The Institute of Actuaries has outlined its suggestions for pension reform in light of the current inadequacy of retirement incomes for an ageing population.
The institute believes one of the potential solutions to this pressing problem is encouraging continuing workforce participation from older Australians through changes to current legislation surrounding the taxation of the age pension.
Catherine Nance, convener of the Institute of Actuaries’ Retirement Incomes Taskforce, said there are significant financial disincentives for older Australians to stay in the workforce. The ability to access superannuation tax-free, combined with the impact of the income test on age pension recipients, are two issues deterring retirees from continuing employed work.
“Tax free super at age 60 is contrary to every sort of behaviour we want to encourage,” Nance said.
Access to super is now determining retirement age, not the age pension, Nance said. But the income test for the age pension is the major disincentive for those on the age pension to work.
In response, the Institute of Actuaries is recommending a number of measures, including an increase to the pension age, simpler means testing around the age pension, including a removal of the income test, and simplification of the mature age tax offsets.
The institute recommended a voluntary delay of the commencement of the age pension and allowing the pension amount to accumulate every year until the pension is begun. Nance said this was a ‘financially neutral’ option for the Government, and represents ‘a fair deal’ for both the Government and individuals.
But increasing the pension age is a political hot potato, Nance said, and a topic no politician wants debated.
“But we do need to debate it,” she said.
However, Nance admitted a long lead time would be required for a change in legislation to be successful. The institute has suggested an introduction date of 2025, with the pension age increasing in half-year increments before settling at age 67.
The institute has also recommended the simplification of mature age tax offsets, making self-funded retirees the beneficiaries of the offsets, while those on the age pension would not receive offsets, but would be taxed at normal rates. Nance also suggested the potential for the use of home equity (such as reverse mortgages) to be exempted from means testing, but only when the equity is used to fund health and aged care costs.
The average age of retirement for men is currently 61 years, and 58 years for women. Nance said 80 per cent of people over 65 are on the age pension, and this figure is likely to go up as a result of the fall in investment markets.
