Retirement-age workers hit hardest by tax rates: HESTA

The tax disadvantages outweigh the benefits for older Australians who receive the Age Pension to also earn income from employment, according to new research commissioned by industry superannuation fund, HESTA.

The report conducted by Retirement Essentials found age pensioners are subject to higher effective marginal tax rates due to the Income Test taper rate, essentially “disincentivising” retirees from continuing or returning to the workforce. As part of the test, a part pensioner’s benefits are cut by 50 cents for every dollar earned as employment income above the income-free threshold.

According to modelling, a single pensioner whose annual income jumps from $25,000 to $30,000 could pay a 77 per cent effective tax rate on that additional income, leaving only $1,150 in net income out of a $5,000 gross increase.

For a couple with only one person returning to work, a 77 per cent effective marginal tax rate applies up to $30,000 in annual income; if both return to work, a 64 per cent marginal tax rate applies if their joint income reaches $40,000.

HESTA chief executive, Debby Blakey, said this system was particularly challenging for the fund’s own members, 70 per cent of which are employed in the health and community services sector and with 30,000 of the over 80,000 members eligible for the pension still active in the workforce.

“We recognise the retirement experience of each Australian is unique, and flexibility is important to support both financial and mental wellbeing. That’s why we’re concerned by the significant disincentives within the current system for older Australians who wish to remain active in the workforce,” she said.

“For our members, who are largely in the health and community services sector (HACS), working in retirement has a multitude of benefits for them and the community. Part-time or casual work in retirement helps people retain a sense of purpose and fulfillment, while addressing critical workforce demands and boosting the broader economy.

“We continue to hear stories from members on the pension who would like to work more but are put off by the extreme effective marginal tax rates.

“By removing barriers, we can unlock greater opportunities for individuals in retirement, while delivering significant benefits to society as a whole.”

Following on from the research, HESTA is urging for reforms to the current system to:

• Ensure retirees’ incentives to work are not diminished by indexing the Work Bonus payments thresholds to Average Weekly Ordinary Time Earnings (AWOTE).  The Work Bonus allows those at or over Age Pension age to earn income from part-time, shift, or casual work while retaining more of their pension.
• Conduct a review and simplification of the Age Pension Tax Offset rules, which are extremely complex and difficult to understand.