Calls to scrap pension means test

Actuaries giant Mercer has slammed the means test and called for a universal age pension in its submission to Treasury for the retirement income review, reports Investment Magazine.

The actuary wants the means test completely scrapped. It also says the superannuation guarantee should remain steady at 9.5 per cent.

Mercer claims the means tests is the main factor hindering effective interaction between the three pillars of Australia’s retirement system – the Age Pension, compulsory superannuation and voluntary savings.

Mercer partner and retirement specialist David Knox said its original purpose was to ensure that those most in need had access to the age pension, alleviating poverty among senior citizens.

Mr Knox says the original purpose of the means test – identifying those retirees most in need of a full Age Pension to alleviate pension poverty – had been lost. He believes a universal age pension would benefit more retirees and households and will have a positive trickle-down effect on the economy and the superannuation industry. And, with the right tax structures in place, it may not have a substantial effect on the federal budget.

“Significantly, if the universal age pension was an important source of retirement income for all Australians together with superannuation, the superannuation guarantee rate need not rise to 12 per cent, while still providing the same living standard in retirement for average income earners,” said Mr Knox.

“This would reduce the cost of projected superannuation taxation concessions, increase the level of take-home pay and increase taxation revenue.”

However, if the Age Pension remains means-tested, says Mr Knox, the SG would have to rise to 12 per cent.

Mercer says a universal age pension could be funded by taxing the Age Pension for all those who receive it, achievable by basing the tax rate on the balance of an individual’s tax-exempt pension accounts. It could also be offset by changing the super tax arrangements, or by implementing a tax on any investment income generated in the pension phase.

“With a universal age pension, Australians will have an incentive to save for retirement,” Mr Knox says. 

“This isn’t the case today. While the Age Pension would be taxable, there would be a clear benefit to the individual for every extra dollar contributed into super.

“While the universal age pension may not be a viable option in the current political environment, it is a compelling proposition for a simpler, more effective system with a clear objective that delivers stronger long-term retirement outcomes for older Australians,” he adds.

The Mercer submission stands aside from many submissions to the retirement income review and has been applauded by some in the retirement sector.

“Many submissions, which are meant to assist the review build a fact-base for future reference, have failed to fully assess the retirement system across all its component parts,” says David Bell, of The Conexus Institute thinktank.

“In our submission we, like others, highlight the lack of a system objective and the complexity of the system. A universal pension could significantly reduce complexity, but the system would remain complex. For instance, the taxation and incentive structures across super, housing and other investments differ greatly, and households would remain exposed to many financial risks.

“Best practice would be to establish an objective and then work towards the best system solution,” he says.

“Nonetheless, I’m sure reducing complexity would be on everyone’s wish list.”

What do you think of Mercer’s submission? Would a universal age pension benefit you? Do you like the idea of different tax brackets for those potential universal age pension recipients who have more money in savings and investments? Or is it merely a variation of what is already in place?

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Written by Leon Della Bosca

Leon Della Bosca has worked in publishing and media in one form or another for around 25 years. He's a voracious reader, word spinner and art, writing, design, painting, drawing, travel and photography enthusiast. You'll often find him roaming through galleries or exploring the streets of his beloved Melbourne and surrounding suburbs, sketchpad or notebook in hand, smiling.


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