

[49] FaHCSIA, Guide to Social Security Law (2012) <www.fahcsia.gov.au/guides_acts> at 11 April 2012, [3.4.7.50]; [ 3.4.7.20].

[50]Social Security Act 1991 (Cth) s 92J(1A); FaHCSIA, Guide to Social Security Law (2012) <www.fahcsia.gov.au/guides_acts> at 11 April 2012, [3.4.7.20]; The Pension Bonus Scheme was closed following a finding by the Pension Review that the Scheme was complex and not serving its goal of increasing workforce participation: FaHCSIA, Pension Review Report (2009), 95; Explanatory Memorandum, Social Security and Other Legislation Amendment (Pension Reform And Other 2009 Budget Measures) Bill 2009 (Cth).

[51]Social Security Act 1991 (Cth) s 92H; FaHCSIA, Guide to Social Security Law (2012) <www.fahcsia.gov.au/guides_acts> at 11 April 2012, [1.2.3.70].

[52] FaHCSIA, Pension Review Report (2009), 94.

[53] Commonwealth Ombudsman, Annual Report 2005–2006 (2006).

[54] The Australian Institute for Social Research, Experience Works: The Mature Age Employment Challenge (2009), prepared for National Seniors Australia, 37.

[55]Social Security Act 1991 (Cth) s 1073AA; FaHCSIA, Guide to Social Security Law (2012) <www.fahcsia.gov.au/guides_acts> at 11 April 2012, [4.2.1.10]. An instalment period is a period of a maximum of 14 days: FaHCSIA, Guide to Social Security Law (2012) <www.fahcsia.gov.au/guides_acts> at 11 April 2012, [3.1.14].

[56] FaHCSIA, Guide to Social Security Law (2012) <www.fahcsia.gov.au/guides_acts> at 11 April 2012, [4.2.2].

[57] Ibid, [4.3.3.20].