Here's a radical reform that could keep super and pay every retiree the full pension

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Kevin Davis, University of Melbourne

The government’s retirement income review is being told our current tax and benefit treatment of retirement incomes is a mess.

Much of financial planning industry is devoted to structuring affairs to maximise access to the age pension.

The means test and other requirements that control access to it 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.

Then-treasurer Peter Costello’s 2006 removal of tax on super fund earnings in the retirement phase has proved to be misguided.

Read more: Why pensioners are cruising their way around budget changes

The scale of the benefits 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.

A budget neutral proposal…
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 changes I propose could mean the only likely losers will 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 there would be relatively few squealers and they might be unlikely to gain much sympathy.

The change could be budget-neutral.

Read more: 5 questions about superannuation the government’s new inquiry will need to ask

Under the 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.

…that could make retirement simpler
At one stroke, all of the complexities involved in applying for and checking eligibility for the age pension would vanish.

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, but this would be offset by increased tax revenues under the changes proposed which would leave most retirees no worse off in after-tax terms.

This is calculated using ball-park 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.

Most retirees would be no worse off
Existing full pensioners would be unaffected.

The average part-pensioner could be left in the same after-tax income position by the tax scale changes which see the government recouping 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.

With proper adjustment of the tax rates the changes could mean that only those with very high income from super ($100,000 or more) would be adversely affected.

Unforseen consequences
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.

Read more: It’s hard to find out who Labor’s dividend imputation policy will hit, but it is possible, and it isn’t the poor

That shouldn’t 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, as we saw in the last election.

But my proposal, albeit radical, appears to be feasible and has the potential to 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 ought to be considering wholesale reform.

Professor Davis was a member of the government’s 2014 Financial System Inquiry.The Conversation

Kevin Davis, Professor of Finance, University of Melbourne

This article is republished from The Conversation under a Creative Commons license. Read the original article.

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Written by The Conversation


Total Comments: 74
  1. 0

    This LNP give nothing away unless its good for them and there mates, Endue card mean anything

    • 0

      Company owning the Indue card is in administrations ie gone broke.

    • 0

      Couldn’t happen to a nicer bloke – one really must ask again – how is it that companies taking in billions in government funds go broke? Know why? Because when the government, in its infinite wisdom, ‘sold’ this newly ‘privatised’ venture – they gave a guarantee that the parasite who ‘bought’ it would be compensated to the tune of billions in the event of failure.

      Now what kind of ‘business’ person or group sells a business off with that kind of guarantee?

      This is just a cosy way of transferring a few lazy bill of YOUR money into the hands of mates – a well-traveled path in Third World Central American Banana Republics (such as San Austrador has become) – but who would have expected it in Australia – the great land of equality and opportunity that once was, based on mateship, integrity and standing together?

      (You got it – been asked to stand for election again – not sure if I want to do Veteran claims or politics.. maybe both)…

    • 0

      We desperately need a Federal ICAC.

    • 0

      Absolutely, Rae. Especially as the reality is that when such companies go broke, it is after the owners have already siphoned off the money to obscure accounts! Would like to know if any kickbacks were there for anyone.

  2. 0

    Sounds like a good idea which needs further consideration.

  3. 0

    I would like to see some worked examples, but if it can be shown that a female full age pensioner with small super will be better off, or not worse off, I can support such a change.

    What we have now is a rort for accountants and those rich enough to employ them.

    Except successive governments have legalised rorting of the public purse, I would call it fraud – bu u ut it’s not illegal, is it say the fraudsters.

    That’s what happens when you allow the rich to own the government. Any illusions that older Australians might have had that government is of the people, by the people FOR the people is well and truly refuted by the behaviour of this government, its benefactors and its beneficiaries.
    Sports rorts anyone? Water rorts anyone? Bankster rorts anyone? Girls in sport and $150m rorts anyone?

  4. 0

    There is plenty of historical evidence that making corporations and the rich pay their fair share of taxes improves society as well as the economy.

    When will this Government learn that creating poverty does not boost the economy and neither do legal tax avoidance loopholes?

    Australia needs real Governance, not the corrupt puppets we currently have in parliament. I want the same politicians Sweden has. They are REAL public servants.

    • 0

      Wonder whether you ever worked and lived in Sweden, jackie. Look at the taxes and the work ethics of the population, no perennial surfers, shirkers, eternal students. Aussies are not Swedes, I come from that neck of the woods.

  5. 0

    It comes down to trust. As an SMSF holder and totally self-funded retiree, I have witnessed governments changing ‘rules’ on amounts allowed to be accrued without tax, and even trying to implement sneaky tax, slamming those of us who saved and planned as ‘rich’ and ‘greedy’ in order to swing public opinion against us. I would not support this recommended change, due to a lack of trust that after implementing it and down the road a few years, they change down the pension payments and change up the taxation rate.

  6. 0

    Seems a very sensible, if radical, approach.
    Problems may be getting libs to support because of their rich mates and their own super benefits, and getting labour support due to their union and voter mates in Centrelink who may find themselves out of work!
    Too many vested interests may stand in the way of a good solution to a broken system. Meanwhile many pensioners suffer.

  7. 0

    Pensions should not be a political party football,pensioners were workers, built this country ,put money in politicians pockets and the pension scheme till Grubbs got their filthy thieving hands on it,Universal pension is the way to go ,no political interference from any party,I personally think this idea should be worth a look,we are supposed to enjoy our last years of life but I’m afraid politicians just want us to go away and die,they have proven that by their attitude against us

  8. 0

    “Introducing a universal non-means-tested full pension would increase budget outlays by about $30 billion, but this would be offset by increased tax revenues under the changes proposed which would leave most retirees no worse off in after-tax terms.”

    This paragraph is a concern, it doesn’t say that increased tax revenues would fully offset the increase of $30 billion. If not fully offset then there would be an increase in government expenditure which may cause an increase in government income which, as we all know, means an increase in taxation.

    Another part of the proposal is to take away the imputation credits which Labor proposed at the last election and has been quoted as one of the factors in the election result. For those age pensioners already receiving a full pension and who also top up with dividends and imputation credit refunds, this will reduce their income.

    Again, we see the “bash the rich” come into play but, as usual, we are not given a definition of who the “rich” are. We are certainly not in that category but it seems unfair to those who have worked hard, been fortunate or have become self sufficient by other means. A point not made in this is that retired politicians and billionaires will also be given the age pension so it seems that some of the “rich” people will be winners.

  9. 0

    As usual, will be too late to benefit most current seniors – only helpful for future.

  10. 0

    Read Dr Cameron Murray’s book “Game of mates” that’s an expose’ he recommends New Zealand’s automatic pension plan for EVERYONE & it works well! There’s no jumping through hoops & neither it should be, we’ve paid our taxes, politicians here get it (before retirement age) so why shouldn’t we get it on retirement with no questions asked????

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