How Australia's retirement system is failing older Australians

The superannuation and Age Pension systems are designed to provide older Australians with a comfortable lifestyle, but are punitive regulations having the opposite effect?

Australia’s superannuation system provides a fantastic opportunity for people to build a nest egg for their retirement in a low-tax way. That is, up until you reach the age the government thinks you should retire.

The system is based on individuals leaving the workforce, no longer making contributions, and spending their super after reaching the ‘preservation age’, which differs depending on when you born.

Once you hit age 67, you enter the final stage of your eligibility to make voluntary super contributions.

Read: Backbencher support adds to push to alter Work Bonus scheme

Between ages 67 and 74, you need to meet the requirements of an annual work test if you wish to add personal tax-deductible contributions to your super account. The work test also applies to your spouse if you wish to make contributions to their super.

Currently, the work test requirement also applies to any salary-sacrificed (pre-tax) or non-concessional (after-tax) super contributions from this age group, but this will be abolished for those under 75 from 1 July 2022.

But for those aged 75 and over, the work test remains for all three forms of voluntary super contribution, providing a huge disincentive for older Australians to remain in work even if they want to.

It’s not just the super system that keeps older Australians out of employment, but the intricacies of Age Pension as well.

Australians become eligible for the pension at the age of 66 years and six months. From 1 July 2023 this age increases another half-year to 67.

Read: Mooted changes to the Work Bonus ‘won’t help age pensioners’

But at a pitiful $987.60 per fortnight for singles and just $1488 for couples, the Age Pension isn’t enough to survive on, let alone lead a comfortable life. Especially if the retiree doesn’t own their own home or is still paying it off.

The government’s answer to this problem has been the Work Bonus, a scheme allowing older Australians to earn employment income while not having their Age Pension impacted.

But like the Age Pension, the Work Bonus is woefully inadequate. Individuals can earn up to $300 per fortnight that is not counted toward any income test.

In addition, the pension income test free area means an individual has a further $180 in income excluded from the test, and couples a further $320.

Combining the Work Bonus and pension income test free area means an Age Pensioner could earn up to $480 a fortnight and still receive the maximum pension. Pension and income combined would total a still inadequate $1467.60 per fortnight for individuals.

Read: Pension thresholds March 2022

However, if you earn more than $480, the pension is cut by 50 cents in every dollar in income, which is effectively a marginal tax rate of 50 per cent. At the national minimum wage rate of $20.33 per hour, $480 works out to just under 24 hours of work per fortnight, or 12 per week.

Very few jobs are offering such low hours, and of those that are most are looking to hire younger or more transient workers.

Both the superannuation system and the Age Pension are lauded in Australia as safeguards of an earned lifestyle in our later years.

But the huge disincentives for older Australians to work are having the opposite effect, dooming some to years of poverty with no way to get themselves out of it.

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Written by Brad Lockyer