News eDaily24 May 2018

Australia:Proposal put forward for universal pension

24 May 2018

The Australian government could introduce a universal pension that would improve the retirement income for the average income earner but have a reduced effect at higher incomes as it would represent a fixed payment in dollar terms, Dr David Knox, a senior partner at Mercer, has suggested.

In a paper presented at the Actuaries Institute Financial Services Forum held earlier this week, Dr Knox said that there is potential for government expenditure on pension to be increased slightly, when expressed as a percentage of GDP, without imposing a significant burden on the federal budget.

The Australian retirement system has many positive features but the outcomes for the average income worker in respect of retirement incomes should be improved. This would not only improve adequacy but also provide a fairer system overall, he said.

Proposal

“One way forward is to follow the Danish approach where part of the pension is paid to everyone as taxable income with the balance paid on an income-tested basis,” he said.

For example, the current age pension could be divided into two components:

  • A universal pension equal to 10% of the average wage
  • An income-tested pension equal to the balance, namely 17.6% of the average wage.

This approach has several advantages including:

  • The universal pension would include provision of the health card, thereby removing the current incentive for many retirees to deliberately rearrange their affairs to receive a part pension and therefore the health card. Such an outcome would encourage all retirees to maximise their assets and income.
  • As the income-tested pension would represent less than 18% of the average wage, the income test would cease to have any effect where other income exceeded about 40% of the average wage. This would provide a much clearer incentive for those with the capacity to save to do so, whereas such behaviour is not always rewarded under the current system due to the assets test.
  • A single income test would be applied, including deemed income on all assets. This would remove the need for a dual means test. Australia is the only country with the complexity of both an assets test and an income test.
  • Given the universal part pension, it may be feasible to gradually increase the taper rate on the income test from 50% to say 75% thereby making it closer to the arrangements in many other countries and reducing the overall cost.
  • Full pensioners would not be affected.

However, the provision of a limited universal pension means that the designs of forthcoming comprehensive income products for retirement (CIPRs) and any related requirements could be developed in the knowledge that all retirees will be receiving an age pension of at least 10% of the average wage. This should also lead to a stronger focus on incomes which, over time, could lead to a requirement that a certain portion of all superannuation benefits above a certain threshold must be taken as an income for retirement, said Dr Knox.

 

 

 

 

 

 

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Recent Comments

Peter Worcester

Good idea David. However, the family home should also be added to the assets (and deemed) income test (perhaps 4% p.a.)

24 May 2018

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